UK to reform banking sector ring-fencing rules

The changes were announced by the UK chancellor, Rachel Reeves, as the government unveiled a wide-ranging package of reforms to financial services regulation.

During a highly-anticipated speech at the Mansion House dinner at London’s Guildhall, Reeves said the government had committed to “meaningful reform of the UK’s ringfencing regime” in recognition that “now is the time to go further in tackling inefficiency and boosting growth…while retaining the aspects of the regime that support financial stability and protect consumer deposits.”

Designed to protect core UK retail banking services from risks elsewhere in the banking sector, the UK’s ring-fencing regime came into force on 1 January 2019 as a key component of the government’s response to the global financial crisis. It affects any UK bank with more than £25 billion of retail deposits, which includes all the major high street banks, and marked the sector’s single biggest regulatory change since the 2008 financial crisis.

However, the regulation has attracted criticism over concerns it has placed UK banks at a disadvantage compared to international peers – particularly in the EU – and has resulted in unnecessarily onerous red tape and administrative costs for those banks affected. Industry stakeholders also argue that, since it was implemented in 2019, the regime has been superseded by other reforms, including several regulations aimed at making banks more resolvable.

Financial services was identified as one of the government’s eight sectors earmarked for growth in the government’s industrial strategy announced earlier this month. Reeves said during her speech that the ring-fencing regime was one of several regulations that acts “as a boot on the neck of businesses” and continued to stifle innovation across the UK’s financial sector.

Her comments follow the launch of the government’s wider financial services regulation strategy, dubbed the Leeds reforms – which was announced earlier this week. The proposed reforms include launching a new advertising campaign to highlight the benefits of investing to individual consumers and new ‘targeted support’ scheme to help consumer make more informed decisions on pensions and retail investments. Risk warnings on investment products will also be reviewed and long-term asset funds will be allowed to be held in Stocks & Shares ISAs.

As regards specific proposals to reform the ring-fencing regime, the government has said the Economic Secretary will lead a review to examine how the changes can “strike the right balance between growth and stability, including protecting consumer deposits.”

These announcements also coincide with a major review of bank capital requirements by the Financial Policy Committee to support UK banks’ competitiveness. The chancellor said the review would inform the steps taken by Her Majesty’s Treasury and the Bank of England “to ensure the prudential framework strikes the optimal balance to deliver resilience, growth and competitiveness.”

Commenting on these developments, John Maciver, financial services expert at Pinsent Masons, said: “Whilst we do not yet have the full detail, these reforms will be viewed within the financial services sector as a positive statement of intent and a welcome step in the right direction.”