From dream to reality: obtaining a banking licence
So you've decided you want to start a bank. You have a founding team in place, a core idea of what problems your bank is going to solve, and how it is going to do it.
Now you need to start a process of engaging with the external world. Along the road to success, you will need the ideas you have developed between you and your team to resonate clearly and effectively with different stakeholders, from potential customers to investors and more. But the very first people you'll need to convince, after yourself and your team, are the regulators.
A bank's relationship with its regulators is crucial; the regulators will be a vital stakeholder in determining market access, and ultimately the banks' success.
First impressions are hard to shift, so it is vital a prospective new bank puts a strong foot forward when it first engages with the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
This blog is going to help explain how you can make the right first impression. We will look at the initial steps of what happens when you apply for a banking licence.
The starting gun
Technically your first step will be to contact the PRA and FCA authorisations teams to inform them of your intention to apply for a banking licence, although your preparation for engaging with the PRA and FCA should begin well before your initial contact.
The PRA and FCA will work in tandem throughout your application process and will make independent decisions on authorisation. While the PRA will hold the pen on the ultimate authorisation, it may only authorise with FCA’s consent.
You can expect a response to your email and perhaps a short phone call or two to establish your legitimacy, before the regulators ask for what is commonly referred to as a ‘high-level-summary meeting’.
Don't let the name of the meeting lead you into a false sense of security. You're going to be asked a lot of detailed questions about your business plans; and you'll be expected to have initial responses and a well-thought out approach.
The best approach is to create an initial presentation ahead of the meeting that demonstrates that you have thought through all the necessary detail. This should be shared in advance of the meeting so that the PRA/FCA have reviewed your initial proposition and provide helpful feedback in the discussion, as well as post it.
Your presentation will need to cover everything from your basic business plan, right down to the details of how you have modelled anticipated capital volumes and pricing against varying interest rate environments. You will be asked questions about market research you have undertaken to help you verify the appropriateness of your business proposition and forecasts.
You will need to explain the anticipated customer journey, technology platform, risk management systems you will put in place, the anticipated outsourcing arrangements, and how you plan to access payment systems amongst others. You will also need to share a design of your planned governance within the bank as well as detail on the management team.
You should expect to spend at least four to six weeks of work into the development of this document.
This meeting is one of the most important steps in your journey to establishing a new bank. First impressions are hard to change, so take no risks.
At this stage, you should know your plans in great depth. If not, don't rush in. You should be well-prepared, knowledgeable about the process and articulate about your proposition. You should also be open to listening to and discussing the expectations of the regulators.
There is a good chance you will be meeting people that will oversee your entire application process for a licence. You would want to strike a warm, productive relationship from the get-go, it is therefore important to be conscious of the regulators’ key concerns.
The PRA cares primarily about the stability of the financial system. They're going to be concerned with your potential impact on the structure, health and (most importantly for a start-up) reputation of the UK's financial services sector. They want new ideas and business models to thrive, but they will not grant licences without the satisfaction that the new business models do not pose a risk to the Bank of England’s objectives.
The FCA cares about how a bank will conduct itself both in the interests of its customers and of the market. Their focus will be on your potential customers and the customer journey, your management team, your approach to financial crime prevention and your operational resilience. Again, the FCA is keen to help new ideas get to market, but not at the risk of customers’ wellbeing.
Expect them to probe every conceivable area of your business plan. Where you have an answer to their queries, be clear and helpful in your answers. If you are asked about an area for which you are not prepared, be open and honest about this.
For your part, you shouldn’t be asking vague questions that appear to be using the regulator as an adviser. This is a good opportunity to gather information on the regulators’ outlook. Therefore, where you do have questions, be clear, specific, and targeted.
You will most likely wait 2-4 weeks after the meeting to receive a written feedback from the regulators in the form of a letter from both the PRA and FCA representatives.
Don't expect to be showered in praise, it is highly unlikely that the feedback will be uniformly positive.
All the points in their letter will need to be addressed, so you should read it very carefully. The most common areas on which the PRA and the FCA usually want to see further details are:
- Market research to prove the value proposition
- Fuller consideration of risks
- Detailed consideration of the proposed governance structure
- Evidence of your ability to raise sufficient capital
- Information on how you intend to access payment systems
- More sophisticated thinking around liquidity and capital risks assessments
The process often moves slower than entrepreneurs expect or are happy with, but you shouldn’t rush your response to this initial feedback. Make sure you’ve addressed all points of feedback properly, before going back to the regulator.
Equally, be conscious that this is the stage of the process during which enthusiasm is often curbed. As the dream turns into reality, it’s vital to keep your motivation up as you tighten your belts for more work and gruelling challenges to follow.
The next steps
Once you have addressed the feedback, you will submit a detailed ‘Regulatory Business Plan’ and have a ‘challenge session’ with the regulators to give them further opportunities to probe your proposition and preparedness.
Maybe, but only maybe, then it will be time to move to the next stage of the process, but we will discuss this in the next blog!