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Why banks have no competition

I had a couple of really interesting dialogues with bankers yesterday.

The first was with a career banker who is now working with one of the New Banks on its launch. The second was with an Asian bank manager running his bank's UK operations.

As I talked with both, they expressed their frustrations with the UK regulatory system, the FSA, licensing and operations.

Here’s roughly how the commentary went.

The Government, Treasury, Bank of England and the FSA are all publicly stating that they want more competition in banking. They seek to actively encourage new entrants, according to their press, but then they do their darndest to ensure no-one can compete.

In particular, it’s the FSA’s stringent rules that create inordinate hurdles to getting approvals to open and operate in the UK.  These controls are needed, as loose control is what caused the crisis, but how much of a barrier such controls create to new entrants is a question we should also be asking.

For example, in order to get a banking licence you must first assemble a group of people of whom the FSA approve. Getting that approval can be hard.

First, you have to ask for approval for all key staff. That can be a lengthy process and is restricted to approval by the FSA for the individual to perform one or more strictly 'controlled functions' on behalf of an authorised firm.

These controlled functions relate “to the carrying on of a regulated activity by a firm”, which means that each time you change roles or add activities you need to be vetted again.

And that vetting is not just for one person, but for each member of the bank’s senior management from non-executive directors and executive directors, through Chief Executive and key functional heads of compliance, risk and audit.

For a new bank, that can be a phenomenally time consuming process but it is needed to ensure integrity and appropriateness (what happened when they vetted Andy Hornby, Adam Applegarth, Fred Goodwin …).

Thing is, if you’re engaged in a controlled activity and not approved then the individual can be fined and possibly jailed, and their firm’s license rescinded.

This means that each time a person changes role or function, they need to be re-approved.

As you would expect, management of the bank’s processes, procedures and people to ensure compliance is a full time job and can be hard for an existing bank.

For a new bank or foreign bank, it can be near impossible.

For example, one of the individual’s selected for a senior role with one of the new bank entrants was a mighty talented chap … from an Icelandic Bank. Once those banks found their assets thawing, the FSA immediately gave them the cold shoulder and the talented individual was shown the exit door before he’d even been hired.

In another case, the foreign bank operating in Britain tells me they have just appointed a new CEO. The CEO’s appointment was notified to the FSA in April but, due to the vetting process, he’s still not able to take up his key role and the bank is therefore headless … they hope he can take his position in August.

Even with that, as a foreign bank they have to comply with FSA rules and with UK Home Office rules. These state that when a foreign bank employee changes their job title, they cannot have their business cards changed to reflect their new role until a work permit is issued reflecting the new title. That can also take months.


This stuff is hard and it is getting harder, as the FSA are getting increasingly aggressive on enforcement and increasingly stringent on their criteria for approval.

But let’s say that you can be bothered gathering a group of competent and capable people who get FSA approval: is that it?


You then need your banking licence.

That’s tough too.

Here’s how tough that is, as articulated by a compliance consulting firm:

“Applying for a UK banking license is a complex process. You will need to complete a comprehensive set of application forms and provide the regulator (the Financial Services Authority) with a full set of supporting documents such as your business plan, risk management policy statements, compliance manuals and procedures and other information.

“You will need to show the regulator that you have a clear and workable business plan. You will need to evaluate your capital requirements and to demonstrate that sufficient capital is in place.

“Applying for a banking license is officially known as a ‘Complex Application’, and is unlike the vast majority of Financial Services License applications.”


It’s so darned complex that you have to hire a consultancy to advise you how to do it.

For some banks, it's too much and they give up.  For others, it takes them about three years of administration and form filling to get to the start line.

Meanwhile, you may think you can short circuit all of this by buying an existing bank.

That's what I thought when I heard that JC Flowers is trying to acquire Kent Reliance or that Virgin buys Church House Trust.


Y’see getting the people approved and gaining a licence has no relationship with your ability to conduct business.

That’s a separate matter.

By way of illustration, I thought that the likes of JC Flowers and Virgin were buying a banking licence so that they could take over the branches of RBS and Lloyds, and become a fully fledged bank with several hundred branches.


The banking licence only provides you with a licence to take deposits and offer loans.

But the deposits and loan levels you can provide are restricted to the capital you have to cover the business from day one.

