Less Fenced In: Review of the UK Ring-Fencing Regime

On 18 May 2026, HM Treasury published the conclusions of its Ring-Fencing Review, which sets out a comprehensive package of proposed reforms to the UK’s ring-fencing regime. The Prudential Regulation Authority (PRA) simultaneously announced plans to consult on reforming rules around shared operational services for ring-fenced banks (RFBs). These proposals aim to create a more proportionate and flexible ring-fencing regime, with a view to supporting growth in the UK. 

Background of the Proposed Reforms

Ring-fencing was introduced following the financial crisis to require banks that hold significant retail deposits to separate their core retail banking activities from investment banking activities into an independent RFB.

The proposed reforms seek to ensure that the ring-fencing regime remains fit for purpose, taking into account changes to the regulatory landscape since the regime came into effect (eg the introduction of a comprehensive bank resolution regime), and to further implement the recommendations from the Skeoch Review in 2022. 

These reforms follow the government’s recent “Smarter Ring-Fencing Reforms”, which aim to help banks engage in trade finance and SME financing more easily and raised the primary core deposit threshold for ring-fencing from £25 billion to £35 billion.

Key Proposed Reforms

The Review proposes reforms in five areas. We have summarised the key changes below.

1. More Proportionate and Flexible Framework

The government proposes to remove many of the prescriptive rule-making requirements contained in the current legislation and move some specified operational elements of the ring-fencing regime into the PRA rules. This will allow the PRA to build a more proportionate and flexible regime in the face of regulatory and market developments.  

The government also proposes to expand the current legislation to ensure the PRA’s rule-making can cater for a broader range of bank failure scenarios, in addition to insolvency of a non-ring-fenced body in the group. 

These changes, among others, will be implemented through the Financial Services and Markets Bill (see current draft and explanatory notes), which is currently going through Parliament. In addition to the points above, the draft Bill imposes a statutory duty on the PRA to make further ring-fencing rules only if the existing provisions, taken as a whole, are not sufficient, which should reduce the risk of duplication between regulations that apply to RFB groups.

2. More Products and Services to be Allowed for RFBs

Aligned with the government’s growth agenda, a key proposal is the “New Growth Allowance” (the Allowance), which will permit RFBs to undertake activities that are currently prohibited by the ring-fencing regime up to a certain proportion of their risk-weighted assets, thereby helping to reduce banking-related costs for growing businesses and allowing banks to service and lend to a broader range of financial counterparties within the Allowance. 

The government will consult on the Allowance for up to 10% of a RFB’s Pillar 1 risk-weighted assets for credit risk, which they say could be used to unlock up to £80 billion of financing for UK businesses. The consultation will also consider if existing flexibilities, eg the £100k exposure limit to relevant financial institutions (RFIs) and the permission to invest up to 10% of Tier 1 capital in SME equities, should be folded into the Allowance. The Review does not set out details of the Allowance, much of which therefore still remains subject to consultation. Firms may want to share their views on, eg: which activities should be permitted and the relevant thresholds. They should also consider how the Allowance should interact with the secondary ring-fencing threshold, which exempts banks from ring-fencing if the financial assets held for trading do not exceed 10% of their Tier 1 capital. 

There will also be consultations on: (i) further expanding the range of risk management products RFBs can offer and moving the list of permitted derivatives out of legislation, and (ii) permitting RFBs to have exposures to firms that offer services the RFBs could perform themselves and structured financing vehicles that invest in SMEs.

3. Review of Prudential Requirements for RFBs

The Bank of England’s Financial Policy Committee has committed to explore the interaction between capital and ring-fencing requirements, eg the extent to which the leverage ratio has become more binding as a result of underlying reductions in the riskiness of banks’ exposures. It has also committed to review the Basel 3.1 output floor at the ring-fenced subgroup level after Basel 3.1 is implemented, but before full weighting of the output floor comes into effect in 2030.

The Bank of England will also review its calibration of the Minimum Requirement for own funds and Eligible Liabilities (MREL) for RFBs within banking groups and engage firms on this issue in the second half of 2026.

4. Relaxation of Separation Requirements

The PRA will consult this summer on relaxing the restrictions for sharing operational services across the ring-fence, in light of other rules that provide similar protections. This could help banking groups operate more efficiently by making resources, eg IT and other back-office support, available across the group. 

The government intends to consult on targeted legislative changes to enable more flexibility in how surplus in closed RFB pension schemes can be used across the ring-fence.

On the other hand, it has decided not to take forward proposals to permit the sharing of financial resources across the ring-fence, as they could undermine the ring-fencing regime.

5. Review of Thresholds and Reporting Requirements

The government has committed to reviewing the core deposit threshold (currently at £35 billion) every three years, with the first review being conducted in Q2 2028.

The PRA will review ring-fencing specific reporting requirements as part of its regular review of its ring-fencing rules, reporting in 2028, in addition to reviewing regulatory reporting for banks under the Future Banking Data programme.

Next steps

Consultations on expanding the range of products and services that RFBs can offer (including the New Growth Allowance) and sharing of operational services are expected to be published in summer 2026.

The direction of travel is clear from the Review: while the ring-fencing regime is here to stay, the government wants to make sure that it responds appropriately to the evolving regulatory landscape and supports growth in the UK. That is to be welcomed.