Bank ring-fencing in the UK – the statutory regime and the latest PRA proposals on legal structure, governance and continuity of services/facilities.


2 Overview of the UK ring-fencing regime

2.1 Background and context

As a response to the financial crisis, the Independent Commission of Banking (ICB), chaired by Sir John Vickers, made several recommendations on reforms to the banking system. In the final report the ICB proposed the idea of ‘ring-fencing’ vital banking services to protect retail banking from unrelated risks to ensure that should a banking group incur problems, it can be resolved in an orderly manner and ensure continuous provision of necessary retail banking services without taxpayer liability. Draft legislation followed and was reviewed by the Parliamentary Commission on Banking Standards. The final regime is described at 2.2 below.

The EU has looked at the question of structural reforms of EU banks. Following the Liikanen report, the European commission published a proposed regulation[1] intended to stop the largest and most complex banks from engaging in proprietary trading. The new rules would also give supervisors the power to require these banks to separate certain potentially risky trading activities from their deposit-taking business if the pursuit of such activities compromises financial stability. The legislation is currently being considered by the European Parliament and the Council of the European Union under the trialogue process and may impact the final form of the UK regime.

Ring fencing policy reflects a vigorous new focus on preventing bank failures, particularly in the context of retail banking/depositors, and on ensuring that resolution can be achieved without impacting the continuity of key services (essential to financial stability) and without the need for tax payer support. The UK has already developed its Special Resolution Regime in this context and the EU Bank Recovery and Resolution Directive was finalised earlier this year. 

2.2 The UK’s statutory regime for ring-fencing

The ring-fencing regime is contained in –

  • Part 9B - Sections 142A to section 142Z1 – of The Financial Services and Markets Act 2000 as amended (for these purposes by the Financial Services (Banking Reform) Act 2013) (“FSMA”)
  • The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 (“Excluded Activities Order”)
  • The Financial Services and Markets Act 2000 (Ring-fenced Bodies and Core Activities) Order 2014 (“Core Activities Order”)

The ring fencing regime permits retail deposit taking to be conducted within a broader/universal banking group (rather than requiring complete separation i.e. by requiring that retail deposit takers are owned independently) but the quid pro quo is that

  • there is a reserve power (the group restructuring power) to force complete separation on individual bank groups (or take other measures beyond the ring-fencing regime)
  • an RFB is subject to statutory restrictions (excluded activities and prohibitions – see below); when the regime comes into effect, banks within the scope of ring-fencing will have had to separate their core deposit taking business into a RFB; and
  • a strong obligation on PRA, via its enhanced objectives, to avoid/minimise adverse effects on the continuity of the provision of core services deriving from an RFB’s business conduct/ risks or failure.

Core services are facilities for deposit taking, withdrawing money and making payments, and overdrafts – all where they relate to an account which is a core deposit. Within FSMA the only activity designated as a core activity is the regulated activity of accepting deposits. An institution is only deemed to be carrying out core activities if it accepts deposits which are core deposits. A core deposit is defined as –

  • a deposit at a UK deposit taker (ring–fencing does not apply to incoming branches of EEA banks)
  • in an EEA account (i.e. at branch in EEA) – so ring-fencing applies to the branches of a UK bank across the EEA (see below re the prohibition on an RFB having branches outside the EEA)
  • unless the depositor is <br/>relevant financial institution, <br/>qualifying organisation (non-SME), <br/>qualifying group member or <br/>an eligible individual (high net worth)

A UK deposit taker is a Ring-fenced body (RFB) unless

  • it is a <br/>building society, <br/>an insurer (or an industrial and provident society or credit union) OR <br/>its average <br/>core deposits<br/> (of relevant group members) do not exceed £25 billion (calculated/averaged over three financial year periods as at each quarter end - but certain recently transferred deposits may be excluded)

Excluded activities are those activities which are prohibited to be performed by the RFB under the Excluded Activities Order. These are the activities which are considered to pose a risk to the provision of core services and would make the resolution more complicated. The Excluded Activities Order specifies that dealing in investments as principle and dealing in commodities are excluded activities. This Order also includes certain prohibitions such as incurring exposures to certain other financial institutions.

