The banking practice of "ring-fencing came into effect as a result of the 2007-2008 global financial crisis.
Ring-fencing resulted in the separation of core banking services — taking deposits, making payments and providing overdrafts for UK retail customers and small businesses — from other activities that banks undertake. The aim of the new regime was to help protect core services from problems which may arise elsewhere within a banking group (which may, for example, be perceived as more "risky").
This effectively means that larger corporate bank customers can be made subject to different decision making and entitlement regimes within a bank than smaller companies, whose governing regimes are often more rigid and restrictive.
However, banks have been slow at communicating the changes to their customers.
This may in part be because moving a smaller company into a new non ring-fenced banking regime involves a lot of work on the Bank's part as well as the customer's given, for example, brand new accounts need to be set up if an existing company grows beyond small business status and so becomes entitled to be moved out of the ring-fenced regime.
Growing companies, however, would do well to be aware of this and be proactive in consulting their bank's guidelines to see if they have become so entitled.
This is because, under the new regime, being moved out of the ring-fence can result in, for example, better credit and overdraft facilities being available on a quicker, more streamlined basis.
One Southern England based company we work with recently topped the £40M revenue barrier. They have banked with one of the largest UK Retail and Business banks since start up. Yet nobody from the Bank ever contacted them to say that they had moved to a revenue level at which they were entitled to the higher level rights that a non ring-fenced account provided until they filled out a periodical Bank survey complaining of lack of support, consistency and fluidity from the Bank!
While specific criteria for ring-fencing can vary from bank to bank, checking them could be one of the most important business tasks a Board undertakes this year!
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