From 1 January 2019, the largest UK banks must separate core retail banking from investment banking (ring-fencing).
The aims of ring-fencing are to:
-protect retail deposits from risks elsewhere in the banking group and wider financial markets
-reduce incentives for risk-taking; and
-enhance resolvability by ensuring continuity of “core” (retail banking) services.
The regime applies to UK banks and their groups with a 3-year average of more than £25 billion in “core ” deposits. Where a group includes multiple UK banks, the regime applies to all of them. Only ring-fenced banks will be allowed to take core deposits.
Core deposits are generally those from individuals and small to medium-sized businesses.
The Prudential Regulation Authority (PRA) is required under the Financial Services and Markets Act 2000 (the Act), as amended by the Financial Services (Banking Reform) Act 2013 (the Banking Reform Act) to make policy to implement the ring-fencing of core UK financial services and activities.
Core activities are defined as the regulated activity of accepting deposits. Banking groups which undertake core activities place these activities into ring-fenced bodies (RFBs).
To supplement the definition of core activities, section 142C of the Act defines three ‘core services’:
1.facilities for the accepting of deposits or other payments into an account which is provided in the course of carrying on the core activity of accepting deposits;
2.facilities for withdrawing money or making payments from such an account; and
3.overdraft facilities in connection with such an account.
The Act also prohibits RFBs from undertaking ‘excluded’ activities and specifies that this includes dealing in investments as principal. Details of which are further set out in the Ring-fenced Bodies and Core Activities Order 2014 and the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014.
On 4 December 2014 Commencement Order No. 12 was published bringing into force on 1 January 2019 the remaining provisions of the Financial Services (Banking Reform) Act 2013 relating to the ring-fencing regime that are not already in force.