The 2007-2009 financial crisis led the Government to undertake a programme of structural reform of the UK banking system. A central element of this is the requirement for UK banks to ring-fence their retail activities (both personal and small and medium-size entities (SMEs)) from wholesale and investment banking by protecting the provision of core banking services to retail and SME depositors.
Core banking services
These are defined as:
- Facilities for accepting deposits or other payments
- Facilities for withdrawing money or making payments
- Overdraft facilities.
The framework for ring-fencing was set out in the Financial Services (Banking Reform) Act 2013, which provides for the separation of core activities (deposit taking) which must be carried out by ring-fenced bodies (RFBs) from excluded activities (trading in investments) which RFBs are not permitted to do.
What RFBs can – and cannot – do
The Government has recently issued detailed regulations on which bodies are RFBs, what activities can only be done by RFBs and what RFBs cannot do.
(a) Exempt bodies
Institutions taking deposits will have to be RFBs unless they are exempt from ring-fencing; exempt institutions include:
- Building societies
- Insurance companies
- Co-operative societies and community benefit societies
- Deposit-takers holding less than £25 billion in ‘core deposits’.
(b) Core deposits
The RFB regime only applies to ‘core deposits’. These are deposits made by customers other than customers who are:
- Financial institutions
- Organisations whose annual turnover exceeds £6.5 million OR who have more than 50 employees OR whose balance sheet shows assets of more than £3.26 million
- Individuals with assets (being only cash or shares for this purpose) of more than £250,000
(c) Prohibited activities
RFBs must not:
- Buy, sell or otherwise deal in shares or other investments
- Deal in commodities (metals, oil, agricultural produce and the like).
There are certain exemptions to these general prohibitions, including:
- RFBs may continue to take security over shares and other investments and enforce such security
- Simple derivatives can be sold to customers (principally, certain currency and interest swaps and options).
The mechanics of actually establishing RFBs will take some years as issues such as liquidity and capital requirements, intra-group transfers and ‘electrification’ of the ring-fence are finalised. The Government hopes to finalise the main detailed regulations by next year.