UK regulators need scale-up units to help challenger banks thrive

Experts have backed a call for the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to create dedicated teams to support the UK’s challenger banks to scale up and compete with the country’s Big Five high street banks.

Richard Davies, chief executive officer of Allica Bank, and Charles McManus, chief executive officer of ClearBank, recently told the House of Lords Financial Services Regulation Committee challenger banks would be prepared to pay for more intensive supervision from UK regulators.

John Cronin, founder of SeaPoint Insights, who has covered the UK banking sector for many years said that the PRA did not offer any targeted measures to support mid-tier banks.

“There’s been a very clear lack of support,” he said. “If I think back to 2017, the Bank of England was making adjustments to its process for attaining internal ratings-based accreditation, which is approval for the sophisticated models the large banks use that allows them carry lower capital requirements or lower risk weights on their lending.

“The Bank of England spoke very exuberantly about levelling the playing field for the challengers, where they would be allowed to use external data to inform the calibration of their risk weights and benefit from lower capital requirements in time. And there has been scant evidence of that materialising thus far,” he added.

Valley of death

Challenger banks believe UK regulators are focused on either the biggest banks or the smallest start-ups, with those in the middle left to languish, as Janine Hart, chief executive of fintech trade body Innovate Finance, explained another evidence hearing for the Financial Services Regulation Committee’s inquiry.

Though Hart praised the FCA for its much-replicated sandbox for early-stage fintechs, she added: “There is what some of our members term a ‘valley of death’ between the period when the firm has been past its authorisation point but before it is a structurally important firm and given a dedicated supervisory team.

“During that period, our firms, as they are growing and scaling and are still large, have no direct dedicated contact at the FCA or a dedicated supervisory team — and that can be very challenging for growing companies,” Hart said.

McManus, who co-chairs Innovate Finance’s Unicorn Council, said: “More recently we have seen a shift in relation to the regulatory environment, which is becoming less focused on enabling successful firms to grow. Our regulators need to get better and faster at offering tailored support for those high-growth firms.”

Challenger banks were not looking for weaker regulation, McManus said. He said the enhanced support they were seeking could mirror what is already offered to start-ups.

“This support could mirror the structure of the regulatory start-up units — it could be a sandbox for scale-ups, if you like. It would be focused on addressing policy barriers such as disproportionate capital requirements, and supervision barriers such as long lead times in relation to product authorisations. These require experienced supervisory relationships,” McManus said.

Higher regulatory fees

Davies at Allica said most firms would be happy to pay a levy towards scale-up units, while Cronin said that targeted support for challenger banks would need “sponsorship at the highest level within the regulator”.

“The sector needs the regulator to actually care and have a philosophy in terms of support,” he added.

According to the minutes of an FCA board meeting on October 3, the previous month the risk committee had discussed enhancing the support offered to high-growth companies. The minutes said that “early and high growth oversight” had been established in 2021 “to support new firms post-authorisation and to provide stronger oversight of firms growing significantly”, and the committee had looked at its “progress to date and if it could be enhanced”.

However, an FCA spokesperson said the regulator had no plans to establish a supervisory unit for scaling up banks.

The PRA declined to comment for this article.