For some time in the UK the regulators and authorities have tried to introduce true competition to the traditional banks. Much debate has occurred as to the rights and wrongs of allowing a new grouping of Challengers, Neos and FinTech enter the banking market with a lighter regulatory touch to the incumbents. Former Fed chairman Paul Volcker summarised the debate as follows –
“Banks remain the functioning heart of the financial system, and they are protected and regulated. To the extent they have competitors that have different ground rules, kind of free riders in my view, weakens the financial system.”
Those arguing this point highlight that, for many of these competitors, they do not pay deposit insurance or other levies, yet are permitted to raise deposits or hold customers funds and make loans in competition to banks. In the UK, we have several regulatory licences that allow this grouping to operate mainly as Payment Institutions, Electronic Money Institutions (deposits with both these entities are not protected by insurance) and Banks which are regulated by the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) which is part of the Bank of England. Over the summer the PRA took an important step in changing the stance on the emergence of these new banking entities.
In July, the PRA released a Draft Supervisory Statement entitled “Non-systemic UK banks: The PRA’s approach to new and growing banks” and a consultation paper on the supervisory proposals. So we have a new bracket of banks which are identified as being “non-systemic banks” and the terminology of neo and challenger bank is shortened to “new banks” with two sub-categories. These new banks are those that have been authorised with restrictions, which is the first step on the regulatory pathway to becoming a fully-fledged bank, and banks in their first year of full authorisation. While, for banks that are past this phase i.e. have been fully authorised for at least a year, they are referred to as growing banks until they become systemically important.
In a speech announcing the consultation Sarah Breeden, Exec Director, UK Deposit Takers Supervision stated clearly that the Statement was to provide clarity of what the PRA expects from new banks as they grow. She used the analogy of mountain climbing in her speech entitled “Climbing Mountains Safely” and noted that the PRA’s focus had been getting “more banks on the mountain at Base Camp”. The consultation paper notes that “Often these banks are focussed on the ambition of becoming authorised and lose the longer term focus of becoming a sustainable business, or fail to appreciate the ongoing need to invest in systems and controls to ensure they remain commensurate with the evolving needs of the business.” This aspect is re-emphasised in one of the key proposals regarding requirements for new banks as they mature, they should “expect to invest significantly in risk management and controls, and have a mature control environment typically by five years after authorisation”.
In the Supervisory Statement this theme of investing in appropriate systems during the growth phase, when the complexity of the business picks up, is also rammed home. Developing the theme that new banks should expect to invest significantly in systems in the early years the PRA states they “have observed a theme of banks outgrowing their control environment and having to retrospectively invest in control functions. This is not an appropriate way to develop the business and in the long run can be more expensive, as banks then have to undertake extensive remediation activity.” Reading the speech, Supervisory Statement and the consultation the late Paul Volcker quoted above would approve given his view that “In my vision of the new financial system, you obviously want to protect banks and have strong banks, and I don’t think they should be put at a competitive disadvantage.” The proposals from the PRA open the market to competition with a steep mountain to climb but will lead to a level playing field and you need to prepare for this en route.
In the conclusion to her speech Sarah Breeden states “We recognise that the winding path up the mountain to become a large player can seem arduous and strewn with rock faces that appear difficult if not impossible to scale. Barriers to growth are in many ways the inevitable corollary of our lowering of the barriers to getting onto the mountain in the first place and of us introducing proportionality into the regime. So ironically our actions to support competition risk creating the very barriers that firms then find it hard to overcome.”
Here, at Support Camp Eurobase we have seen unprecedented interest in our solutions from the “new bank” sector and our Integrated Treasury approach. We are some of the secure crampons that are called for in the speech to be “firmly in place” to plot the ascent and ensure that early investment in appropriate systems now will avoid “having to re-climb a section of the mountain” which can be “scary, frustrating and costly in equal measure”.