Out-Law News 2 min. read
09 Jul 2014, 5:13 pm
Industry regulator the Prudential Regulatory Authority (PRA) and conduct and compliance regulator the Financial Conduct Authority (FCA) said that attempts to reduce the barriers to entry for new banks had resulted in five new authorisations over the past year. Their joint report, which considered the impact of the new measures (18-page / 232KB PDF), also said that the regulators had held pre-application meetings with more than 25 other firms keen to offer a range of services including traditional banking, mortgage lending and lending to small businesses.
"It is clear that the changes introduced last year have been positive for new entrants and will make a contribution to increasing competition and thus benefit customers," said Andrew Bailey, PRA chief executive.
"Reducing barriers to entry can be achieved alongside continuing to ensure new banks meet basic standards that prevent risks to the safety and soundness of the UK financial system. The feedback we have received from the new banks has been very encouraging," he said.
Axis Bank, Union Bank of India (UK), FCMB (UK), UBA Capital (Europe) and Paragon Bank all received PRA authorisation in the year following the entry into force of the new requirements, on 1 April 2013, the PRA said.
Changes to both the authorisation process for new banks and the way in which new entrants to the sector are regulated took effect from 1 April 2013. The changes included a streamlined application process for authorisation and a new ‘mobilisation’ option. This allowed firms to become authorised if they have met certain essential requirements but with restrictions where they have yet to complete the process. On the regulatory side there are lower capital and liquidity requirements for new entrants and a new requirement that firms be able to show the regulator that they have a clear recovery and resolution plan in place in the event of future difficulties.
According to the regulators, the lower capital and liquidity requirements in particular had resulted in a “real reduction” in the barriers to entry to the banking market for new firms. The minimum initial capital requirement for a new entrant bank has fallen from £5 million to £1m plus a ‘capital planning buffer’. This applies where the bank is classed as a ‘small specialist bank’ (SSB) which provides basic banking services such as current and savings accounts, lending to SMEs or residential mortgage lending. Banks still have to meet both regulators’ ‘threshold conditions’ to become and remain authorised.
According to the report, three of the five newly-authorised banks in the year to 31 March 2014 had used the new mobilisation option, while a number of firms in the pre-application stage had also shown an interest in the new route. The regulators said that the option had been particularly helpful for those firms that may have previously faced challenges in raising capital or investing in expensive IT systems without knowing that they would definitely be authorised at the end of the process. However, feedback from firms had identified a number of areas where the information provided by both regulators could be clearer, they said.
The regulators said that firms at the pre-application stage were considering a variety of business models; ranging from retail and wholesale banking to payment services firms, already authorised by the FCA, who were looking to enter the banking market and offer deposits and lending to their existing customers. The regulators are also monitoring the development of ‘off the shelf’ banking software that would enable new lenders to set up systems without investing in bespoke IT. Use of this software would be subject to existing regulatory rules governing outsourcing, they said.
The PRA plans to publish regular authorisation figures updates. The regulatory changes are part of government and regulators' plans to improve retail banking competition. The FCA has had a specific statutory objective to promote competition since its inception, while the PRA’s secondary objective to facilitate effective competition took effect on 1 March.