Treasury confirms changes that could free up £80 billion in additional business lending, though core protections remain in place
The UK government has set out plans to ease ring-fencing rules that require large banks to keep their retail operations separate from investment banking activities, following a review launched by Chancellor Rachel Reeves last year.
Ring-fencing, introduced in 2019, applies to banks holding at least £35 billion in retail deposits. Five institutions are currently subject to the regime: Barclays, HSBC, Lloyds Banking Group, NatWest and Santander UK. The rules were designed to protect retail depositors and taxpayers by preventing lenders from using funds from ordinary customers to finance complex or high-risk activities.
The Treasury confirmed that legislation would be amended to broaden the range of activities permitted within ring-fenced entities, including lending to public financial institutions such as the British Business Bank and the National Wealth Fund. Banks would receive an allowance worth up to 10% of their risk-adjusted ring-fenced assets to carry out activities currently prohibited, provided these support the real economy. They would also be permitted to conduct additional hedging activity through derivatives within ring-fenced entities and share some pension surpluses across their business.
Lucy Rigby, chief secretary to the Treasury, said the planned changes would "unlock finance for growth" by freeing up £80 billion of extra lending, while keeping the UK banking system "resilient, competitive and fit for the future."
The Bank of England's Prudential Regulation Authority (PRA) is to consult over the coming months on allowing essential back-office functions — including IT services — to be shared between ring-fenced and non-ring-fenced parts of a bank. Such arrangements are currently prohibited under the existing regime.
David Bailey, executive director for prudential regulation at the PRA, said: "The forthcoming consultation…is designed to make the ring-fencing rules more proportionate, reducing the compliance costs for Britain's biggest banks. It will allow banks more flexibility in the way they support their customers while retaining important protections for consumers' deposits."
The reforms fall short of the outright abolition that some in the industry had sought. Several large banks have long argued that changes to resolution rules and the introduction of new consumer protection measures have rendered ring-fencing redundant, and that the regime — estimated to cost UK banks a combined £1.5 billion per year — hampers their ability to lend to businesses. Barclays has been an exception, with its chief executive backing the regime.
The announcements coincide with the departure of Sam Woods, PRA deputy governor and the architect of the ring-fencing regime, who is due to step down at the end of next month. His successor, Katharine Braddick, formerly head of strategic policy at Barclays, told lawmakers in April that she was not planning further reforms beyond those already outlined.
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