The Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) have set out joint information about the New Bank Start-up Unit. The regulators clearly envisage providing a slicker journey towards becoming a bank, to open up competition through full authorisations or the mobilisation process and to offer some flexibility for those still needing to develop infrastructure or funding.
The proposal for the start-up unit is an extremely interesting idea and very much on message in terms of the UK embracing innovation and competition within financial services. Its creation, announced by the HM Treasury in November 2015, builds on existing initiatives to reduce the barriers to entry for prospective banks and it complements the FCA’s regulatory sandbox concept, which is likely to be operational in the Spring of 2016.
Potential users will, however, need to understand the bank application process and permitted parameters of this unit.
Getting started – as the unit provides a guide and specialist support through the authorisations process for businesses considering how to be a bank, an obvious starting point is deciding whether the business intends to be, or needs to be, a bank. In basic terms, a bank is an entity that carries out deposit-taking business and a firm cannot call itself a bank until it has been authorised. The regulatory definitions need to be worked through and also thought needs to be given to whether an alternative approach might be better for the business – should it be a credit union or community development finance institution? Other models may also regulated but, generally, in a more light-touch way. If the firm is already authorised in the UK, the “variation of permissions” process should be used. Is it clear what other regulated activities will be carried out?
No substitute – the unit is a chance for specialist information and support through the authorisations and development process; it is not intended to replace it. This means that firms must still consider core requirements, such as the business plan, who will run the bank and how, funding (for capital and liquidity), resolution planning, the systems required (e.g. access to the payment systems and other core IT infrastructure) and how this is sourced as well as more prosaic issues such as business continuity and the customer experience. Applicants need to be prepared to be tested and challenged through this process – the new unit will run a pre-application stage for this purpose.
Mobilisation – the PRA will consider whether the more agile “mobilisation process” can be used on a case-by-case basis, generally for start-ups that need time to develop upfront investment, arrange or build IT systems and other infrastructure, put in place human capital or engage with third-party suppliers. It is not a lighter-touch regime but authorisation at an earlier stage in the development of the business. Firms with this Authorisation with Restriction (AWR) may find the level of the business they can write is capped (e.g. to £50K) but should be able to move quickly to full authorisation and removal of any cap. AWR is a very significant step in the regulators’ support for growth and innovation. AWR is part of the authorisation approach considered in the new bank unit.
Be aware of the process and timelines – map this into your launch project; understand that your level of engagement and preparedness will help to smooth and speed up this process. A point to note is that the regulators will assess the suitability, experience and skills base of applicants for key roles, which may include face to face interviews. The regulators aim for, but do not guarantee, a six-month turnaround time from receipt of a completed application for full authorisation. Importantly, both the PRA and the FCA need to agree to the authorisation being granted.
Protections – financial stability, consumer detriment and risks to market integrity will be a priority for the regulators. This will be true during the full or AWR authorisation process and also after a licence is granted. Firms must be prepared for ongoing oversight of their compliance with all core areas, such as the threshold conditions, prudential requirements andFCA conduct measures.
The regulators envisage that the unit will provide a smoother journey but this requires dialogue and feedback between them and the applicant. A potential advantage of the close dialogue approach is that the regulators will, at the end of the process, have engaged with the applicant and had the business model demonstrated to them, hopefully making an application for AWRor full authorisation a more straightforward process. The PRA and FCA map of the approximate journey firms will take when using the unit is not free-form, although it is couched in comparatively flexible terms. There is no one size fits all approach and, while it should be flexible, the regulators are at pains to state that the unit will need to reflect a real life environment and respect legal requirements.
We believe that this useful and constructive regulatory approach should be welcomed by would-be banks seeking to secure funding or to provide some leverage during commercial contractual negotiations. It is a further strong indication from the regulators that growing, innovative businesses should not feel they are facing an impossible regulatory hurdle.
This recognition of the particular needs of positive disruptive firms is a further tentative step towards a more sustainable regulatory position that actually can deliver real benefits for businesses, markets and consumers. It is encouraging to see the regulators use their mandates to promote competition this way and we are hopeful that more initiatives will be forthcoming.
The express inclusion of an “international” section is also to be welcomed. For those with an international profile looking for consistency, it is notable that the PRA and FCA work closely with regulators globally and clearly intend to welcome international banks to the UK.
This is a clear signal that the regulators want to engage with stakeholders to open up the UK banking market to drive better outcomes for users through competition.