HM Treasury set out plans to ease ring-fencing rules for banks

HM Treasury has announced that it is moving forward with plans this summer to relax the bank ring-fencing regime, a measure introduced following the financial crisis in 2019 that is designed to separate retail banking activities from riskier investment banking activities. The ring-fencing rules apply to banks with at least £35 billion in retail deposits, which includes, Barclays, HSBC, Lloyds, NatWest and Santander UK. 

The Chancellor confirmed at last year’s Mansion House that the government would uphold ring-fencing and undertake a review to identity meaningful reform to support growth. With this review now concluded, HMT has now also published a report, ‘Safeguarding Stability, Enabling Growth: The Ring-Fencing Review’ announcing the package of reforms that will be delivered through the forthcoming Enhancing Financial Services and Markets Bill and subsequent legislation. The focus is on creating a more “agile and proportionate regime that reduces duplication within banks and removes barriers to lending and investment” without weakening protections for consumers.  Further consultation is expected this summer on the proposals.

Overview of the key proposals

• New Growth Allowance: At the heart of the reforms is the introduction of a ‘New Growth Allowance’ which will permit ring-fenced bodies (RFB) to undertake activities otherwise prohibited by the regime, with the aim of unlocking new financing for UK businesses. HMT will consult on an allowance worth up to 10% of their Pillar 1 risk-weighted assets for credit risk. HMT will also consider the interaction between the allowance and the existing secondary threshold, which requires banks with over £35bn of core deposits to ring-fence if financial assets held for trading exceed 10% of tier 1 capital.

• More risk management products: HMT will consult on allowing RFBs to offer a more comprehensive set of risk management products. The government will also work with the PRA to consider whether the list of permitted derivatives should continue to sit in legislation or be delegated to the PRA to ensure it can be updated more easily in the future.

• Delegation to the PRA: HMT propose to legislate to move operational aspects out of legislation into more detailed PRA rules, allowing the PRA more flexibility to update and tailor the rules as the financial system evolves. The PRA will also be enabled to remove outdated and duplicative rules where the objectives of ring-fencing are already met by other prudential or resolution requirements.

• Addressing inefficiencies in how ring-fencing is applied: The PRA and the Financial Policy Committee will review how ring-fencing interacts with certain capital requirements, including how the Basel 3.1 output floor and the leverage ratio are applied to banks in the regime. The Bank of England will also engage with firms in the second half of 2026 to review the calibration of the internal-MREL scalar to ensure the appropriate amount of loss-absorbing capacity is pre-positioned at the RFB. 

• Sharing operational resources: The PRA has announced that it will consult this summer on reforming rules that will allow firms more flexibility as to how they share operational resources across the ring-fence. This is currently prohibited under the PRA’s ring-fencing specific rule 9.1. The proposals will seek to streamline requirements and unlock new flexibilities and cost savings for firms, for example in how groups with ring-fenced entities utilise operational services, such as data-processing services, information technology and back office functions, across the group. HMT will also consult on legislation to enable surpluses in closed ring-fenced banks pension schemes to be shared with other schemes in a wider banking group, subject to certain conditions, enabling flexibility in how surplus funds are used.

• Keeping the regime proportionate: To ensure the regime remains proportionate, the £35 billion primary threshold will be subject to review every three years, with a view to uprating it in line with the evolution of banking practices and growth in the deposit base.  In addition, the PRA will review ring-fencing specific reporting requirements as part of its regular review of its ring-fencing rules, reporting in 2028, to ensure they are proportionate once the revised regime is in place.

HMT’s press release published on 18 May 2026 is available here.

The PRA press release is available here.