Smarter Ring-Fencing Reforms: Government finalises plans

The ring-fencing regime is about to be reformed. The Government published the response to its 2023 consultation on reforming the ring-fencing regime in November 2024, together with a Statutory Instrument. The headline news is that the ring-fencing threshold will be increased from £25 billion to £35 billion and that the activities a ring-fenced bank may carry out has been expanded. This will be welcomed by many in the industry who wanted the regime to better reflect banking realities.

Background

The ring-fencing regime was introduced in 2013 as part of a number of reforms to the UK banking sector, coming into full effect in January 2019. The independent review of ring-fencing, chaired by Sir Keith Skeoch, set out a series of recommendations to improve the operation of the ring-fencing regime, with the Government publishing a consultation in 2023 (see our briefing here). The Government published a response, together with a draft statutory instrument with the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024.

Key Measures

The Government is proceeding with most of the proposals laid out, namely: 

• increasing the £25 billion core deposits threshold to £35 billion;
• introducing a new secondary threshold (with various transition periods) under which a bank will be exempt from the regime (even if its total core deposits exceed the £35 billion core deposit threshold) where investment banking activity across the bank’s group represents less than 10% of the group’s “Tier 1 capital”;
• removing global systemically important insurers and certain types of SME financial institution from the definition of “relevant financial institution” (RFI) (therefore allowing RFBs exposures to these entities);
• permitting RFBs to incur exposures of up to £100,000 to any RFI;
• removing the current prohibition on RFBs from establishing entities outside the UK or EEA (subject to PRA requirements);
• permitting RFBs to invest in UK SMEs by enabling RFBs to: make minority direct investments in UK SMEs; make investments in funds or investment companies investing at least 50% of their capital or assets in UK SMEs; and acquire certain instruments when providing loans to UK SMEs; and
• permitting RFBs to: undertake a wider range of standard trade finance activities (the Government has removed the proposed requirement for an RFB to have a direct relationship with either the supplier or receiver of goods or services following feedback); offer inflation swap derivatives; deal in investments as principal for the purpose of correcting the failure of a securities trade due to error; hedge “mortality risk and “longevity risk”; offer more types of FX products; and carry out correspondent banking arrangements with payment service providers (as opposed to solely banks).

In January 2025, the final version of the SI implementing the reforms, the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2025 (No 30), was published. The SI makes amendments to the Financial Services and Markets Act 2000 (Ringfenced Bodies and Core Activities) Order 2014 and the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014, the secondary legislation implementing the ring-fencing regime (alongside primary legislation).

The Order comes into force on 4 February 2025.