Question

In relation to recent banking regulation changes, what is reing-fencing?

Answer 1

First of all we need to know. What is ring fencing? Ring Fencing is when a regulated public utility business financially separates itself from a parent company that engages in non-regulated business. This is done mainly to protect consumers of essential services such as power, water and basic telecommunications from financial instability or bankruptcy in the parent company resulting from losses in their open market activities. Ring fencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company's other business.

UK banking regulation is undergoing significant changes which will affect UK banks and foreign banks operating in the UK.

This is to ensure that either side of the ring-fence need to be able to operate independently, with the acid test being whether they could function independently were the areas forced to operate as completely separate entities.

This will create a broad range of strategic and operational issues for legal and commercial functions in many banks. There will be implications for arrangements relating to tax, real estate, employment, pensions, third-party contracts, and litigation and competition considerations.

Ring-fencing aims to avoid a repeat of the 2008 financial crisis, when banks’ bad bets threatened ordinary depositors’ cash, leading to big taxpayer-funded bailouts. The rules apply to all banks in Britain that have both retail and commercial or investment banking activities.Ring-fencing rules apply to banks with more than £25 billion of consumer and small business deposits. Payments using old sort codes will be automatically redirected for a ‘significant period of time’, according to the FCA and banks will take responsibility for updating Standing Orders and Direct Debits.