Could the Government ditch ring fencing requirements?

What would this mean for Banking?

Alex Speedie

April 29, 2025

The heads of HSBC, Lloyds Banking Group, NatWest and Santander UK have urged the government to scrap ring fencing requirements, arguing that the regime introduced after the global financial crisis is hampering Britain's competitiveness as a global financial centre.

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Ring fencing, which applies to banks holding more than £25bn in core deposits from retail and small business customers, was designed to shield day to day banking operations from shocks elsewhere in banking groups or in broader financial markets. Under the regime, key retail services such as deposit taking, payments and overdrafts are kept financially, operationally and organisationally separate from investment banking and other activities.

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The call from the banking chiefs comes at a time of growing pressure on the UK economy and against a regulatory backdrop that is already shifting. Chancellor Rachel Reeves has previously signalled that post crisis financial regulations may have gone too far, and she has updated the Financial Conduct Authority’s mandate to prioritise growth and competitiveness alongside consumer protection.

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In their letter to the government, the executives argue that the ring fencing regime is overly restrictive and impedes Britain's ability to compete with other financial hubs. They contend that dismantling the requirements would not only enhance the UK’s international standing but also unlock new avenues for growth and investment. Should the government move to unwind the regime, the banking sector could see several important changes:

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Enhanced competitiveness: Loosening the rules would offer UK banks greater operational flexibility, enabling them to better compete with international rivals at a time when London’s dominance in financial services is already under scrutiny.

Freer deployment of capital: Banks currently required to hold significant capital buffers to meet ring fencing requirements would be able to redeploy funds more dynamically, potentially fuelling new investment into the broader economy.

Reduced compliance costs: Maintaining the ring fence has proven administratively complex and costly. Legislation introduced in 2013 took six years to implement fully, and banks have argued that the ongoing burden continues to weigh heavily on resources.

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The previous Conservative government had already commissioned a review of ring fencing, led by former Standard Life Aberdeen chief executive Keith Skeoch. While the review found that the rules were too rigid, it recommended maintaining them, albeit with some flexibility. However, with the new Labour government’s emphasis on boosting economic growth, there is growing speculation that a fresh review could soon be on the table.

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Impact on Fintechs and challenger banks

The potential reform of ring fencing also raises questions for Fintechs and smaller banks. Institutions specialising in lending, in particular, could face heightened competition if established banks are able to release additional capital currently tied up in reserves. Greater flexibility could allow incumbents to offer loans at lower rates, leveraging their scale against newer entrants.

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At the same time, lifting the regime could remove barriers to growth for the UK's emerging neobanks. Starling Bank, for instance, has amassed £11bn in deposits and is rapidly expanding its market share. Under current rules, Starling and others would face significant compliance hurdles if their deposit bases doubled, a scenario not beyond the realms of possibility.

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The convergence of traditional banking with fintech, accelerated by the adoption of AI across the sector, further complicates the picture. With Santander UK already exploring strategic options following a decline in profits in 2024, the only region globally to record a fall, the removal of ring fencing could improve the profitability of UK arms of international banks.

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More broadly, bank leaders argue that regulations conceived nearly fifteen years ago are increasingly ill suited to the modern financial landscape, where AI driven risk controls and lending models are reshaping industry practices. Whether the government shares that view will be critical to the future shape of UK banking.

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Could the Government ditch ring fencing requirements?

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