UK Government Finalizes Near-Term Bank Ring-Fencing Reforms

HM Treasury has published a response to its consultation on the near-term reforms relating to the bank ring-fencing regime. Overall, there was widespread support for the proposed reforms. However, a number of policy and legal issues were identified by respondents which the government has sought to address.

• as proposed, the threshold for banks to be within scope of the regime is being raised from £25 billion to £35 billion in "core deposits."
• HM Treasury is maintaining the proposal that banks that do not have major investment banking operations will be removed from the ring-fencing regime entirely. Retail-focused banks with trading assets of less than ten percent of Tier 1 capital will be exempt from the regime, except where they are part of a Global Systemically Important Bank.
• as proposed, a de minimis threshold is being introduced to allow ring-fenced banks to incur an exposure of up to £100,000 to a single "relevant financial institution" (e.g., another bank, certain insurers or an investment firm) at any one time. HM Treasury is clarifying that where an RFB's counterparty becomes a relevant financial institution, the twelve-month grace period in article 19B of the FSMA 2000 (Excluded Activities and Prohibitions) Order 2014 (EAPO) only applies where no other exemption applies.
• as proposed, both tier 1 capital and trading assets must be calculated on a consolidated basis. However, HM Treasury has amended its proposal to accommodate different types of financial groups and is introducing four-year transition periods to allow a banking group sufficient time to comply with the ring-fencing regime. This aligns with the four-year transitional period where an RFB acquires another bank not subject to ring-fencing, which proposal is also being kept. There is no transition period for RFBs when they acquire asset/liability portfolios.
• the list of activities which RFBs are prohibited from undertaking is being revised, although HM Treasury has made certain clarifications since its original proposals.
• as proposed, HMT is removing the prohibition on RFBs that prevents them from operating in or servicing customers outside the U.K. and European Economic Area.
• as proposed, RFBs will be permitted to have exposures to RFIs qualifying as SMEs. HM Treasury has decided to extend this RFI SME exemption to management companies, alternative investment fund managers, UCITS, AIFs, mixed financial holding companies, and financial holding companies. Structured finance vehicles and credit institutions are not within scope of in the exemption.

In addition to the consultation response, HM Treasury also published, and laid before Parliament, a draft of the Financial Services and Markets Act 2000 (Ring-fenced Bodies, Core Activities, Excluded Activities and Prohibitions) (Amendment) Order 2024, along with a draft explanatory memorandum and a draft impact assessment. The draft Order amends the FSMA 2000 (Ring-fenced Bodies and Core Activities) Order 2014 (CAO) and the EAPO to adjust the regulatory regime applying to ring-fenced bodies. The amendments made by the new draft Order resolve unintended consequences of the original legislation, provide increased flexibility to banks within scope of the regime, exempt certain banks from the regime, and ensure it remains proportionate. The draft Order also makes minor amendments to the CAO and the EAPO to remove EU-related expressions that are no longer relevant to the U.K.

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