The Financial Services Authority (FSA) and the Bank of England have published the results of their review (the Review) into barriers to new entrants to the banking sector. This Review sets out significant changes to regulatory requirements and authorisation processes which, taken together, will reduce some of the regulatory barriers to entry into the banking sector and, as a result, enable an increased competitive challenge to existing banks.
The FSA will be replaced by the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) on 1 April 2013. Both the FCA and PRA will need to approve new entrants, the PRA for prudential issues and the FCA for conduct.
The main features of the changes are:
Changes to the prudential regime
- A major shift in approach to prudential regulation of banking start-ups. This reflects the PRA’s philosophy of regulation, within which the possibility of bank failure should be accepted as a normal market process provided there are clear mechanisms in place to resolve banks smoothly without threatening financial stability. Specifically the changes will involve:
- No longer applying the additional requirements (known as “add-ons and scalars”) which we have previously applied to reflect the uncertainties inherent in start-ups. These requirements often resulted in capital requirements for start-ups being higher than for existing banks
- Implementing the Basel III regime by applying at start-up only the 4.5% minimum Core Tier 1 capital requirement versus the 7% to 9.5% requirement which will apply to major existing banks (made up of the Core Tier 1 requirement plus the Capital Conservation Buffer and in some cases a Globally Systemically Important Bank surcharge).
- Reduced liquidity requirements for all new banks:
- All new banks will benefit from a recent reduction in liquidity requirements; and
- There will be no automatic new bank liquidity premium.
Changes to the authorisation process
- Improvements to the existing authorisation process. Where an applicant firm is able to deliver a complete application form with all supporting materials, the PRA and FCA will work together to complete all of the assessment and decision making within six months. To support firms to provide a complete application, 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. This approach is particularly suited to firms which have 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.
- An additional option for the authorisation process. Some firms are not able 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. These firms will be able to ask for an alternative, 3-stage route to authorisation, specifically:
- The same enhanced pre-application support.
- A shorter application that focuses on essential elements (such as business case, capital, liquidity, and key senior appointments), which, where the information is of the required quality, we will determine within six months.
- Granting an authorisation but with a restriction that will enable the firm to then mobilise the remaining requirements such as capital, personnel, IT and other infrastructure.
- Streamlining the information requirements, which means the PRA and FCA expect to be able to significantly reduce the time taken for authorisation.
Some of these changes have already been implemented and the remainder will come into effect at legal cutover on 1 April 2013, when the PRA and FCA come into existence.
FSA chairman Adair Turner commented:
“This has been a comprehensive review and we have made some bold changes, ones that respond to the difficulties faced by applicant firms. We believe the changes will make a significant difference to the ease with which new firms can enter the UK banking system and, as a result, enable an increased competitive challenge to existing banks.”
Notes to editors
The FSA and the Bank of England believe these changes will lead to better outcomes – in terms of capital required by firms and the time taken to authorise them - reducing the cost incurred by firms, giving them more certainty on the outcome of an application and levelling the capital requirements post authorisation between small and large banks doing similar business.
The scope of the review and this report is restricted to banks, and does not include other deposit-taking or credit institutions.
During the course of the review the FSA asked stakeholders, such as recent and prospective new entrant firms, for feedback on the proposed changes, including through two roundtable meetings. The response was strongly positive, with stakeholders believing that the proposals address key areas of concern. The FSA also asked for feedback on the effectiveness of its staff in operating the existing process. In general the feedback was that the interaction with FSA staff was positive, both in their professionalism and the level of technical expertise provided to firms to support them through the application process. This will be continued and, in many cases, enhanced through the proposed changes.
The PRA will lead on and administer the application and be responsible for granting authorisation, but it must obtain the consent of the FCA before doing so. Authorisation to carry out deposit-taking activities will not be granted unless both the PRA,as prudential regulator, and the FCA, as conduct regulator, are satisfied that it should be. There will be a single administrative process, with a single application form and a single decision.
- The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
The FSA will be replaced by the Financial Conduct Authority and Prudential Regulation Authority in 2013 as required by the Financial Services Act 2012.