The industry body for UK fintech will today take aim at the banking watchdog in a scathing report that will blast “logic-defying” regulation.
A fresh report from Innovate Finance, seen by City AM, will accuse the Prudential Regulation Authority’s (PRA) of “excessive” requirements that create an “uneven playing field for UK challenger banks, placing heavy burdens on them.”
Challenger banks are facing headaches from a “suite of existing and incoming rules” from the PRA which “contain logic-defying elements that disproportionately burden [them],” the report states.
Janine Hirt, chief executive of Innovate Finance, said: “It is vital that the regulatory framework supports – rather than hampers – [challenger’s] success.”
Hirt added: “Regulators must adopt a ‘Think Challenger’ approach to ensure we are supporting innovation.”
The document also blasts the watchdog for “undermining the homegrown British banking success story” through overly burdensome regulation.
The calls come despite Rachel Reeves’ pledge to “rewire the financial services industry” in her Leeds Reforms package earlier this year. The Chancellor has touted the success of UK fintech in the last 12 months and promised to bolster the sector in her Financial Services Growth & Competitiveness Strategy.
But Innovate Finance’s report has said the UK’s regulatory structure “unintentionally favours large, established incumbents, hindering the very competition the UK regulatory system was designed to foster”.
Challenger banks have dominated the small- and medium-sized enterprises (SME) lending space over recent years.
The firms – which include the likes of Allica Bank and OakNorth – account for 60 per cent of the space, compared to 2019 where the four largest banks made up 90 per cent of lending.
But Innovate Finance warns the implementation of Basel 3.1 reforms – the UK’s adoption of post-2008 international banking safety rules – will create a major headwind for challengers.
To mitigate the complexity of Basel 3.1, the Bank of England developed the Small Domestic Deposit Taker (SDDT) regime, intended as a simplified, opt-in framework for smaller banks.
However, the report argues that even this “simplified” version, which still uses Basel 3.1’s core methodology, remains overly burdensome.
It warns the combined effect of these regulations could slash critical lending to small and medium-sized enterprises (SMEs) by up to £44 billion.
“This drop in available capital is a ‘growth tax’ on the SME economy and would directly impact the UK’s entrepreneurial engine room and future productivity,” Innovate Finance added.
Challenger banks forced to ‘hoard capital’
The fintech body’s report also took aim at the minimum requirement for own funds and eligible liabilities (MREL), which the Bank of England hiked the threshold for earlier this year coinciding with Reeves’ Leeds Reforms.
Introduced in the fallout of the 2008 financial crisis, MREL rules dictate strict tailored requirements for banks possessing assets between £15-25bn and act as a regulatory buffer to ensure lenders can be safely resolved in a crisis without taxpayer bailouts.
The central bank raised the threshold to £25-40bn.
Innovate Finance called for a more “proportionate application of the MREL… by the Bank of England to better reflect the realities that fast-growing challenger banks face”.
“[The regulation is] forcing [challenger banks] to hoard capital for regulatory compliance rather than deploy it for essential lending and investment,” it added.
It added the burden faced by challengers was “counter to the government and regulator’s commitment to growth and competitiveness.”
Rachel Reeves ordered regulators to take up the mission of “regulation for growth” as part of her Mansion House speech earlier this year.
The PRA last week announced it was watering down its rules on banker bonuses allowing part-payment for the most senior bankers from year one, rather than year three as under previous rules.
But Reeves has faced some friction from the Bank of England, which the PRA exists under, with Governor Andrew Bailey pushing back at claims that post-crisis financial regulation was hampering growth.