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Settlements built on stolen Palestinian land are illegal under international law, so any trade that props them up should be off limits. A ban must cover goods, services and investments, with real enforcement and clear guidance for business, or this risks becoming a press release instead of a reckoning. This is the bare minimum obligation the U.K. has under the ICJ.
There is no such thing as a smart sanction, and this one will bleed straight into Israel's wider economy because settlements use the same banks and financial system as the rest of the country. British lenders will simply walk away from Israeli business rather than untangle which account sits where, effectively boycotting the only Jewish state. Britain cannot loose a valuable security partner to impracticable international policy.