CUSTOMER confidence in the banks is low. You would therefore think that the time was ripe for new entrants to the banking market. There was a time when scarcely a week went by without somebody saying they were about to become a bank. Tesco, Virgin and Metro Bank are lining up to offer the full range of banking services, but so far we have not seen anything like the promised number of new banks appearing on the high street. A look at the list of authorised banks currently published by the FSA, and prior to that by the Bank of England, reveals that there have been very few new names added to the list in the past decade. But why? And can we expect the picture to be any different, say, a decade from now?
Undoubtedly, the main reason is that the hurdles for potential banks to jump are high. Any organisation seeking permission from the FSA to carry out banking activities – broadly, accepting deposits and calling itself a bank – is going to face considerable challenges. This month the OFT published its Review of Barriers to Entry, Exit and Expansion in Retail Banking, which reported concerns by those seeking to enter this market about the difficulties and uncertainties arising from the regulatory process of becoming a bank.
The government is considering a radical reform of financial services regulations. However, given that banks are systemically important financial institutions and the fact that accepting deposits from the public is an activity underwritten by the UK taxpayer to the tune of £50,000 per customer per bank, it’s unlikely that there will be much relaxation in the regulatory barriers – and sensibly so.
But there’s more to banking in the 21st century than accepting deposits, and so there are alternatives for a business seeking access to the broad banking sector. Many of the activities associated with banking – for example lending, providing payments services, managing investments and giving investment advice – require far more achievable regulatory approvals. For example, businesses seeking to lend to individuals can obtain a license under the Consumer Credit Act from the OFT, or they can get permission from the FSA to carry out investment activity, if that’s their chosen market, without getting authorised to become a bank. The recent Payment Services Regulations have also opened up the market for innovative new entrants who are now able to seek permission from the FSA to become a Payment Services Institution and gain new accreditation and access to payment systems.
As for the future of banking, perhaps we will see a continuation of the trend for parts of banks to be sold off, creating new entrants to the broader retail banking market. The disposal by RBS of its merchant services to Advent International and Bain Capital is a recent example of this. However, those seeking to acquire pure banking businesses with existing permissions to accept deposits will still have to clear similar regulatory hurdles as those seeking to start up banking businesses. We are unlikely to see an explosion in the number of banks on the high street, but changes are afoot in the banking sector.
Ian Benson is a finance lawyer at national law firm Mills & Reeve. firstname.lastname@example.org