HMT consults on ring-fencing reform

HM Treasury (HMT) has published a consultation on proposed ring-fencing reform following its review published in May. The review found that while the regime remains an important component of UK financial stability, it should be updated to be more flexible, proportionate and responsive to developments. The government confirmed its intention to take forward a package of proposals through primary legislation (as part of the ongoing Financial Services and Markets Bill), secondary legislation and the UK Prudential Regulation Authority (PRA) rulebook.

The government is now consulting on the technical details of implementing the aspects of the package to be delivered via secondary legislation. This covers:

• A new growth allowance, proposed at 10% of a ring-fenced banks (RFBs) Pillar 1 risk-weighted assets for credit risk (including counterparty credit risk). The allowance will incorporate existing small and medium-sized enterprise (SME) exemptions and the relevant financial institution de minimis.
• Expanding the range of products RFBs are permitted to offer, so the ring-fencing legislation on permitted derivatives will be brought into line with Basel 3.1 and permit RFBs to offer customers a wider suite of derivative products which are not in scope of the market risk relevant risk add-on as defined in the PRA Rulebook.
• Expanding the range of counterparties RFBs are permitted to have exposures to, including holding exposures to Undertakings for Collective Investment in Transferable Securities and to Structured Finance Vehicles set up for the purpose of securitising SME loans, amongst others.
• Management of pension schemes.

HMT is also seeking to understand if any further technical changes could be made to address barriers to RFBs supporting the UK real economy.

The deadline for responses is 8 September. The government will consider feedback before publishing a draft statutory instrument; the final instrument will be laid in 2027, following Parliament's approval of the Financial Services and Markets Bill and subject to parliamentary time.

In parallel, the PRA published a consultation paper confirming its intention to consult on deleting rules 9.1, 9.2 and 9.3 of the Ring-fenced Bodies Part of the PRA Rulebook.

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