In business and finance, ringfencing or ring-fencing occurs when a portion of a company's assets or profits are financially separated without necessarily being operated as a separate entity. This might be for:
* regulatory reasons
* creating asset protection schemes with respect to financing arrangements
* segregating into separate income streams for taxation purposes
Asset protection
In
asset protection Asset protection (sometimes also referred to as ''debtor-creditor law'') is a set of legal techniques and a body of statutory and common law dealing with protecting assets of individuals and business entities from civil money judgments. The goal of ...
arrangements, ring-fencing can be employed through segregating specific assets and liabilities into separate companies of a
corporate group
A corporate group or group of companies is a collection of parent and subsidiary corporations that function as a single economic entity through a common source of control. These types of groups are often managed by an account manager. The concep ...
. It can also be used as a method for mitigating liquidation risk or to improve a corporate
credit rating
A credit rating is an evaluation of the credit risk of a prospective debtor (an individual, a business, company or a government), predicting their ability to pay back the debt, and an implicit forecast of the likelihood of the debtor defaulting.
...
.
Separation for tax purposes
In the
United Kingdom
The United Kingdom of Great Britain and Northern Ireland, commonly known as the United Kingdom (UK) or Britain, is a country in Europe, off the north-western coast of the continental mainland. It comprises England, Scotland, Wales and North ...
, ring fence profits arise from income and gains from oil extraction activities or oil rights in the UK and UK
continental shelf
A continental shelf is a portion of a continent that is submerged under an area of relatively shallow water, known as a shelf sea. Much of these shelves were exposed by drops in sea level during glacial periods. The shelf surrounding an island ...
, and are subject to a higher rate of corporation tax. This
petroleum fiscal regime
The petroleum fiscal regime of a country is a set of laws, regulations and agreements which governs the economical benefits derived from petroleum exploration and production. The regime regulates transactions between the political entity and the ...
can be seen in other countries as well.
Regulatory separation
In the case of loans or bonds, ringfencing generally allows an investor to have both a link to a specific asset they possess (such as wind farms owned by a utility), while also enjoying the full credit support of a utility's
balance sheet
In financial accounting, a balance sheet (also known as statement of financial position or statement of financial condition) is a summary of the financial balances of an individual or organization, whether it be a sole proprietorship, a business ...
.
One common form of ringfencing is when a regulated
public utility
A public utility company (usually just utility) is an organization that maintains the infrastructure for a public service (often also providing a service using that infrastructure). Public utilities are subject to forms of public control and r ...
business financially separates itself from a parent company that engages in non-regulated business. This is done mainly to protect consumers of essential services such as power, water and basic telecommunications from financial instability or bankruptcy in the parent company resulting from losses in their open market activities. Ringfencing also keeps customer information within the public utility business private from the for-profit efforts of the parent company's other business.
A high-profile success story with utility ringfencing occurred during the
Enron
Enron Corporation was an American energy, commodities, and services company based in Houston, Texas. It was founded by Kenneth Lay in 1985 as a merger between Lay's Houston Natural Gas and InterNorth, both relatively small regional companies. ...
meltdown of 2001–2002; Enron acquired Oregon-based
Portland General Electric
Portland General Electric (PGE) is a Fortune 1000 public utility based in Portland, Oregon. It distributes electricity to customers in parts of Multnomah, Clackamas, Marion, Yamhill, Washington, and Polk counties - 44% of the inhabitants of O ...
in 1997, but the local power generator was ringfenced by the state of Oregon prior to the acquisition being completed. This protected Portland General Electric's assets, and its consumers, when Enron declared bankruptcy amid massive accounting scandals. There were examples of this in other US states as well.
Arising from the
2008 financial crisis
8 (eight) is the natural number following 7 and preceding 9.
In mathematics
8 is:
* a composite number, its proper divisors being , , and . It is twice 4 or four times 2.
* a power of two, being 2 (two cubed), and is the first number of t ...
, the largest banks in the United Kingdom are required by the
Financial Services (Banking Reform) Act, 2013
Financial services are the Service (economics), economic services provided by the finance industry, which encompasses a broad range of businesses that manage money, including credit unions, banks, credit-card companies, insurance companies, acco ...
to ring-fence their retail operations in order to increase depositor protection. The Ring-fencing requirements came into effect on 1 January 2019. The UK bank ring-fencing requirements require such retail operations to be operated through separate entities and sub-groups, within each wider bank group. The
Prudential Regulation Authority is the lead regulator for ring-fencing, with responsibility for identifying which banks are within the scope of the ring-fencing legislation and for supervising banks’ implementation of the rules.
[Financial Conduct Authority]
Ring-fencing
14 September 2016, updated 6 November 2017, accessed 2 December 2017
References
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See also
*
Escrow
An escrow is a contractual arrangement in which a third party (the stakeholder or escrow agent) receives and disburses money or property for the primary transacting parties, with the disbursement dependent on conditions agreed to by the transacti ...
*
Hypothecation (taxation)
The hypothecation of a tax (also known as the ring-fencing or earmarking of a tax) is the dedication of the revenue from a specific tax for a particular expenditure purpose. This approach differs from the classical method according to which all g ...
Anti-competitive practices
Separation of investment and retail banking