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UK Regulators crucify UK Banks

In case you missed it, there have been THREE substantial and
major regulatory changes announced in the last two days:

  1. More Competition in Banking
  2. More Competition in Payments
  3. More Capital in Reserve

These announcements precede the introduction of the new
regulators as the Financial Services Authority (FSA) will be replaced by the
Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA)
from 1st April 2013.

Probably an April Fool but, just in case, here are the three
announcements:

NUMBER ONE: MORE COMPETITION IN UK BANKING

The Financial Services Authority (FSA) and the Bank of
England have published the results of their 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 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 FCA
and PRA come into existence.

You can find out the substance is here of these
announcements here.

NUMBER TWO: MORE COMPETITION IN PAYMENTS

In July 2011 the Treasury Select Committee (TSC) published
its final report into the decision by the Payments Council – ultimately
reversed – to set a target date of 2018 for the abolition of cheques.

One of the TSC’s key recommendations was that the Treasury should
bring the Payments Council formally within the system for financial regulation.

The Government accepted the TSCs recommendations, and as a
result in July 2012 issued a consultation – Setting
the Strategy for UK payments
 - setting out options for improving the
way that payments strategy is made in the UK.

In Setting the Strategy, the Government said that its
favoured approach was the introduction of a new public body, the Payments
Strategy Board (PSB), to set strategy across the UK payments industry.

Since the publication of that document, however, a number of
developments have occurred that have led the Government to conclude that this
option would not deliver its aims as set out in that document, and that these
would be best achieved by pursuing an alternative approach of bringing payment
systems under a new regime of economic regulation.

The Government is now proposing to proceed with bringing
payment systems under economic regulation, and establish a new
competition-focused, utility-style regulator for retail payment systems.

This consultation sets out the Government’s response to the
outcome of the previous consultation and its proposal for a new regulatory
system, details how the Government envisages the new regulatory regime
functioning, and lists the consultation questions.

The period of consultation will run from 26 March 2013 to 25 June 2013,

NUMBER THREE: BANKS FORCED TO RAISE MORE CAPITAL

The Bank of England will tell the UK banks to raise billions
more in capital to absorb potential losses today.

In its Financial Stability Report released in November last
year, the Bank said banks may need to raise as much as £60bn to cover potential
costs relating to hidden losses, regulatory demands and potential fines for
mis-selling.

The Bank believes that the banks will not provide the credit
needed for economic recovery unless and until they raise additional capital.  The Bank’s Financial Policy Committee (FPC),
which formally gained powers in December, is expected to say how much must be
collectively raised by the banks, but will not say how much specific banks need
to raise.

The Bank of England's FPC has overall responsibility for
financial regulation in the UK and is part of a new order of regulation
designed to keep the banks under closer scrutiny.

It will oversee two new financial watchdogs: the Prudential
Regulation Authority (PRA), which will take over responsibility for supervising
the safety and soundness of individual financial firms, and the Financial
Conduct Authority (FCA), which will be tasked with protecting consumers and
making sure that workers in the financial services sector comply with rules.

The new watchdogs will replace the Financial Services
Authority (FSA), which is set to close next week.

The Bank’s announcement is due at 0930 GMT.

As it’s Easter, it appears that the UK authorities decided to
kill their banks and see them resurrected next week.

 A little bit OTT
(Over The Top)?

No.

I’ll write more after Easter, as I’m more interested in
bunnies and chocolate right now …

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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  • On the one hand the BoE is looking for greater stability and a lower risk of banks going to the wall and then on the other hand they are reducing the amount of capital new entrants will require which can only increase the risk of one of those new entrants crashing. There doesn’t appear to be an coherence in the regulation.