HMT sets out Ring-Fencing Review findings

What does this mean?

The review proposes the most significant changes to the UK ring-fencing regime since its implementation in 2019. While the Government has confirmed that ring-fencing will remain in place, it is seeking to adapt the framework to reflect changes in banking markets, prudential regulation and the wider resolution regime. 

The Government and the PRA recognise that the current framework is highly prescriptive, with many requirements embedded directly in legislation. This has limited the regime’s flexibility and created duplication where similar outcomes are already achieved through prudential and resolution rules. To address this, the Government plans to introduce legislation that would give the PRA greater discretion in how ring-fencing rules are designed and applied. 

One of the most significant proposals is the introduction of a “New Growth Allowance". Subject to consultation, this would allow ring-fenced banks (RFBs) to undertake activities currently prohibited under the regime up to a limit of 10% of Pillar 1 credit risk-weighted assets. The Government estimates this could unlock up to £80bn of additional financing for UK businesses and infrastructure projects. The proposal is intended to help fast-growing firms continue banking with the same institution as their needs become more sophisticated, reducing the need to migrate to non-ring-fenced entities or alternative providers. HMT will consult in the summer of 2026 on the details of the New Growth Allowance.

The review also proposes expanding the range of risk management products RFBs can provide to clients. Current restrictions on derivatives and hedging products are viewed as creating unnecessary friction for businesses seeking to manage risks in an uncertain environment. This could result in RFBs being able to offer more comprehensive treasury and hedging solutions directly from within the ring-fence.

In addition, the Government is seeking to improve the ability of RFBs to participate in financing initiatives supported by UK Public Financial Institutions, including the British Business Bank (BBB) and National Wealth Fund (NWF). Currently, aspects of the ring-fencing framework can limit RFB participation in certain funding vehicles and structures involving these institutions. The proposed reforms would allow RFBs to participate more fully in financing schemes guaranteed or supported by the BBB and NWF, potentially increasing the flow of funding into UK infrastructure, innovation and scale-up sectors. This aligns closely with the Government’s broader industrial strategy and growth agenda.

The Financial Policy Committee (FPC) and PRA will review how ring-fencing interacts with elements of the Basel 3.1 framework, including the application of the output floor at ring-fenced subgroup level. Some banks have argued that aspects of the current framework can result in duplicated or overly conservative capital requirements when applied alongside ring-fencing structures. The authorities will also review how the leverage ratio framework interacts with ring-fencing requirements. This reflects growing regulatory recognition that reductions in underlying asset riskiness may mean leverage requirements are becoming more binding than originally intended for some firms. 

The Bank of England has confirmed it will review the calibration of the internal MREL scalar applied to ring-fenced bodies and engage with firms further during 2026. Some firms have argued that current internal MREL requirements can lead to excessive pre-positioning of loss-absorbing capacity within ring-fenced entities, creating inefficiencies in capital and funding structures across banking groups. While no immediate changes have been proposed, the review indicates regulators are open to reassessing whether the current approach remains appropriately calibrated.

Operational flexibility is another major theme of the review. The PRA has announced plans to consult on permitting greater sharing of operational resources and services across the ring-fence. In particular, the consultation will examine how groups with ring-fenced entities utilise operational services, such as data-processing services, information technology and back office functions, across the wider group. This reflects developments in operational resilience and resolution frameworks since ring-fencing was originally introduced, particularly the implementation of Operational Continuity in Resolution (OCIR) requirements.

The Government has, however, ruled out more fundamental reforms that could weaken financial separation between ring-fenced and non-ring-fenced entities. In particular, it has rejected proposals to allow greater sharing of funding and liquidity across the ring-fence without appropriate safeguards. The Government concluded that such changes could undermine depositor protection and financial stability. 

What do firms need to do?

While further details will be provided through the consultations in the summer, firms should begin assessing the strategic, operational and prudential implications of the proposed reforms. This is particularly important where the changes could create opportunities to expand business models and client offerings or rationalise legal entity structures.

Ring-fenced banking groups should evaluate how the proposed New Growth Allowance may enable them to provide additional lending, treasury and risk management services from within the ring-fenced entity. This includes considering potential impacts on product governance, risk appetite, capital allocation and client onboarding models. Firms should also assess whether existing booking models and counterparty management frameworks may need to change if the reforms proceed.

Operationally, banks should review current shared service arrangements and dependencies between ring-fenced and non-ring-fenced entities. The PRA’s planned consultation on operational resource sharing may create opportunities to simplify operating models and reduce duplication, but firms will still need to demonstrate operational and outsourcing resilience.

Next steps

In summer 2026 HMT will consult on the New Growth Allowance and wider product and counterparty reforms, while the PRA will consult on operational resource sharing changes. Legislative reforms will follow through the upcoming Financial Services and Markets Bill.