In addition to this, under FSMA, HM Treasury has the ability to make a number of ‘specific activity prohibitions’ with which RFBs must comply. This has been introduced in addition so as to include conduct not easily defined as ‘activity’. An RFB cannot conduct excluded activities and is subject to certain prohibitions which include –

  • Dealing in commodities (except as permitted)
  • The activity of dealing in investments as principal (even if not regulated by virtue of certain RAO exemptions) unless as permitted (permitted dealings relate to activities re securitisation and covered bonds, central banks, derivatives (forward contracts and swaps, options and swaptions)
  • Access to inter-bank payment services unless conditions are satisfied (e.g. direct membership) to ensure continuity of access/service
  • Restrictions on financial institution exposures (including detailed rules re permitted exposures for hedging, conduit lending, securitisation and covered bonds, trade finance, repos and ancillary activities)
  • Having a branch in a non-EEA country or having a participating interest in a company/undertaking incorporated outside the EEA

3 CP19/14 – PRA’s proposals on legal structure, governance and continuity of services/facilities.

3.1 PRA Objectives

Under the Financial Services and Markets Act 2000, the PRA is required to develop policy to implement the ring-fencing of core UK financial services and activities. The PRA has focused on two main objectives when developing this policy:

  • ­Resilience of the RFB, by seeking to ensure that the business of an RFB is restricted and that the RFB has a degree of protection from shocks that originate in other parts of its group or the global financial system; and (in case failure does occur)
  • ­Orderly resolution in the event that either an RFB or another member of its group fails, and the continuity of core services thereafter.

CP19/14 proposes rules and supervisory statements in three areas: the legal structures of groups containing an RFB; the governance of groups containing an RFB; and the continuity of services and facilities.

3.2 Proposals for legal structures

The PRA has identified particular risks that may arise if RFBs have an ownership interest (including, but not limited to, shares, voting rights or other rights to participate in the capital or profits) in entities carrying out excluded or prohibited activities, or if any such entity has ownership interests in the RFB.

As such the PRA expects that banking groups will adopt the ‘sibling structure’. This is where the RFBs and entities that can conduct excluded or prohibited activities (which we refer to as non-qualifying entities or NQEs) are structured as separate clusters of subsidiaries beneath a non-operating UK holding company.


A bank group is therefore likely to involve at least two sub groups beneath a non-operating holding company – see the diagram below. Some group companies, such as service companies, could sit as a third sub-group/as siblings directly beneath the parent, but this may only complicate the position without reducing capital requirements (as, under CRD, siblings can still be added when setting capital for a regulated entity). The question of companies that are not NQEs, sitting as subsidiaries of the RFB (or indeed of the parent) will need to be assessed by PRA on a case by case basis.

Subgroup/sibling structure in its simplest form


*Ownership interest in RFB subject to PRA review (unless held by ultimate UK holding company)

**Services and facilities provided to RFB by either

  • (i) RFB subsidiary or third party supplier which contracts directly with RFB; or
  • (ii) dedicated intragroup services company/ third party supplier to the group but only if provision to RFB sufficiently protected/ ring-fenced.

This group structure is not required under the legislation, but given the benefits of sibling structures, the PRA expects that banking groups with RFBs will structure themselves in this way. The PRA has set out these expectations in a draft supervisory statement (Appendix 1 of CP19/14) and is not proposing formal rules in this area.

This proposed legal structure of groups containing RFBs flows into both of the areas of governance and continuity of services. The legal structure is such that it promotes the idea of independent decision making and ensures a cleaner split between the RFB and the NQEs in a banking group, thereby reducing the likelihood of an RFB’s core services being disrupted.

Bail-in: PRA also indicated that it expects resolution planning for RFB groups to involve bail-in at the holding company level and that operating entities (whether RFB or not) would be recapitalised by passing losses up to the holding company. This, it is hoped, would avoid the need to separate the RFB at the point of resolution. Comment: This is an important point for banks to be aware of in their approach to resolution/recovery planning and capital.

3.3 Proposals for governance

The PRA will regulate RFB governance, via new rules and supervisory statements (which will enhance the existing PRA requirements relating to governance and systems and controls). The objective is to ensure that the RFB is able to take decisions independently of other group members - by identifying and managing conflicts (at both corporate and individual senior manager levels) - and can demonstrate ring-fence rule compliance.

For the requirements for board and board committees of an RFB, the PRA has proposed the following rules:

  • ­At least half of an RFB’s board members, excluding the chair must be independent non-executive directors (“NEDs”), to reflect the UK Corporate Governance Code;
  • ­The chair must be independent during their tenure as chair and must not hold another chair position in another group entity board, however they could hold other independent non-executive positions;
  • ­An executive director on the board of an RFB must not hold other executive director positions on the board of a group NQE;
  • ­No more than one third of the RFB’s board members may be current employees or directors of another entity in the group; and
  • ­An RFB must have its own risk, nomination, audit and remuneration non-executive board committees. This is supplemented by additional rules requiring the RFB to have its own sufficient risk management and internal audit resource; however the PRA is allowing flexibility by making this an outcomes-focused requirement.

The PRA’s remuneration requirements for RFBs do not mean that RFBs must necessarily have a separate remuneration policy. However, the RFB will have responsibility for the implementation and content of the policies for RFB employees and will be expected to adjust the content of group policies accordingly. This is again flexible and another outcomes-focused proposal.

