FSA’s swansong opens a fast track for new entrant banks

The Bank of England wants more competition in the UK banking sector

In future, the possibility of a bank failure will be accepted as a normal market process, and barriers to entry for new start-ups, including a removal of capital requirement obstacles, will be removed, the Financial Services Authority and the Bank of England have confirmed.

Potential new entrants who have “the development backing, capital and infrastructure to allow them to set the bank up at speed” – such as through subsidiarisation of branches or where they are able to use existing IT and other infrastructure – will also be able to take advantage of an improved authorisation process that should allow them to be fast-tracked through in just six months.

The Bank and the FSA have published the result of a review into barriers to new entrants in the last week of the FSA’s existence. As of 1 April, it will be replaced by the Financial Conduct Authority and the Prudential Regulation Authority. New entrants to the banking sector will have to be approved by the PRA for prudential issues and the FCA for conduct.

The 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 arrival of the double-headed FCA/PRA regulatory regime next week will see the enactment of a range of measures intended to increase competition in the UK banking sector, reflecting a “major shift in approach to prudential regulation of banking start-ups”.

The PRA’s philosophy of regulation is that “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 removing the additional requirements that were previously applied to reflect the uncertainties inherent in start-ups, and which often resulted in capital requirements for start-ups being higher than for existing banks

On top of that, the Basel III regime will be implemented by applying to start-ups only the 4.5% minimum Core Tier 1 capital requirement instead of the 7% to 9.5% requirement that will apply to major existing.

New entrants will also benefit from reduced liquidity requirements and no automatic new bank liquidity premium.

Changes to the authorisation process will see the PRA and FCA introduce “a significant level of up-front support” to firms during the pre-application stage. 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”.

For those new entrants who can’t 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” there will also be the same pre-application support.

After a shorter application that focuses on “essential elements such as business case, capital, liquidity, and key senior appointments”, they can be granted a restricted authorisation “that will enable the firm to then mobilise the remaining requirements such as capital, personnel, IT and other infrastructure”.

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.

“This has been a comprehensive review and we have made some bold changes, ones that respond to the difficulties faced by applicant firms,” said FSA chairman Adair Turner. “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.”