Early signs of a post-Brexit UK: Help for challenger banks?

Early signs of a post-Brexit UK: Help for challenger banks?

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The Bank of England has announced that it proposes to allow new banks to have simplified capital requirements once the Brexit transition period ends next year to help them challenge the “Big Four” banks (RBS, HSBC, Lloyds and Barclays).

The current regulations implemented as a result of the Capital Requirements Directive apply equally to all banks regardless of size. They are intended to create a “level playing field” between banks but the fixed costs of implementing the regulations have a greater impact on smaller banks as they incur higher regulatory costs in relation to their turnover. As a result of Brexit, the UK has the ability to move away from the Capital Requirements Directive and amend the legislation currently in place.

Following the financial crisis, the UK has seen a large increase in start-up banks which has changed the landscape of the UK banking sector. It has been argued that the capital requirements regulations are actually causing “barriers to growth” preventing smaller banks from challenging the established banks. For this reason the Bank of England is proposing to implement a graduated regime where as a bank grows it can migrate through various levels of regulation. The smallest bank would be subject to the simplest regulations which gradually increase with the largest banks aligning with the current EU standards. The gradual stages of regulation would also aim to avoid having a large jump in regulations which may encourage banks to limit their size in order to take advantage of simplified regulations. There are similar rules that other countries around the world, such as Australia and Canada, have implemented successfully.

Although further details were not given in relation to what the simplified requirements might be, the proposed changes would be a boost for challenger banks with the new regulations aiming to increase competition in the UK banking sector.

This is one example of a number of changes to the financial services sector that could be implemented on 1 January 2021 once the Brexit transition period has ended. The government is currently in the process of consulting on a number of other changes to the UK’s financial regulations. However, with the trade deal covering the UK’s future relationship with the EU still hanging in the balance, significant divergence from EU laws could result in the UK not being granted “equivalence” status to continue trading freely with the EU in financial services. In November, the UK announced a number of areas in which the UK would grant equivalence to EU member states but the EU has yet to confirm their position while trade negotiations are continuing. This will be an area to watch closely whatever the outcome of the trade negotiations. 

Jonathan Porteous, Head of Banking and Finance at Stevens & Bolton, comments: “2021 will be a really exciting time for the UK in financial services regulation (I don’t get out much). The UK will be designing new architecture which should be (i) permissive and light touch to optimise its strong global position in financial services, especially fintech (ii) being suitably prudent and protective of consumers at a time of great uncertainty with Brexit and COVID (iii) with an eye to promoting green finance and ESG, and (iv) bearing in mind the importance of obtaining equivalence with the EU as far as possible. It’s going to be a difficult balancing act, but it should be interesting.”    

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