- Chancellor Rachel Reeves is pushing to cut UK financial red tape to spur growth, including changes to bank capital rules, permissions and ring-fencing.
- The Bank of England’s PRA will deliver most Basel 3.1 in January 2027 but delay the key trading-book internal models (FRTB) element to January 2028.
- The package also aims to boost retail investing given the UK’s low household equity exposure, which the government argues could unlock trillions for capital markets.
- Ring-fence reform is the most contentious element, with banks urging relief and senior regulators warning that weakening safeguards could raise systemic risk and hurt lending.
Read More
These reforms reflect a significant shift in the UK’s regulatory posture under Labour, designed to balance the need for stability with stronger economic growth. The proposal to ease regulatory constraints—including delaying Basel 3.1 implementation, modifying ring-fencing rules, boosting access for smaller/mid-sized banks, and encouraging retail investment—indicates a strategy that prizes financial sector dynamism as a growth lever.
However, tactical trade-offs loom. Delaying the internal models approach (FRTB) until 2028 provides certainty for banks but risks falling out of sync with other jurisdictions, potentially complicating cross-border operations. The raise in thresholds for loss-absorbing capital (MREL) relief for mid-sized institutions helps with competitive pressure but may weaken loss-absorbing capacity in times of stress unless calibrated carefully.
Ring-fence reform is especially controversial: large banks see it as costly and restrictive; critics—including former governors and architects of the post-crisis framework—fear that loosening these protections could reverse lessons learned from past crises. Questions remain over whether modifications preserve depositor protection and lending flows to households and SMEs.
On retail investment, the UK’s very low exposure of household wealth to equities (especially compared to the US) is a structural weakness. Proposals to relax risk warnings, expand banks’ communications with customers, and adjust prospectus requirements may help—but cultural, tax, and incentive barriers also need addressing. The potential long-term gain (~£3.5 trillion) is large, but short-term investor behaviour (flows) remain cautious and volatile.
Strategically, the government’s package aims to improve UK attractiveness as a financial centre—boost listings, avoid “listing migration,” and support growth sectors. But this must be weighed against financial stability risks, international regulatory alignment, and public sector fiscal constraints, especially given weak investment and muted growth. Open questions include how fast reforms will pass, how regulators balance oversight and flexibility, and how markets will respond—especially in light of economic and geopolitical uncertainty.
Supporting Notes
- The PRA will implement about 90% of Basel 3.1 rules on January 1, 2027, but delay the new internal models approach for market risk (FRTB) until January 1, 2028.
- Threshold for loss‐absorbing capital (MREL) will be raised for mid‐sized banks from £15-25 billion in assets to between £25-40 billion.
- Ring‐fencing regime established by the 2013 Act is under review; options include excluding banks without major investment banking operations, easing subsidiary geographical constraints, and allowing ring-fenced entities to engage in certain financial activities.
- UK adults hold just 8% of non-pension wealth in equities and mutual funds—lowest in G7; ~50% is in property, ~15% in cash. Moving to U.S. levels of equity exposure (≈33%) implies potential £3.5 trillion mobilizable capital.
- Retail investor flows: in H1 2025, inflows into UK funds modest (~£2.9 billion), with equities seeing significant monthly outflows (UK equities -£964 million in June).
- Senior figures—Sir John Vickers, Lord Turner, Lord Tyrie, and Andrew Bailey—warn that weakening ring-fencing risks destabilizing effects, with possible adverse impact on lending to UK households and SMEs.