While the Chancellor, in her 2025 Mansion house speech, committed to a review and meaningful reform of the UK ring-fencing regime, it is questionable whether now is the right time for another review and more change?
A brief history
Ring-fencing is the separation of UK retail activities, such as deposit taking and mortgage lending, from wholesale, investment and international activities within a group. It was recommended by the Independent Commission on Banking (ICB), as one of the responses to the 2007/09 global financial crisis (GFC). Its purpose is to improve financial stability by promoting the continued provision of core retail activities vital to the UK economy.
The ICB felt that: “structural separation should make it easier and less costly to resolve banks that get into trouble; [that] structural separation should help insulate retail banking from external financial shocks, including by diminishing problems arising from global interconnectedness; [that] structural separation would help sustain the UK’s position as a pre-eminent international financial centre while UK banking is made more resilient; [and that ring-fencing] accompanied by appropriate transparency should assist the monitoring of banking activities by both market participants and the authorities.
If ring-fencing had existed prior to the GFC, core UK activities might have been better insulated and, notably RBS, might not have needed a £45bn investment from the UK government to save the entire group, losing the taxpayer £27bn (Bank rescues of 2007-09: outcomes and cost).
Structural separation of retail from other activities is not a new concept and, the UK is not alone in requiring separation, although there are different forms and ‘strengths’ to the various ring-fences. The US Glass-Steagall Act (1933) separated commercial and investment banking as a response to banks suffering investment and stock market losses leading to bank failures and to the detriment of US retail depositors. The Glass-Steagall Act was repealed in 1999, less than ten years before the GFC. Elsewhere for example, post the GFC, the US passed the Volker Rule to limit banks’ proprietary trading, or Germany required certain proprietary trading be undertaken in a separate legal company.
The UK ring-fencing requirements are mostly set out in legislation, but also in PRA rules, and became effective 1 January 2019. A key provision was that ring-fencing applies to UK banks with more than £25 billion of core retail deposits (raised to £35bn in early 2025). As at 1 April 2025 only the big five UK banking groups had ring-fenced businesses (HSBC, Nat West, Lloyds, Santander, and Barclays). Building Societies were exempted as predominately retail in nature.
In 2022, the Skeoch Review concluded that “the ring-fencing regime is worth retaining at present”, and that “retail banking in the UK is safer than it was before the global financial crisis”. The review made various recommendations to improve the operation of the regime, including amending the ring-fence boundary to limit the banks in scope to the largest most complex and systemic, and expanding the range of services capable of being provided from within the ring-fence. However, the Review also felt that the “regime’s benefits will likely diminish with time”, notably due to the introduction of the Resolution regime, and so also proposed that HMT review how best to align the two regimes in the longer term, including giving more flexibility to the authorities to exclude resolvable banks from ring-fencing.
In December 2022, as part of its Edinburgh reforms, the then Conservative government announced its intent to take forward and consult on the recommendations of the Skeoch Review, as well as to raise the deposit threshold to £35bn. The consultation was launched in September 2023. The new Labour government published a response and laid a Statutory Instrument (SI) before Parliament on 11 November 2024. The SI came into effect on 4 February 2025.
In March 2023 there was a call for evidence on aligning the ring-fencing and resolution regimes, with the government’s response published in September 2023. 14 written responses were received, with the government concluding that they provided limited evidence and a range of views on the benefits of ring-fencing and options for reform. The government proposed to set out its further policy response in the first half of 2024, and which is now being taken forward by the Labour government.
In January 2024 (presented December 2023 to HMT) the Bank of England / PRA published a review of its ring-fencing rules, in which it concluded that most rules were performing satisfactorily, although some improvements were identified.
Leeds reforms
In its 2024 plan for financial services, the Labour Party “committed to upholding the ring-fencing regime to protect financial stability, and supports the on-going work to align with the resolution regime, as recommended by the Skeoch Review”.
On 15 July 2025 the Labour government launched the Leeds Reforms, a set of measures aimed at boosting investment and UK growth. As one of the proposed changes to the capital regime to free up capital for growth, the government stated “The ring-fencing regime – which separates banks’ retail and investment banking activities – will be reformed. The Economic Secretary will lead a review looking at how changes can strike the right balance between growth and stability, including protecting consumer deposits”.