So if you have one branch supporting 10,000 customers, you must have the capital to cover the exepcted holdings of 10,000 customers; two branches, 20,000 customers; ten branches, 100,000 customers; and so on.  And you must have that capital coverage for all customer holdings before you open those branches.

This is illustrated in a recent speech by Thomas Huertas, Director for the Banking Sector with the FSA, who states that: “the only capital that really absorbs loss whilst the bank is a going concern (at least in the UK) is core Tier I capital or capital that is convertible into core Tier I capital whilst the bank remains a going concern.”

As a result, the FSA has increased the Tier 1 Capital levels a bank must reserve against its potential losses, with the rest covered by contingency capital (convertible equity).

This means a new bank must have enough capital to cover all of its projected exposures from day one … a tough call, and one that means that even if you have a banking licence you cannot suddenly open hundreds of branches without loads of money in the bank.  And getting a return on that money will take years.

All of these
challenges and issues are the reasons why we are not seeing massive new competition in banking in Britain, or anywhere else for that matter.

But then all of these rules and regulations are there to safeguard society aren't they?

So when you hear politicians saying that they want to see lots of competition in banking, it is a complete untruth.

In conclusion, and to quote Thomas Huertas again from a speech in June 2008 before the crisis:

“Regulations do not restrict competition. Entry into banking, especially in the UK, is free to anyone who can meet the threshold conditions for establishing a bank. The UK places no barriers to the ownership of banks on the basis of nationality, and under EU directives any EU-incorporated credit institution is, under the so-called passport granted to all banks under the single market, entitled to establish a branch or sell its services cross-border into the UK. This policy of free, but orderly, entry underlies not only London's position as one of the world's leading financial centres, but also contributes to competition in retail banking.”

What he actually meant was that banking is open to free competition, but only from other existing banks with banking licences from their country of operation, and with major capital assets to cover their exposures.

This is why there hasn’t been a new bank opening in Britain for over a century and the only new competition has been from existing foreign banks, such as Santander.

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, the Finanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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  1. “It’s so darned complex that you have to hire a consultancy to advise you how to do it.”
    Or you can buy a bank, which is cheaper.

  2. and why Paypal went to Luxembourg for it’s banking licence…

  3. “These controls are needed, as loose control is what caused the crisis…”
    This is what the powers will tell us (to obtain more power) and the media will happily repeat it. But think it through, the opposite is actually true:
    1. Some of the most heavily regulated institutions played a major part in the crisis (Fannie Mae, …)
    2. Most affected institutions in Europe were government controlled or influenced (Hypo real estate, IKB, Landesbank).
    3. It was precisely strict regulation FORCING banks to invest in what rating agencies deemed Triple A, rather than to go by their own, independent credit judgement.
    4. Arguably what really caused (=motivated) the crisis is tax law (interest deduction for US mortgages).
    We can refute the argument “bad controls caused (!) the crisis” because rather tax laws and “inappropriate regulations” were the key causes, without which this crisis would not have happened.
    The sentence on top is thus revealed to be a fake argument to promote anti-competitive self-interest.

  4. (… which of course supports the good thinking in your blog about the powers’ real attitude to competition …)

  5. I think you’re agreeing with me Hubertus
    ‘Loose controls’ is a reflection of ‘inappropriate regulations’, e.g. you control what you regulate. If you don’t regulate appropriately then the controls will be off course.
    I also think there’s a failure of regulators in recent times too, e.g. they weren’t enforcing the regulations they had created.

  6. Getting the FSA Approval and the Banking licence are only the first of the msny hurdles for new competitors getting into the market. You either have to build the infrastructure for a bank from scratch (branches, technology, call centres, processing centres, etc) or buy them (e.g. Northern Rock, Lloyds Banking Group’s branches) with all the complications of separation from the mother ship. Combine these two together and you can see why it can take several years and a lot of capital before a new competitor can enter the market. Then the fun starts, trying to persuade customers to transfer their banking relationship to the new bank whilst still making a profit. You really, really need to want to do it if you’re to enter the UK banking market.

  7. I am more interested in finding out how to remove a banks license; I have just about had enough of the incompetance of Santander – it’s time that bad news story was ended once and for all.

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