In January 2019, the UK introduced leglislation on big banks known as ring-fencing to help ensure that money belonging to businesses and people are safe. Quick Looans Express discuss what ring-fencing is and how it affects us.

What does ring-fencing mean?

The definition of ring-fencing is guaranteeing that funds separated for a particular purpose are not spent.

Many of the largest UK banks operate both a retail banking branch and another sector devoted to riskier banking services such as investment. The idea behind ring-fencing is to separate retail banking behind a ring-fence.

The structuring of the ring-fence means that the two sectors, within and outside the ring-fence, will operate alongside each other but independently.

However, the ring-fence only applies to UK banks. They also need a 3-year average of more than £25 billion in ‘core deposits’ (money from individuals and small/medium-sized businesses). The government can place larger companies on either side of the ring-fence.

Ring-Fenced Banks in the UK

Since the global crisis of 2007, the UK finance industry and the British government have been determined to create legislation to limit the effects of such a crisis ever affecting retail banking again. As a result of the recommendations of the Independent Commission on Banking, chaired by Sir John Victors, the largest UK banks will now be ring-fenced. The deadline for ring-fencing was in January 2019 from the government.

What are the Advantages of a Ring-Fence?

  • Even if there is another financial crisis, the legislation protects customers’ deposits and savings. The bank will still be able to offer banking services such as little loans, overdrafts and debit card payments. The lack of ring-fencing had a significant impact on both customers and businesses. Experts estimated that it led to a 5% drop in wages, 1 million more unemployed and a halt to bank lending. With ring-fencing, it limits these negative consequences.
  • Another advantage of ring-fencing is that this guarantee of financial stability makes it easier to resolve banking issues. This will mean that government bail-outs of banks will never again be necessary. Not only will this benefit the whole UK economy but it will also save the British taxpayer money. Our taxes can go where they’re really needed and not for propping up reckless bankers.

How Ring-fencing will Affect UK Bank Customers

In a report in ‘The Guardian’ in June 2017, experts estimated ring-fencing would affect up to 1 million bank customers: In which ways?

In order to comply with the new rules, some customers might have to be ‘moved’ into a new part of the bank. As a result, they must have their account details changed. For example, the bank may issue them a new 6-digit sort code, bank account number or receive a new IBAN (International Bank Account Number) for international transactions.

The banks will reroute payments, such as salaries and pensions, sent using the old account details to their intended destination by automatic redirection facilities. Most banks have said that they hopeto complete this for all customers in around 24-36 months. At the end of this period, the bank will inform the sender to change the account details.

Banks will update direct debits and standing orders, such as for fast short term loans repayments on their customers’ behalf.

What Bank Customers Need to Do

If ring-fencing directly affects you, you will be contacted by your bank. They will explain how and when the changes will take place and whether you need to do anything.

Ring fencing will affect different customers in different ways. Even if you have more than one account with the same bank, you might receive different instructions or advice. Also, different banks are preparing for ring-fencing according to a different timetable so you might be contacted at different times.

Ring-Fencing – A ‘Golden’ Opportunity for Scammers?

If you’re contacted by your bank about your financial and personal details, you should take all the necessary precautions to protect yourself from fraudsters.

Firstly, you should never click on links in unsolicited emails but instead, access the bank’s website independently. Similarly, never assume a call from the bank is authentic. If you have any doubts, call the bank back using the number from your card or statement and preferably use a different phone.

Never feel pressurised to give out any information. The preparations for ring-fencing are underway but that’s no reason for the bank to rush you and not give you the chance to think. Scammers often give their call a false sense of urgency so that people panic and reveal their personal details without thinking.

Finally, a bank would never ask for security details such as your PIN or internet banking codes.

Will Ring-Fencing Help?

Ring-fencing will ensure greater financial stability in the UK economy. There’s no guarantee that there won’t be another financial crisis. At least with ring-fencing, bank customers will be protected. Also, it will mean ordinary bank customers won’t have to foot the bill for the risky investments of some bankers.

Your bank will guide you through any changes that have to be made to your account. In all communications with them, make sure you know exactly who you’ll be dealing with. If you have any reservations about the authenticity of the call/email, reveal nothing and contact the bank independently.

Crystal Evans
Crystal is a Web Content Manager with a passion for helping others. A Marketing Specialist by trade, Crystal’s first job was in the financial sector and she has been adding verve to personal finance ever since! When in high school, Crystal enjoyed creating revision notes and study aids for her peers – making concepts Crystal Clear. She continues this practice in the post-university School of Life – channelling her love of sharing information into blogging about personal finance

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