March 26, 2013 / 12:16 PM / 5 years ago

FSA eases rules for start-up banks

LONDON (Reuters) - Start-up banks in Britain will not need as much capital as their established rivals starting from April, the Financial Services Authority (FSA) said, in a move to boost competition.

Staff serve customers at the first branch of Metro Bank in Holborn in central London July 29, 2010. REUTERS/Toby Melville

Under pressure from MPs to increase choice in a sector dominated by four banks, the FSA unveiled sweeping changes to authorise new entrants within six months, a process that currently takes a year or more.

Capital requirements will be lighter for the first three to five years as long as a new bank can show deposits are insured and that it can be wound up easily without destabilising markets.

Additional requirements that were previously applied to cover uncertainties in start-up firms will be scrapped.

A new bank will need a core capital buffer equivalent to only 4.5 percent of its risk-weighted assets, a level that will be increased as the bank expands.

This is well below the 7 to 9.5 percent that applies to Britain’s “big five” lenders with 83 percent of retail accounts - HSBC (HSBA.L), Barclays (BARC.L), Lloyds (LLOY.L), RBS (RBS.L) and Santander UK (SAN.MC).

There will also be reduced liquidity requirements, the FSA said on Tuesday.

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

“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,” Turner added.

Andrew Tyrie, who heads a committee of lawmakers examining standards within the industry, said the FSA’s plans appeared to be a step in the right direction.

“The lack of competition in banking has been reinforced by a regulatory regime favouring large incumbents. Customers have lost out as a result,” he said.

The Parliamentary Commission on Banking Standards will publish its own proposals for stimulating competition in its final report due in May.


New entrants have already begun to surface in the wake of the 2008 financial crisis, looking to fill the gap as the big banks focus on shrinking their balance sheets and building up capital reserves to meet new regulations.

Metro Bank became the first new high street lender to emerge for over 100 years when it was granted a banking licence in 2010. Other new challengers such as Aldermore and Shawbrook have also emerged but have opted not to open branches.

Philip Monks, chief executive of Aldermore, said the initiatives would make applying for a banking licence less onerous and would help new banks compete effectively.

“I think it’s good to see more banking competition, and I think it’s good to give start-up banks more certainty in the process and to streamline the process,” Monks said in an interview.

“It’s all very well to have a number of new banks in the marketplace, but when they do get into the market, what you need to do is ensure that they have a level playing field,” he added.

Aldermore was founded in 2009 with backing from private equity firms AnaCap and Morgan Stanley Alternative Investment Partners. Its loan book now totals over 2 billion pounds, and it is the sixth-largest lender in the Bank of England’s Funding for Lending Scheme, which provides cheap funds for lending to small firms and households.

New entrants still face a big challenge in taking on existing lenders, which have branches across the country and whose payment systems the start-ups still have to use.

The Bank of England’s director of financial stability, Andrew Haldane, has mooted a common payment systems platform that all banks could use to level the playing field for entrants.

The changes are among the FSA’s last policy announcements before the regulator is scrapped on March 31.

Approval of new banks will be shared by two new regulators from April 1, with the standalone Financial Conduct Authority handling authorisation of staff and the Prudential Regulation Authority at the Bank of England overseeing capital requirements.

Editing by David Holmes and Jane Baird

Our Standards:The Thomson Reuters Trust Principles.
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