Securing a banking licence – what it takes to become a challenger bank
25 July 2016
By Nihar Mehta
If there’s one thing that those planning on launching a challenger bank have in common with each other, it’s courage. As I set out in my blog in March, we are expecting a lot of new banking entrants to get regulatory approval this year and next. The Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA) are doing much to encourage new entrants, including setting up a new bank start-up unit and bringing down the barriers to entry for challenger banks. In May, the first retail banking licence of the year was granted to Masthaven Bank and this was recently followed by Starling Bank. The PRA and FCA are currently assessing authorisation applications from between 20 and 30 firms, with many more waiting in the wings.
The people behind challenger banks are positive, adventurous and entrepreneurial by nature. They see market opportunities, and are prepared to take them, even at a time when the banking sector is undergoing challenges. As my colleagues Stephen Morse, Andrew Kail and Darren Meek have recently pointed out, almost all of our start up clients are proceeding with their plans despite the recent EU referendum and the uncertainty in the market.
Courage isn’t a problem, but that’s not necessarily enough. Gaining a banking licence is an intense and rigorous process – the first to be issued in the new wave of banks, for Metro Bank, took over two years. The regulators will, by default, set the agenda and the timeframe – the task for the applicant (and their advisers) is to help steer the regulators through the process efficiently, by being proactive, anticipating questions and challenges and pre-empting “problems” before they can take root. The process can quickly become completely out of the applicant’s control if they do not provide the right information or sufficient detail in their submissions to the regulator, or if they are not sensitive to the regulators’ likely questions and concerns and take steps to deal with them positively.
The regulators want to be sure that new challengers are capable, prepared and ready. The Government's policy is to increase the number of UK banks. Regulators don’t want challengers to fail their test, but it needs to be a rigorous process. This makes applying for a licence the best possible preparation for the reality of life as a challenger bank. If the groundwork is done thoroughly enough, a challenger should be confident that on day one of its operations, it’s prepared, ready and can cope with anything. Proper preparation can also bring a lot more certainty and speed to the process. Now, with the right approach, the right banks could get authorised within one year.
We’re working with several firms at the moment, guiding them through the application process – including the detailed preparation stage, which is all important. We always stress that this is the stage during which the firm tests and validates its idea, makes sure that its tax and legal structure is right, it has the right strategy, the right infrastructure and that its team is well put together and fully prepared. And because we encourage our clients to collaborate with the regulators throughout the end-to-end process, we help prospective challengers build a constructive relationship with them from the very first contact, long before the application itself goes in.
As I discussed in my talk about PwC’s ‘Bank in a Box’ at the London Fintech week, if all of this detailed work is done well, the people behind the challenger can be confident that the decisions they make are the right ones. And that on day one of business, the only thing to focus on is growing the business.