The ring-fence is a structure placed to separate assets or a part of a company from the main business. The ring-fence often involves the use of a legal structure that helps protect the separated elements from scenarios such as bankruptcy.
Definition and Examples of Ring-Fencing
Ring-fencing is a method of protecting assets used in one area of the organization from use or influence by other areas. It can be utilized in various fields from medicine to business. In business, a ring-fence is often a legal structure that separates different assets within the company or between its subsidiaries. The enclosed area then has a clear barrier from the main business or parent company.
As the name suggests, there is a “fence” that creates a protective barrier around the separated assets or business unit. This fence can be metaphorical boundaries that are simply understood to exist; or it can involve legal separation and clear procedures, such as creating separate bank accounts.
How Does Ring-Fencing Work?
Ring-fencing works by separating assets or a business unit from other parts of the organization. The precise process of ring-fencing can vary depending on what the organization uses to achieve it.
For example, creating a ring-fence for bankruptcy protection may involve a clear separation of assets between the subsidiary and the parent company. This can be done through the use of separate bank accounts and accounting records, rather than having intertwined assets.
Ring-fencing may also involve the establishment of a special purpose vehicle (SPV) to separate the business unit from the parent company. An SPV is a legal entity in its own right that does not carry the financial history of the company it is separated from. This creates a level of financial protection. Additionally, separating the business unit into an SPV can help in areas such as taxation, instead of that subsidiary bearing the tax liability of the entire parent company.
Types of Ring-Fences
There can be different types of ring-fences. Some ring-fences may be informal, while others are clear legal structures. Legal fences are typically created for specific purposes. This could be achieving a distinct financial benefit such as bankruptcy protection, or compliance with regulations such as UK banking rules.
Other types of ring-fences may not necessarily be legal structures. Instead, they might involve establishing organizational rules to separate assets or operational aspects. For instance, a healthcare organization might separate certain hospital beds for use in specific types of procedures.
Similarly, ring-fencing can involve allocating funds for a specific purpose. For example, a donation or a certain level of funding may be designated to support one area of charitable support. Conversely, an organization that does not have any ring-fences may have a mixed pool of assets. This may give the organization more flexibility to use the funds as it sees fit. However, it also means that some causes may not receive a guaranteed level of support.
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Sources:
1. PubMed.gov. “Ring-fencing a Budget for Cancer Drugs: Is It Fair?” Accessed Jan. 26, 2022.
2. Financial Conduct Authority. “Ring-fencing.” Accessed Jan. 26, 2022.
3. Barclays. “Preparing for Ring-Fencing.” Accessed Jan. 26, 2022.
4. Utah.gov. “Report on Ring-Fencing,” Pages 1-2. Accessed Jan. 26, 2022.
5. PwC. “Creating an Understanding of Special Purpose Vehicles,” Pages 5 and 8. Accessed Jan. 26, 2022.
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Getting It Right First Time. “Getting It Right in Orthopaedics: Reflecting on Success and Reinforcing Improvement,” Page 9. Accessed Jan. 26, 2022.
7. Lloyd’s Bank Foundation. “Our Approach to Ringfencing a Minimum of 25% of Our Funding for Black, Asian and Minority Ethnic Communities.” Accessed Jan. 26, 2022.
Source: https://www.thebalancemoney.com/what-is-a-ring-fence-5216796
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