Definition of ring-fence
What is a Ring-Fence?
A fence is a virtual barrier that separates some of the financial assets of an individual or business from the rest. This can be done to set aside money for a specific purpose, to reduce the taxes of the individual or business, or to protect assets from losses incurred by riskier transactions.
Relocation of part of the assets off the coast reducing an investor’s equity or lowering income taxes owed is an example of cantonment.
Key points to remember
- A financial fence is a protective measure to separate certain assets from the whole.
- Offshore banking services are sometimes referred to as cantonment assets.
- More broadly, the cantonment can protect part of the assets from certain risks.
The term has its origins in fences that are built to keep farm animals inside and predators outside. In financial Accounting, it is used to describe a number of strategies used to protect part of the assets from mixing with the rest.
A new UK law that came into effect in early 2019 requires financial institutions to separate their day-to-day banking activities from their investment branches.
Cantonment may involve the transfer of part of the assets from one jurisdiction to another that has lower or no taxes or less onerous regulations. Alternatively, it can be intended to keep the money in reserve for a specific purpose.
It can also be done to make the money unavailable for other purposes. That’s the intention of a new UK law, known as the Ring-Fencing Act, which came into effect in early 2019.
The law requires financial institutions to restrict their banking activities to consumers in order to protect customer bank deposits from potential losses by investment banks. The institutions were forced to recreate their banking branches as separate entities, each with its own board of directors.
The intention of the law is to warn another bank bailout like the one that followed the 2008 financial crisis. The government’s bailout was forced by the perceived vulnerability of ordinary consumers and their economies to the collapse of major banking institutions.??
In the United States, the term is often used to describe the transfer of assets from one jurisdiction to another, usually offshore, in order to reduce an investor’s verifiable income or reduce the investor’s tax bill. It can also be used to protect certain assets from seizure by debtors.
Segregation of assets to reduce taxation or avoid regulation may be legal as long as it remains within limits set by the laws and regulations of the home country. The limit is usually a certain percentage of the net value of the business or individual, which means that the dollar amount will vary over time.
Blocking can also describe the allocation of assets to a particular use. For example, a savings account can be reserved for retirement. A business can block its pension fund to protect it from being drained for other business expenses.