Challenger banks’ applications for banking licences are coming under closer scrutiny from the Prudential Regulation Authority (PRA) says fscom, the financial services regulatory consultancy.
The PRA only approved four applications for banking licences in the last year*, down from 14 in the previous year, while the number of applications (11) has remained virtually unchanged from last year (10) (see graph below).
The fall in approvals suggests that the PRA is taking longer to approve new applicants for banking licences than in the past. Many of the recent wave of applicants for banking licences have been digital-only challengers and fintechs.
The figures come in the wake of a letter from the PRA to chief executives of challenger banks in mid-June, which outlined the regulator’s concerns about their risk management.
fscom says that while the PRA is still keen to approve new entrant to the sector, there are three key factors that all applicants for banking licences must address to give themselves the best chance of getting approval:
Ensure your board has sufficient experience in banking – through at least one economic cycle
fscom says that a major issue for online-only challenger banks seeking PRA approval is a lack of board members with practical experience of running a bank. Their boards are often primarily made up of members from a tech background.
Says James Borley, director at fscom: “The PRA sees a lack of genuine banking experience as a stumbling block for an organisation looking to enter the banking sector.”
“The regulator is keen to see that the leadership team at a new bank has experience of lending through at least one economic cycle, and can manage a loan book in a period with potential for higher defaults. There is also a need for individuals with experience ensuring compliance in what is a very tightly-regulated industry.”
Prove your business model to the regulator, and back it with data
fscom says that banking licence applicants need to demonstrate exactly what gap in the market they are aiming to fill as part of the application process. The PRA is unlikely to grant a licence to a business that has little realistic prospect of finding sustainable growth and profit.
Says James Borley: “The regulator will want to see data that proves demand for the product the bank will offer. For example, it has been proven to be quite tough to get consumers to switch their main current accounts to a challenger bank. How will the bank deal with this? The regulator will be keen to see an answer that is backed by data.”
Make sure you have the investment needed to meet capital requirements
fscom says that banking licence applicants without sufficient seed capital in place are likely to struggle to obtain approval. The PRA must ensure that the businesses it approves are well-capitalised, in order to protect consumers.
Says James Borley: “It can be difficult for a new bank to get investors to commit equity to the business without having a banking licence in place. Equally, it can be difficult to get the PRA to approve a banking licence without the business having that seed investment.”
“The PRA operates with a presumption towards increasing competition in the banking sector, and is keen to see new banks enter the market. Potential applicants should be aware that none of the regulator’s challenges are insurmountable – the right preparation can ensure the process runs smoothly.”
Number of banking licence approvals falls as PRA increases scrutiny of applicants
* Year end February 28 2019. Source: PRA