The FSA and the Bank of England (BoE) have published the results of their review into barriers to new entrants to the banking sector. The Review sets out significant changes to regulatory requirements and authorisation processes which, taken together, aim to reduce some of the regulatory barriers to entry into the banking sector and thereby facilitate an increased competitive challenge to existing banks. The reduction of barriers to entry will be welcome news to new entrants to the banking market, although it is interesting to note (since under the new regime, it is the Financial Conduct Authority (FCA) that will have the direct competition remit) that it is the concessions that the Prudential Regulation Authority (PRA) will make on capital and liquidity that are most likely to facilitate increased competition.
Essentially two sets of changes are proposed:
Changes to the prudential regime
- These represent a major shift in approach to the prudential regulation of banking start-ups, reflecting the PRA’s philosophy that the possibility of bank failure should be accepted as a normal market process – accordingly the PRA will assess the resolvability of proposed new banks to ensure there are clear mechanisms in place to resolve banks smoothly without threatening financial stability:
- The PRA will no longer apply “add-ons and scalars” (previously applied by FSA to reflect uncertainties inherent in start-ups) which could result in capital requirements for start-ups being greater than for existing banks
- The PRA will implement Basel III by applying only the 4.5% minimum Core Tier 1 capital requirement at start-up (as opposed to the 7% to 9.5% requirement – made up of the Core Tier 1 requirement, plus a Capital Conservation Buffer and a Globally Systemically Important Bank surcharge – applicable to existing major banks)
Going forward, CRD IV will limit the PRA’s discretion with respect to CRDIV buffers when it comes into force in 2014. This is discussed in more detail in the review.
- All new banks will benefit from a recent reduction in liquidity requirements
- There will be no automatic new bank liquidity premium
Changes to the authorisation process
The existing authorisation process will be improved:
For firms with the development backing, capital and infrastructure to allow them to set the bank up at speed (e.g. subsidiarisation of branches or where firms are able to utilise existing IT and other infrastructure):
- The PRA and FCA will introduce a significant level of up-front support to the firm, during the pre-application stage, including a challenge session
- The PRA and FCA will work together to complete the assessments and decision-making within 6 months of receipt of a complete application form with all supporting materials.
For firms unable to meet the 6-month timetable because they cannot fund the up-front investment required, or because they have longer lead times in terms of raising capital or setting up the infrastructure, an alternative 3-stage route to authorisation:
- The same enhanced pre-application support
- A shorter application focusing on essential elements (such as business case, capital, liquidity, and key senior appointments), which, where the information is of the required quality, will be determined within 6 months (during which most of the PRA assessment would be completed), leading to …
… Grant of an authorisation, with a restriction limiting the scale (and possibly the type) of deposit taking, to enable the firm to mobilise potential backers/remaining requirements such as capital, personnel, IT and other infrastructure
- PRA would require injection of the minimum capital requirement of €5m on authorisation and might require additional capital to be held during mobilisation to ensure the €5m minimum is not breached
- PRA would cap the mobilisation phase at 12 months after which authorisation would be removed if conditions had not been met
- FCA would complete a significant part of its asssessment during the mobilisation stage
- For firms with the development backing, capital and infrastructure to allow them to set the bank up at speed (e.g. subsidiarisation of branches or where firms are able to utilise existing IT and other infrastructure):
- Information requirements will be streamlined so that the PRA and FCA expect the time taken for authorisation to be significantly reduced
- Interestingly, the proposal is to use different methods to complete the assessment including asking the firm to attest that an action has been completed, reviewing samples of documentation, conducting on-site visits and speaking to staff, or commissioning s166/166A reports (presumably only in respect of firms that are already authorised persons seeking variation of permission to become a bank)
Some of these changes have already been implemented (pre-application stage challenge, revised approach to liquidity requirements, revised approach to capital requirements for new banks deemed resolvable) and the remainder will come into effect at legal cutover on 1 April 2013, when the PRA and FCA come into existence. New entrants will require approval from the PRA for prudential issues, and from the FCA in respect of conduct requirements.
The Review contains more detailed sections setting out the PRA’s and the FCA’s approach to new banks. Annex 9 of the Review notably provides a useful guide on the importance of IT systems, and Annex 10 sets out the material and information to be submitted by firms at application.