The context in which the ring-fencing regime was introduced post-2008 financial crisis is vastly different from the one in which it now operates. Now, as part of the Edinburgh Reforms, the UK government is proposing changes with a stated purpose of making the ring-fencing regime simpler, more agile and coherent with wider regulation. In this blog we look at why, how and when the reforms will take place.

What is ring-fencing?

The ring-fencing regime, introduced in response to the 2008-09 global financial crisis, requires banks to separate ("ring-fence") consumer or retail banking operations from their investment banking arms to protect customers.

With the aim of insulating critical banking services on which households and SMEs depend from problems elsewhere in the financial system, ring-fencing ensures that only ring-fenced banks can carry out these service in separate entities with individual capital and liquidity requirements.

The government hoped that ring-fencing would increase the stability of the UK's financial system and prevent the costs of failing banks falling on taxpayers again.

Why reform the ring-fencing regime?

In February 2021, the Treasury appointed an independent panel chaired by Keith Skeoch to undertake a statutory review of the ring-fencing regime and proprietary trading ("RFPT Panel"). The RFPT Panel's final report (the "Report") was published on 15 March 2022.

The Report:

  • concluded that the ring-fencing regime has helped improve the safety of retail banking and the resilience of the UK's financial system by making certain large and complex retail banks easier to resolve and supervise.
  • concluded that the ring-fencing regime was worth keeping for now but that the benefits may reduce, particularly as the resolution regime (which is designed to ensure that critical functions on both sides of the ring-fence in a financial group can continue) is embedded.
  • made a series of recommendations about how the ring-fencing regime could be modernised to ensure that it does not stagnate, particularly in the context of the developments in the resolution regime in tackling banks "too-big-to-fail".

What are the Edinburgh Reforms on ring-fencing?

The RFPT Panel's recommendations are now being taken forward by the UK government as detailed in its response to the Report which was published as part of a package of regulatory reforms coined the "Edinburgh Reforms".

The government's response announced that the RFPT Panel's recommendations around:

  • alignment of the ring-fencing and resolution regimes, and
  • improvements to the functionality of the existing ring-fencing regime

will be consulted on at different stages throughout 2023.

The UK government will also review the deposit threshold, which is the level of retail deposits which triggers the application of the ring-fencing regime.

We look at each of these in turn.

Alignment of the ring-fencing and resolution regimes

The alignment of the ring-fencing regime with the resolution regime will be the reform which is addressed first.

The RFPT Panel's review found that the benefits of the ring-fencing regime would likely reduce over time as the resolution regime is embedded and offers a more comprehensive solution to addressing the problems of banks "too-big-to-fail".

The government agreed with the RFPT Panel's recommendation to review the practicalities of aligning the two regimes with the aim of creating a new power for the authorities to remove banks judged to be resolvable from the ring-fencing regime. Broadly, being judged to be resolvable means that the authorities can intervene to manage the bank's failure other than by allowing it to go into simple insolvency (for example by using bail-in or partial-transfer tools).

The UK government will, therefore, issue a public call for evidence in the first quarter of 2023 asking for views on the long-term benefits of the ring-fencing regime in light of developments in the resolution regime and exploring options for aligning the ring-fencing and resolution regimes.

Improvements to the ring-fencing regime

The second set of proposals for reform will be consulted on in mid-2023 and will include:

  • taking banking groups without major investment banking operations out of the ring-fencing regime;
  • updating the definition of Relevant Financial Institution (a category of customer to which ring-fenced banks may not have prohibited exposures);
  • removing blanket geographical restrictions on ring-fenced banks operating subsidiaries or servicing clients outside of the European Economic Area;
  • reviewing and updating the list of activities which ring-fenced banks are restricted from carrying out; and
  • generally, taking forward technical amendments outlined in the Report to improve the functionality of the regime, eradicate unintended consequences and provide benefits for the sector and the economy.

Review of the deposit threshold

Although not a Report recommendation, the UK government also aims to consult on plans to potentially increase the ring-fencing threshold from £25 billion to £35 billion of retail deposits in mid-2023.

Increasing the threshold would open up further relatively cheap funding for banks currently just below the threshold by enabling them to increase their levels of retail deposits without becoming subject to the ring-fencing regime.

The consultation process will consider any potential risks to financial stability and the provision of banking services and will have regard to any competition effects in reaching its decision.


Reviewing the ring-fencing regime should ensure it can address future risks in the dynamic banking sector. While the UK government's proposals are yet to be firmed up, there is a clear indication of direction of travel.

The UK was an outlier when it came to implementation of structural separation under the ring-fencing regime and one given reason for this was the relative size of the banking sector in the UK economy at the time, but that relative size has reduced markedly since 2008. This, along with availability of the resolution powers in the regulatory toolkit under the Banking Act 2009, the vast regulatory reforms and technological advances and the rise of non-bank financial services mean that the environment in which banks operate in the UK has changed dramatically. A review of the ring-fencing regime should be with the following in mind; to encourage innovation, growth and competition in banking services.

This article forms part of a series on the Edinburgh Reforms. You can read about the Edinburgh Reform proposals to repeal retained EU law in financial services here.


Lindsay Lee

Senior Associate