Ring-fencing reform: lowering the barriers?

June 2025

Amidst high profile interventions from HSBC, Lloyds, NatWest and others, and intense media speculation, the debate about the future of ring-fencing has been well and truly re-opened. In this context, we stand back and assess the debate and set out potential ways forward and what these could mean for UK banks.

First proposed by the Independent Commission on Banking (ICB) in December 2013 in response to the financial crisis, and finally implemented in the UK in January 2019, ring-fencing has become a cornerstone of UK financial services legislation.

Designed to protect (or ‘ring-fence’) firms’ UK retail banking operations from problems in their corporate and investment banking franchises of the type seen in 2007/8, ring-fencing required any firm with more than £25bn of UK retail deposits to conduct its retail banking activities through a separate and dedicated legal entity, with strict provisions on what was and was not allowed to cross the ring-fencing divide.

However, the ring-fencing regime has always been contentious and has not remained static. The previous government commissioned an independent review, the Skeoch report, which recommended targeted changes, and raising the ring-fencing threshold to £35bn was a key plank of the Edinburgh reforms. 

The current debate goes far beyond the Skeoch report or the Edinburgh reforms, which were primarily technical refinements rather than a fundamental overhaul. Instead, CEOs from HSBC, Lloyds and NatWest, amongst others, have asked for ring-fencing to be removed entirely and for the barriers to come down.

The logic behind this position is essentially three-fold:

1. The problem ring-fencing tackles (contagion from risky markets businesses spilling over to retail deposits) has significantly reduced — given that firms' trading operations are more collateralized, make more use of central clearing and are more focused on client facilitation rather than risky proprietary trading.
2. The ring-fencing solution has been superseded by other reforms, in particular the significant number of regulations designed to make banks more resolvable, which were not in place at the time of the ICB’s recommendations.
3. The competitive cost of ring-fencing is too high and places UK banks at a disadvantage to international peers (particularly in the EU which did not put in place similar regimes).

In summary, banks are now less risky, more highly regulated and less competitive, and argue that the focus should turn from micro-prudential stability to macro-prudential growth.

However, not everyone agrees, even among those banks that would ostensibly expect to benefit. The costs to implement ring-fencing were significant and the costs and disruption of unpicking these complex arrangements are likely to be material and may crowd out other important priorities. There is also a question mark over whether Whitehall policymakers or City regulators will be inclined to rely wholly on a resolution regime which, whilst well-developed, remains largely untested in anger.

We see three broad scenarios arising from the current debate:
 

Any changes to ring-fencing will likely affect different segments in different ways and to different extents. We have divided the key impacted segments into five categories — ‘UK domestic incumbents’, ‘UK headquartered global players’, ‘US inbounds’, ‘European inbounds’ and ‘Retail challengers and building societies’:

UK domestic incumbents — A transformative strategic opportunity

• These banks have the most to gain from a complete repeal of ring-fencing given limited growth capacity in retail franchises.
• Corporate and investment banking represents a key significant strategic opportunity domestically and internationally but is hampered by ring-fencing. Repeal enables the build of a more sustainable and scalable CIB franchise.
• Scenarios short of repeal may provide marginal funding synergies — particularly if they allow some intra-group lending across the ring-fence — but are unlikely to be transformational. 

UK headquartered global players — A cost and funding synergy play?

• Unlikely to have the same profound strategic impact as for UK domestics but does offer a significant opportunity to reverse the impacts of ring-fencing on trapped capital and liquidity and channel deposit funding into higher yielding CIB assets.
• Given there are more options for deploying retail deposits across the global franchise, this may also change attitude to M&A and desire to increase UK retail deposit footprint.

US inbounds — A deposit-driven expansion opportunity?

• There have been various successful US entrants to the UK retail deposit market and any increases to the ring-fencing threshold offer an opportunity to scale their UK deposit footprint and increase funding to their CIB franchises.
• However, we do not expect this to translate into a fully-fledged retail banking operation given competitive dynamics and potential opportunities for higher returns in other geographies.

EU inbounds — Double or quits?

• Reform of ring-fencing is unlikely to lead to a radical shift in the perceived attractiveness of the UK market for much the same reasons outlined above.
• However, for those inbounds already weighing the shape and structure of their existing UK presence, this will no doubt feed into their strategic assessment.
• For these banks the increased flexibility for retail deposits creates organic funding synergies. More interestingly and more strategically however, it potentially increases the M&A opportunities to exit the UK at a good price.

Retail challengers and building societies — A liquidity and margin squeeze?

• In our view, positive impacts are likely to be offset by more price competition in UK retail deposit markets, particularly savings, which will result in further liquidity squeeze and margin compression.
• Whilst redeployment of capital and funding from incumbents away from UK retail market provides ‘space’ on the asset side for challengers to increase presence in certain parts of the market, barriers to entry will remain high in many areas (e.g. prime residential) and a relaxation of ring-fencing does not change this.
• The key responses are likely to be M&A to acquire scale and real focus on rationalizing the cost base to protect profitability.

Any substantive reform of the ring-fencing regime could drive dramatic shifts in the competitive dynamics of the UK banking market — with incumbents likely to be the overall winners potentially at the expense of domestic mid-tier players.

The key question for government, of course, is how these competitive dynamics translate into consumer outcomes and macro-economic impacts. Does this translate into lower costs and better deposit rates for UK customers and more credit for UK corporates unlocking growth? Or does it increase risk and run counter to other objectives around mutuality and competitiveness? The jury is still out.

With such uncertainty on whether reform will happen, what it might look like and when it would take effect, it is too soon for firms to establish any clear plans or mobilize programs.

However, this doesn’t mean that they should adopt a passive ‘wait and see’ approach. The bookends for the potential scenarios are clear, and the strategic impacts seismic. In this context, firms can and should be taking Boards through scenario analysis to understand the organic and inorganic opportunities, where the challenges are and how they and peers should respond. If nothing else, it will be vital to participate fully and effectively as this critical debate continues to unfold.