Challenger banks in the UK could benefit from “simpler” regulation after the UK transitions out of the European Union to help them tackle larger incumbents, the chief executive officer of the UK’s Prudential Regulation Authority (PRA) has suggested.
In a roundtable speech last week, the banking supervisor spoke about how Brexit could “create opportunities” for challengers. “Although we have in my view been pretty successful in encouraging new entrants, it is so far notable that no small bank has successfully become a large bank,” over the past five years, he said. “So, it is perfectly natural that with our safety and soundness objective in mind we should take a close interest in small firms as well as large, particularly when they are fast-growing. There may be a reasonable case that a simpler regime for small firms would advance both our safety and soundness and competition objectives.”
Digital bank Revolut, which started life as a cross-border prepaid card, has three million customers. Behind it come Monzo (one million), Tandem Bank (500,000) and Starling Bank (400,000).
“The allusions made in the speech are definitely encouraging for challenger banks,” said Matt Ford, product director at Tandem Bank, in an email. “The UK has one of the best regulatory regimes in the world, but the resources required for smaller institutions to obtain a license and then compete with the incumbents can be prohibitive for new entrants. Any step to boost competition and innovation in the space is one made in the right direction.
“That being said, regulation is there for a reason and I’m sure any plans, however ‘simple’, are being thought through on a granular level. Whether incumbent or challenger, a bank should be a pillar of trust and that is largely due to tight regulation. Consumers deserve a choice in the banking sector but these choices all need to be trustworthy and stable.”
The UK’s Bank of England (BoE) and the Financial Conduct Authority (FCA) have previously argued that Brexit will not lead to a bout of deregulation. FCA chair Charles Randall, in an October 2018 speech, said it would not be dragged into “a race to the bottom in regulatory standards”. Randall argued that regulators would need to “redouble our engagement with our policymaking and regulatory colleagues in Europe and across the world.”
The FCA found in its 2018 year-end review that “major retail banks have competitive advantages over other banks, explaining why market shares have remained high and stable over a sustained period.” The FCA concluded that the arrival of technology giants like Amazon, Facebook and Google could impact the industry. It also saved praise for the Open Banking Initiative and the EU’s second Payments Services Directive (PSD2).
Woods suggested that “the jury is still out” on the effectiveness of both Open Banking and PSD2. He added: “It is notable that some digital banks are making material inroads into the current account market – is this the leading edge of a bigger change, or not?”
Woods pointed to the US and Switzerland as examples of relaxed regulation on new market entrants. Life outside the EU, he said, would make it easier for the UK to follow suit. “We have often argued in Europe for simpler approaches for small firms, but the differing legal traditions across the EU27 and the desire to harmonize regulation and supervision are powerful forces in the opposite direction.”
The US Office of the Comptroller of the Currency (OCC) announced in July last year it would accept applications from fintech firms for special purpose national bank charters (SPNB). The charters allow fintechs to take advantage of the federal preemption available to full-service national banks. Gaining an SPNB is also an option for a fintech that would otherwise be excluded from gaining a full-service national bank charter due to any non-financial activities. The US Conference of State Bank Supervisors (CSBS) is currently pursuing litigation against the OCC for what it believes is an unlawful expansion.