HMT and PRA consult on ring-fencing reforms

What does this mean?

The proposals implement the next phase of the Government's ring-fencing reform programme following its 2026 Review. While the fundamental architecture of ring-fencing remains unchanged, the package introduces meaningful additional flexibility for ring-fenced banking groups (or for groups who may become subject to ring-fencing rules in the future) across products, counterparties, operating models and capital deployment.

A New Growth Allowance

A key component of the reforms is a New Growth Allowance, permitting RFBs to undertake activities currently prohibited by the regime up to a limit equal to 10% of Pillar 1 credit risk RWAs.

The allowance would:

• include credit risk, counterparty credit risk, settlement risk, credit valuation adjustment risk and market risk associated with activity undertaken under the allowance; 

• exclude operational risk; 

• be measured using a rolling 36-month average of quarterly data; 

• be calculated using each firm's existing capital methodology (IRB or Standardised); 

• apply at the RFB sub-consolidated level; and 

• absorb the existing SME equity exemption and Relevant Financial Institution de minimis threshold. 

Firms using the allowance would also be required to disclose how it is supporting the UK economy, including sectoral deployment and UK customer activity. The introduction of the Growth Allowance could reduce the need to migrate customers between the ring-fenced and non-ring-fenced bank as their financing needs become more sophisticated.

Wider customer offering

The Government is proposing to replace the current prescriptive list of permitted derivatives with an approach aligned to Basel 3.1. Rather than specifying individual products and maturity limits, RFBs would be permitted to offer customer derivatives falling outside the Basel Residual Risk Add-On (RRAO) framework.

This would significantly broaden customer offerings while retaining important safeguards, including:

• customer facilitation only; 

• own-risk management only; 

• IFRS Level 1 and 2 valuation requirements; and 

• the prohibition on cryptoasset derivatives. 

These changes should enable RFBs to support corporate customers across a broader range of risk management needs. The Government is also seeking evidence on whether existing market risk limits remain appropriately calibrated following Basel 3.1 implementation.

Expanded permitted counterparties

The consultation also proposes widening the range of entities to which RFBs may have exposures.

This includes:

• UCITS funds

• structured finance vehicles securitising UK SME loans

• a broader range of infrastructure SPVs

• financing vehicles supported by UK Public Financial Institutions including the British Business Bank, National Wealth Fund and UK Export Finance. 

Collectively, these proposals are intended to improve financing for SMEs, infrastructure and Government industrial strategy priorities while enabling banks to support clients throughout more of their growth lifecycle.

Pension flexibility

The Government also proposes allowing surplus assets within RFB defined benefit pension schemes to be transferred to defined contribution schemes elsewhere within the banking group, subject to safeguards preventing any ongoing liabilities being transferred back to the RFB.

Removal of shared services rules

Alongside these legislative reforms, the PRA is proposing to delete the shared services rules contained within Chapter 9 of the Ring-fenced Bodies Rulebook. These rules largely require operational services provided to an RFB from elsewhere in the banking group to be delivered through dedicated service companies and place restrictions on service provision across the ring-fence.

The PRA concludes that these requirements have become largely duplicative because equivalent protections are now delivered through:

• Operational Continuity in Resolution (OCIR)

• Operational Resilience

• Outsourcing and Third Party Risk requirements

• the Bank of England's resolution planning framework. 

Accordingly, the PRA proposes deleting Rules 9.1, 9.2 and 9.3, allowing considerably greater flexibility in operating models for groups subject to ring-fencing. Under the PRA’s proposals the requirement under the ring-fencing regime for the RFB to treat an intra-group exposure in the same way as a third-party relationship would remain as would requirements relating to legal separation, financial independence and governance.

What do firms need to do?

Although implementation is expected during 2027, firms should begin assessing where the proposals could reshape customer strategy, legal entity models and operating structures. The reforms provide an opportunity to revisit assumptions that have underpinned ring-fenced banking group business and operating models since 2019.

Impacted banks should assess the opportunities to expand activities and client offerings in the RFB. In particular the Growth Allowance may provide scope to retain customers within the ring-fenced bank for longer. RFBs are also likely to be able to broaden derivative offerings and expand financing activity across SME, infrastructure and Government-supported sectors.

The removal of the shared services rules could provide scope to significantly simplify operating models and reduce costs, while ensuring compliance with OCIR, Operational Resilience and Outsourcing frameworks. Firms should review operating models, legal documentation, governance arrangements and service agreements to understand where functions and activities are duplicated and where future efficiencies could be realised.

Next steps

HM Treasury's consultation closes on 8 September 2026, while the PRA consultation closes on 14 October 2026. Subject to Parliamentary approval of the Financial Services and Markets Bill, the Government intends to lay secondary legislation during 2027, with the PRA finalising corresponding rule changes thereafter.