Alongside a number of proposals and revisions to current supervisory regulations, the consultation paper  noted that of the 22 UK banks authorised since 2013, a number of new entrants underestimated what is required in order to become a successful, established bank.

“Often, these banks are focused on the ambition of becoming authorised and lose the longer term focus of becoming a sustainable business, or fail to appreciate the ongoing need to invest in systems and controls to ensure they remain commensurate with the evolving needs of the business.”

Avoiding common terminology of ‘challenger’ or ‘neobank’ to describe the institutions, the PRA uses the term ‘new banks’ to refer to firms currently in the ‘mobilisation stage’ (authorisation with restrictions) and those that have received authorisation without restrictions within the past 12 months.

It also adds a category for ‘growing banks’, which are typically firms between one and five years post authorisation (without restrictions). It describes these banks as facing rapid growth; making losses; reliant on regular capital injections; significant and rapid changes in strategy and business model; and immature controls.

These two categories of banks largely fit into the ‘non-systemic bank’ bracket, which represents banks that are not considered to be sufficiently systemically important through the O-SILs Identification process.

The key proposals set out within the paper include requirements for new or growing banks as they mature to:

1. have greater clarity over the path to profitability, including how they will meet all relevant loss absorbing requirements;
2. strengthen governance and increase the independence of the board as they mature; and
3. expect to invest significantly in risk management and controls, and have a mature control environment typically by five years after authorisation.

The PRA also proposes a change toward how the PRA buffer is calculated for new banks, including the requirement for new banks to move onto a buffer set on a stress test basis once reaching the five year or profitability milestone (whichever is sooner).

The paper goes on to propose the creation of a new Supervisory Statement titled ‘Non-systemic UK banks: The Prudential Regulation Authority’s approach to new and growing banks.’

As the FCA is the conduct regulator for all firms operating in the UK, the PRA’s Paper will not affect the application of the FCA’s rules or requirements to international banks operating in the UK. That said, the Supervisory Statement is intended to sit alongside the PRA’s requirements and expectations as published in the PRA Rulebook17 and its policy publications, moulding the overarching themes and focus taken by the regulator into the future.

In her speech introducing both the Consultation Paper and draft Supervisory Statement, Sarah Breeden, executive director, UK Deposit Takers Supervision explained that its purpose is to provide clarity regarding the PRA’s expectations of banks as they evolve from ‘new’ to ‘mature’.

“We recognise that the winding path up the mountain to become a large player can seem arduous, and strewn with rock faces that appear difficult if not impossible to scale. Barriers to growth are in many ways the inevitable corollary of our lowering the barriers to getting onto the mountain in the first place and of us introducing proportionality into the regime. So ironically our actions to support competition risk creating the very barriers that firms then find it hard to overcome.”

Continuing the analogy, Breeden noted: “Over the past few years, our focus has been on getting more banks onto the mountain at base camp. But as our next step, our focus has turned to ascending the mountain. And I hope the draft Supervisory Statement we have issued today goes some way to making the path up the mountain easier for you all to navigate.”

The draft Supervisory Statement itself holds comment and critique of new and growing non-systemic banks’ behaviour, arguing: “New and growing banks do not always seem aware of the importance of keeping their control environment in line with the size or complexity of their business.

“The PRA has observed a theme of banks outgrowing their control environment and having to retrospectively invest in control functions. This is not an appropriate way to develop the business and in the long run can be more expensive, as banks then have to undertake extensive remediation activity.

“The governance and controls which are appropriate at authorisation are unlikely to remain appropriate as the bank grows, and consequently banks should expect to make significant investment in controls in their early years of operation.”

Comment and feedback to this draft Supervisory Statement are open until Wednesday 14 October 2020, with the amendments set out in the consultation paper intended to come into effect in the first half of 2021.

Certain commentary on the paper suggests a touch of “soft lobbying” by the big banks, with small banks bearing the brunt of Covid-19 despite efforts to remain compliant. Others observed that the tone of the Statement befits a shift in focus toward supervision of business models and resolution plans as new and growing banks mature.

The Bank of England’s decision to hike Monzo’s capital requirements earlier this year underscores the regulator’s desire to slow the expansion of new loss-making lenders.

Breeden’s speech highlights the PRA’s position as to the issue of expansion speed, noting that “It may be tempting to start up the mountain at a sprint. But those that take their time, ensure their crampons are firmly in place and plot their path for each stage of the climb are much less likely to come unstuck later. Stumbling on the path and having to re-climb a section of the mountain can be scary, frustrating and costly in equal measure.”