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In a clear sign that regulators want to open up competition in the UK banking industry to new banks, the Prudential Regulatory Authority (PRA) and Financial Conduct Authority (FCA) have launched a new initiative to support them through process. The new Bank Start-Up Unit announced in January 2016 is intended to follow through on the Government’s desire to reduce barriers to entry for prospective banks and to increase choice for consumers. Applicants who seek to fill a gap in the market whether in terms of products and services offered or in terms of the market sectors they target will be able to take full advantage of this new initiative.
Single Point of Contact
In essence, the new unit creates a single point of contact from where applicants can access the advice and guidance they require to start a new bank and from where they will continue to receive on-going support once they are authorised. More particularly, new banks will benefit from access to: supervisors at both the PRA and the FCA via a helpline; regular capital and liquidity reviews, if appropriate; and relevant training for staff.
It is envisaged that the new unit will help applicants at the pre-application stage to determine exactly which regulated activities they are most likely to carry out and which they are not. By discussing their initial business plans with the new unit, it is hoped that applicant firms will use any feedback to save time and to ensure that they increase their chances of submitting a successful application.
To ensure that applicants engage fully with the New Bank Start-Up Unit, the PRA advises applicants to consider five essential components of any authorisation application:
• Business plan – What products will the new bank offer and who will they offer them to? Will the applicant have physical branches or not? How will the new bank make money?
• Senior management, the board and governance – Who will run the new bank and how will they do it?
• Financial resources – How will the new bank be funded?
• IT strategy – What systems will the new bank need and who will operate them?
• Outsourcing – What will the new bank do in-house and what will it outsource?
One key area the New Bank Start Up Unit may be able to support new banks is with regard to capital requirements. New or smaller “challenger” banks tend to use the PRA’s standard approach to calculating the amount of capital they must hold to make certain loans (such as mortgages and credit cards). Compared to the advanced approach used by larger more established banks under which they are able to set aside less capital, the larger amounts capital required by smaller banks often puts them at a competitive disadvantage. One reason why new banks are required to adopt the standard approach is due to the lack of sufficient lending data. Recent reports, however, suggest that this may be about to change.
It is understood that the PRA is currently considering an intermediate position between the standard and advanced approaches which may not require the same large overheads and will spell out how new banks can transition from the standard to the advanced approach to calculating the amount of capital they need to set aside. Should an intermediate position be created that allows new banks to take a less onerous approach to capital adequacy calculations, the new unit will no doubt become an important point of call for new banks.
Authorisation with Restriction
Aside from the matter of capital adequacy, it is anticipated that new banks will be able to access more guidance relating to the suitability, experience and skills of applicants for key roles, often a significant issue for new and smaller market entrants. Financial stability, consumer detriment and risks to market integrity also remain a high priority for the regulators and it is thought that the PRA’s “mobilisation process” whereby new market entrants can be authorised to carry out limited activities with certain restrictions in place (known as Authorisation with Restriction or “AWR”) until it has received a certain level of investment or has built the appropriate IT systems may be one of the approaches considered as part of the New Bank Start-Up Unit engagement process.
The unit will also be able to give guidance to international banks who may be considering a UK branch or a subsidiary. There are many factors for them to consider before they decide to operate in the UK and the regulatory approach will largely depend on the nature and size of the foreign bank’s operations. Early engagement with the PRA is therefore highly recommended.
Interested applicants who would like more information about the New Bank Start-Up Unit are welcome to get in touch directly with Alkan Shenyuz.
Information on the PRA’s New Bank Start-Up Unit can be found here:
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