Reforms seek to make the ring-fencing regime more proportionate, whilst retaining its core pillars.

By Rob Moulton, Gary Whitehead, and Charlotte Collins

On 18 May 2026, HM Treasury published the findings of its ring-fencing review. The Chancellor confirmed in her July 2025 Mansion House speech that the government would retain ring-fencing as a requirement, noting its importance to UK financial stability; however, she also acknowledged that the ring-fencing regime has become overly prescriptive and creates an unnecessary burden for affected banks. Accordingly, the government signalled that it would pursue reforms in an effort to support growth and competitiveness. The proposed reforms will be taken forward through a combination of the Financial Services and Markets Bill 2026-27, separate secondary legislation, and changes to PRA rules.

Link to Background Background

The UK bank ring-fencing regime was introduced as part of a package of major reforms aimed at improving the stability and resilience of the banking sector in the aftermath of the global financial crisis. It requires banks with more than £35 billion of retail deposits to separate core retail banking into an independent entity, insulated from investment banking activity.

The government was required to commission an independent review of the ring-fencing regime within two years of it coming into full effect. That review, led by Sir Keith Skeoch, reported in March 2022 that ring-fencing had increased the resilience of major UK retail banks and improved supervisory visibility. However, the Skeoch Review recommended updating the regime to improve proportionality and, in the longer term, better aligning it with the post-crisis prudential and resolution frameworks that have evolved considerably since ring-fencing was first proposed. In response, HM Treasury implemented the Smarter Ring-Fencing Reforms in February 2025 through secondary legislation, which introduced exemptions for retail-focused banks with limited trading activity, updated specific technical parameters, and raised the primary deposit threshold from £25 billion to £35 billion (see this Latham blog post).

Those reforms did not, however, fully address Skeoch’s observations on the inflexibility of the regime or its interactions with the resolution framework, which led to the Chancellor’s announcement in her July 2025 Mansion House speech that government would carry out a further review. The government is clearly mindful that, while the ring-fencing regime is positive from a financial stability perspective, it makes the UK an international outlier. Therefore, the government is seeking ways to make the regime more proportionate and flexible where it can.

Link to Key Proposals Key Proposals

The reform package spans a number of areas:

  • Less statute based: The government will make changes to primary legislation to remove prescriptive rule-making requirements, enable the PRA to disapply ring-fencing rules where objectives are already met by other prudential or resolution requirements, and remove detailed operational aspects of the regime from statute so that these can be recast in PRA rules, allowing for greater flexibility (this will enable the rules to be updated more easily, and waived or modified where appropriate).
  • Permitted risk taking: Subject to further consultation, ring-fenced bodies will be permitted to undertake otherwise prohibited activities up to a limit of 10% of their Pillar 1 risk-weighted assets for credit risk (the “growth allowance”). This will include proposals to require ring-fenced bodies to report publicly on how they are using the allowance. Some existing flexibilities will be incorporated within the allowance. The consultation will also consider the interaction between the allowance and the existing secondary threshold, which means that banks with over £35 billion of core deposits are only required to ring-fence if financial assets held for trading exceed 10% of Tier 1 capital.
  • Broader product and counterparty permissions: The government will consult on allowing ring-fenced bodies to offer a more comprehensive set of risk management products and on permitting exposures to a wider range of financial institutions and financing vehicles, including those supported by the British Business Bank and National Wealth Fund.
  • Addressing capital and MREL inefficiencies: The PRA and Financial Policy Committee will review how ring-fencing interacts with the Basel 3.1 output floor and the leverage ratio, and the Bank of England will review the calibration of the internal MREL scalar for ring-fenced bodies during the second half of 2026.
  • Operational resource sharing: In a separate but coordinated announcement on the same day, the PRA confirmed that it will consult this summer on reforming rules that currently prohibit the sharing of operational resources across the ring-fence, with a view to streamlining requirements and reducing cost. For example, this could increase flexibility around how groups with ring-fenced entities utilise data-processing services, information technology, and back office functions across the wider group.

Notably, the government has rejected proposals to permit greater sharing of funding and liquidity across the ring-fence, concluding that such changes could undermine depositor protection and financial stability.

Link to Next Steps Next Steps

Primary legislative changes will be progressed through the Financial Services and Markets Bill 2026-27 (see this Latham blog post), creating the more flexible framework described above. In summer 2026, HM Treasury will publish a consultation on the operation, level, and scope of the growth allowance and other reforms to allow ring-fenced banks to provide more products and services to businesses. The PRA will also consult this summer on providing firms with flexibility to share operational services across the ring-fence. The government has indicated that, going forward, it will review the primary core deposit threshold every three years, starting in Q2 2028. The PRA will review its ring-fencing specific reporting requirements in 2028 as part of its regular review of ring-fencing rules, to ensure they are proportionate once the revised regime is in place.