The Chancellor adopted a more activist approach to change in the Mansion House speech: “I have committed to meaningful reform of the UK’s ringfencing regime recognising that now is the time to go further in tackling inefficiency and boosting growth while retaining the aspects of the regime that support financial stability and protect consumer deposits”.
And the Growth and Competitiveness Strategy set out the potential areas that the government might target for change: “..This review will … assess options for:– Allowing ring-fenced banks to provide more products and services to UK businesses.– Addressing inefficiencies in how ring-fencing is applied to banking groups. – Examining the case for allowing banks to share resources and services more flexibly across the ring-fence.”
Most policies have scope for some improvement, but whether meaningful change is proposed, and what that might be, we need to await the findings of the review due in early 2026.
Opponents and proponents of ring-fencing
It is not surprising that a majority of the large UK banking groups favour significant reform or even removal of the ring-fence in its entirety. In a Treasury Committee (TC) hearing on 20 May 2025, HSBC, Lloyds and Nat West felt that ring-fencing traps too much capital and liquidity in the ring-fenced business to the detriment of lending to UK corporates, while other policies such as resolution provide the necessary depositor and stability protections. Barclays dissented: “It has led to financial stability, to depositor protection enhancements, …, and to increased trust in the sector. In the last couple of years we have seen some financial issues across the globe. We have been more immune to those, and I think that is because we have ringfencing”.
Any possible changes may, however, not be the chancellor’s silver bullet triggering immediate growth, as Lloyds felt the implementation process would mean any benefits are not felt before the 2030s.
Following the hearing the Bank of England wrote to the TC setting out the arguments for retention of the ring-fence, including that:
- Structural separation benefits resolution and helps safeguard public funds.
- There is a real risk that removing the ring-fence will lead to UK deposit being used to fund international lending by the banks as they look for enhanced returns. This would be the opposite outcome to that the chancellor is looking for.
- Research has found that ring-fenced banks are perceived as safer and benefit from lower funding costs. Similarly, the FPC has judged that capital levels are lower than they otherwise would be. Removing the ring-fence or significantly weakening it may therefore drive up the costs of UK borrowers. Another undesirable outcome. That would, however, address a concern expressed elsewhere that ring-fencing fuels a domestic credit bubble.
The Bank also judged that there was more capacity for the ring-fenced businesses to lend to UK SMEs, which would be consistent with the aims of the chancellor.
But do we need another review and changes now?
While notionally a continuation of the March 2023 call for evidence and a review of the coherency of the broader set of policies, it is unclear whether the review might also look to make changes to ring-fencing in isolation.
Either way it is questionable whether now is the right time to contemplate further changes to the regime or even conduct a review. It is only two years since an apparently inconclusive call for evidence on aligning the ring-fence and resolution regimes; and three years since the Skeoch review might not be enough time for additional reasonable changes to become apparent.
Across the range of policies, ring-fencing has been in force for a mere six years, while the Skeoch recommendations to improve the functionality of the regime only came into force in February 2025. The resolution regime likewise has only been in force a few years, while Basel 3 has yet to be fully implemented. The challenge for the review is, therefore, whether the range of policies has had sufficient time to embed to allow firm conclusions about their operation to be made, and about their interaction with each other. This was somewhat recognised by the Skeoch review, whose recommendation was to consider how to align the ring-fence and resolution regimes in the long run: we are arguably still in the short run.
Furthermore, while it is appropriate that policies should be reviewed to ensure they are operating as intended and that changes be made if they are not, change is not without risks and implementation costs. As such, it seems advisable that frequent changes should not be made. If changes have recently been implemented (as with ring-fencing) the bar for further change shortly thereafter should perhaps be higher than otherwise would be the case. So change at this time should perhaps only be made for a fundamental flaw in the policy (for example the £35bn threshold is far too low). There is a possibility that a government looking for ways to stimulate the economy and growth may go the other way and set too low a bar for change.
Another risk with ongoing reviews is that they continually provide ammunition to chip away at the ring-fence, over time potentially undermining its purpose and operation. While small incremental changes relaxing the ring-fence might seem innocuous, cumulatively that might not be the case, with the policy eventually becoming a shadow of its former self.
So, while it is not clear a review is priority, one could be undertaken to debate the coherency of the various regimes or how to assess coherency, but any actual changes to the ring-fencing regime should not perhaps be on the table at this time.
