UK Mulls Aligning its Ring-Fencing and Resolution Regimes for Banks

On March 2, 2023, HM Treasury issued a Call for Evidence requesting views on the practicalities of aligning the ring-fencing and resolution regimes for banks. The potential to align the U.K. ring-fencing and resolution regimes was announced on December 9, 2022 as part of the Edinburgh Reforms, in response to the recommendations of Independent Review on Ring-fencing and Proprietary Trading, published in March 2022. We discussed the Edinburgh Reforms in our client note: "UK Government Publishes Edinburgh Reforms for Financial Services". Responses to the Call for Evidence may be submitted until May 7, 2023.

In the Call for Evidence, the government is seeking views on:

• The benefits of the ring-fencing regime, such as the potential to assist in bank resolvability because of the likely reduction to the time and cost of the post-resolution restructuring process, operational continuity in resolution, legal certainty for firms about when they will be required to restructure their business, greater supervisory scrutiny and depositor confidence.
• The costs of the ring-fencing regime, such as operational costs, competitiveness and the impact on competition.
• The appropriate criteria for assessing the various options for reform, such as impact on financial stability and firms, impact on competition, impact on U.K. competitiveness and growth.
• The options for reform, which are:
  • Retain the regime, making only the other changes recommended by the Independent Review on Ring-fencing and Proprietary Trading, about which, see below.
  • Disapply the regime for some or all in-scope firms. The operation of this option would depend on the criteria adopted. The Review recommended removing a firm once it is considered resolvable. HM Treasury note that this approach may result in firms being judged as needing to be in or out of the regime at different points in time.
  • Reform the regime so as to remove those factors that do not provide benefits. These reforms would go further than the reforms announced in response to the Independent Review on Ring-fencing and Proprietary Trading.

In response to the Independent Review on Ring-fencing and Proprietary Trading, the government has confirmed that it will consult in mid-2023 on the recommendations made by the Review (other than the recommendation to align the ring-fencing and resolution regimes). These reforms include:

• Removing banks that do not have major investment banking operations from the ring-fencing regime entirely.
• Revising the definition of "Relevant Financial Institution" so as to allow ring-fenced banks (RFBs) to provide banking services to smaller financial institutions.
• Reviewing the list of activities which RFBs are prohibited from undertaking, with a view to allowing RFBs to conduct certain activities (e.g., providing inflation swaps to facilitate project finance and in certain cases taking equity stakes in certain FinTech companies that help the bank improve customer experiences).
• Removing the prohibition on RFBs that prevents them from operating or servicing customers outside the European Economic Area.
• Improving the operation of the regime with various technical amendments, such as introducing a transitional regime in the event of a merger or acquisition of a bank.

In addition, the Government is also proposing to raise the threshold for banks to be within scope of the regime from £25 billion to £35 billion in retail deposits. This latter amendment was not proposed by the Independent Review, which instead suggested that banks with retail deposits in excess of £25 billion should be exempt from ring-fencing where they conducted excluded activities up to a certain level.

A Financial Markets Law Committee paper published in November 2021, to which Shearman & Sterling contributed, set out a series of very detailed potential reforms to make the ring-fencing regime more effective and eliminate uncertainties and difficulties with the regime. The current proposals do not yet extend to addressing this level of detail, however, these could be addressed in the consultation expected in mid-2023.

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