Expert review backs keeping rules on ringfencing UK retail banks

A review of the UK’s ringfencing regime has concluded that it should be kept in place, disappointing many banks that had wanted to see the rules scrapped or relaxed.

However, a panel of financial experts warned that over time the system’s inflexibility could stifle the country’s retail banking market and should eventually be superseded by newer regulations designed to oversee lenders deemed “too big to fail”.

Ringfencing was introduced after the huge state bailouts of the financial crisis and requires lenders with more than £25bn in deposits to formally separate consumer operations from their investment banking arms to protect ordinary customers.

Despite lobbying from banks to scrap the rules entirely or increase the threshold, it should remain at £25bn, the panel led by Keith Skeoch, former Standard Life Aberdeen chief executive, recommended to the Treasury.

The review did, however, raise the prospect that some British lenders with “minimal investment banking activities” could be removed from the regime, reducing the associated costs and complexity of adhering to it.

Of the seven banks subject to the rules, the Treasury could decide to release Santander UK, Virgin Money and TSB Bank, all of which have little or no trading operations and, therefore, very small ringfenced units. Their larger rivals Barclays, HSBC, NatWest and Lloyds would still have to comply.

“The ringfencing regime has been successful in achieving some of its objectives of improving financial stability . . . [and is] worth retaining at present, but needs to be more adaptable, simpler, and more coherent with wider regulation,” Skeoch said in a statement on Tuesday.

“The regime’s benefits will diminish with time while the resolution regime overtakes it in providing a more comprehensive solution for tackling too-big-to-fail,” he added. Otherwise “in the longer term, there is a risk that retail banking in the UK ossifies”.

Since ringfencing was first conceived in 2013, new rules governing capital buffers and how banks are resolved should they go bankrupt have been introduced that are more comprehensive, the review argued.

In future, if a bank is deemed fully “resolvable” without any loss to taxpayers, the Treasury could decide to remove its ringfencing requirement.

The review recommended addressing the inadvertent exclusion of some smaller financial advisory companies from the rules, leaving them unable to access financial services from either the ringfenced or non-ringfenced sides of a bank.

As flagged in a prior release of its initial findings, the review found no evidence to support claims by challenger banks that the regime had resulted in mortgage pricing being driven down.

Separately, some international investment banks have complained that the regulation inhibited growth and inward investment to the UK and affected London’s competitiveness on the international stage.

They had hoped the Treasury might consider softening the regime and boosting the threshold to £40bn or more following Brexit.

The issue was of particular significance to Goldman Sachs, which founded a new UK retail bank called Marcus in 2018 to help cheaply finance its London-based international investment banking operations. It quickly grew to near the £25bn deposit ceiling and had to stop taking new customers in 2020.

The ringfencing rules, which were designed to prevent future taxpayer bailouts on the scale of those in the wake of the 2008 financial crisis, only came into force in 2019 after a six-year implementation process.