What is a 'Ring Fence'
A ring fence is a protection-based transfer of assets from one destination to another, usually through the use of offshore accounting. A ring fence is meant to protect the assets from inclusion in an investor's calculable net worth or to lower tax consequences. Moves to ring fence an asset are often called ring fence trades.
BREAKING DOWN 'Ring Fence'Certain ring fencing activities are legal as long as they stay within the applicable limits, set in various laws and regulations established by the home country. Often, the limit is based on a certain percentage of the person or business's net worth, meaning the amount allowed with fluctuate over time. Ring fencing can produce certain financial benefits, such as lowering overall tax burdens and eliminating certain restrictions, along with removing the property from the jurisdiction of the home country.
Ring fencing is defined by the act of setting particular assets aside, removing them from the control exerted upon them within the current situation or directing the funds to a specific purpose.
While offshoring is one of the more common uses, moving funds into a different arena to allow a business to separate the higher risk ventures away from more stable assets also qualifies. Further, earmarking a particular set of funds or assets to a specific goal can also be seen as ring fencing, as these assets are functional separate from other activities that may put them at risk.
Ring Fencing as a Protection
Ring fencing is generally used to protect certain assets from affecting other assets or obligations. When using offshore accounts, the goal is to limit the taxation or regulation asserted over those assets, often protecting them from less favorable conditions. Additionally, the moved assets can be functionally hidden from creditors, limiting access to the assets in cases of default.
A company may choose to split operations, ring fencing riskier activities from those that are more secure by separating the riskier activities into a new entity. This provides protection; if the riskier venture fails, the more secure portion of the business can remain intact and may not be held liable for the losses associated with the failed portion of the business.
Ring Fencing and Government
A government may attempt to set regulations that force the ring fencing with certain industries to provide protection to the consumer. For example, a government may want to separate the traditional consumer banking services from the associated investment activities within a financial institution. This would protect the more stable banking activities, such as consumer deposit account activities, from the riskier activities that are more likely to result in losses or potential bank failure.