Regarding HR policy, the PRA is proposing the following two rules:

  • In carrying on its business the RFB must not depend on personnel that would cease to be available in the event of the insolvency or another member of the group. The PRA has stated this is not intended to prohibit personnel from providing services to multiple group entities.
  • Vacancies for independent NEDs on RFB boards must be advertised publicly; however there is an exemption where the board chair resigns their directorship before completing the term and an emergency replacement in needed quickly.

The PRA has also drafted a proposed amendment to the Senior Manager Regime (“SMR”) for RFBs. (To read our report on the SMR – please click here). This introduces an additional ‘Prescribed Responsibility’ for Senior Managers of RFBs for ensuring compliance with ring-fencing requirements. This will have to be allocated to any (including, where relevant, Group Entity Senior Managers) that are responsible for managing any area of the RFB’s business that is subject to a ring-fencing requirement.

PRA considers that RFBs should have their own heads of risk management and internal audit who will be senior managers under the SMR. It should be noted that these individuals would not be prohibited from having reporting lines to group senior managers but would be expected to report to the chairs or the respective RFB board committees. In the case of shared risk management/internal audit, clear evidence would be required that the RFB functions could operate on a separate and sufficiently resourced basis (as well as robust arm’s length terms on resource and cost allocation).

Comment: PRA’s rules therefore strike a balance between complete separation of the RFB and the commercial practicalities of operating within a group. Responsibility is placed squarely on individual senior managers, who will be operating within the new SMR, to ensure that the ring-fencing is not prejudiced and is paramount. PRA sees the Prescribed Responsibility for ring-fence requirements as a way to facilitate personal enforcement action against senior managers for any failures that occur. It expects that the majority, if not all, Senior Managers at the RFB will be allocated the ring-fencing responsibility

3.4 Proposals for continuity of services and facilities

PRA has again supplemented existing requirements (including the DP1/14 proposals which are applicable more broadly) with additional rules and supervisory statements for RFBs. PRA considers that it would be disproportionate to require services and facilities to be duplicated on both sides of the ring-fence. Therefore, the proposals do not require RFBs to own and manage directly all of the services and facilities they need, but will instead allow for flexibility in firms structuring of service arrangements, subject to meeting the PRA’s requirements.

In a draft supervisory statement (Appendix 2 of CP19/14), the PRA has defined ‘shared services and facilities’ as referring to those services and facilities which are needed to support the business of the RFB and other group entities, for example, back office functions, data processing services and IT services.

The PRA is proposing the following restrictions on how an RFB obtains services and facilities:

  • an RFB may obtain services and facilities from a third party where the RFB contracts directly with the third party concerned
  • an RFB can also obtain services and facilities (including on a shared basis) from a group entity that forms part of the RFB’s subgroup
  • an RFB can obtain shared services and facilities from a dedicated intragroup services entity or from a group arrangement with a third party supplier, but only if <br/> <br/>the RFB is sufficiently protected (e.g. via contractual terms) and can ensure that their core activities are not disrupted through the acts, omissions or the financial circumstances or insolvency of other group members.<br/>

The PRA has also considered whether to allow an RFB to received shared services and facilities from qualifying parent undertakings which may not meet the definition of being an intragroup services entity. The risk here is that the qualifying parent undertaking may be a potential ‘point of entry’ for resolution and could make it more difficult to conduct a bail-in.

(As noted above, PRA is currently discussing proposals for the continuity of services and facilities for a much larger group of firms - for all deposit-takers and PRA-designated investment firms (see DP1/14 on ‘Ensuring operational continuity in resolution’ which was published on the same day as CP19/14). This would involve a PRA framework for critical shared services, in order that these firms can demonstrate operational continuity in resolution and facilitate recovery and post-resolution restructuring.)

3.5 Timetable - next steps and further consultations

For those institutions which are expected to be subject to the ring-fencing regime, they will be expected to submit preliminary plans of their anticipated legal and operating structures to their PRA and FCA supervisors by 6 January 2015. Any firms which expect, from their growth plan indications, to meet the threshold of £25 billion in core deposits by 2019 should also consider consulting on preliminary plans. Banks will also need to submit project plans for the transition to their new structures and for governance over that process.

Views on any of the proposals and issues for discussion in CP19/14 are sought by 6 January 2015 with the Government intending to implement the ring-fencing provisions from 1 January 2019.

The PRA intends to issue further consultation proposals in due course relating to

  • the exceptional circumstances exemption
  • to direct participation of inter-bank payment systems,
  • intragroup arrangements and
  • prudential requirements.


[1] Proposal for a Regulation on structural measures improving the resilience of EU credit institutions.