Response to consultation on RTS and ITS on the authorisation of credit institutions

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Question 1: Do you have any general comments on the draft Regulatory Technical Standards under Article 8(2) of Directive 2013/36/EU or on the draft Implementing Technical Standards under Article 8(3) of Directive 2013/36/EU?

he UK experience suggests that the sequencing process is highly beneficial to facilitating innovation and the creation of strong new banks with the associated benefits for the real economy and consumers.

Question 2: Do you have any comments on the proposed list of information to be provided for the authorisation of credit institutions?

We believe that a number of items in the proposed list should be provided as part of a sequenced application (see answer to Q8 below).

It is not clear what is meant by the term “management body” and what level this should go to in an organisation – the Board, Executive Directors, members of ExCo etc.

Question 3: Do you have any comments on the proposed requirements applicable to shareholders and members with qualifying holdings of credit institutions?

It is unclear what sort of benefit asking what a shareholder’s reasons/intentions are for owning a holding will provide to the supervisory authorities (Article 5 4.a) other than that they believe the investment will be a profitable one in a successful business, as a core driving force for shareholders is obtaining a satisfactory return on their investment.

It is unclear what benefit derives from a shareholder being required to provide details of the means of payment/payment service provider for their intended participation given the significant other information already required on shareholders’ financial resources and corporate structure/shareholdings which should allow the competent authority to confirm that the proposed shareholder is fit and proper.

Question 4: Do you have any comments on the proposed list of obstacles which may prevent the effective exercise of supervisory powers?


Question 5: Do you have any comments on the procedure set out in the draft Implementing Technical Standards?

We strongly support the introduction of a sequencing process as discussed on page 43 of the Consultation Paper and believes that competent authorities should have the ability to agree such arrangements as appropriate.

Question 6: Do you have any comments on the draft application form for authorisation as a credit institution?

KPMG in the UK believes that there should be flexibility to allow a sequencing process which would therefore have a significant impact upon the proposed draft application form.

Question 7: Regarding the assessment of the credit institution’s management, do you believe that, in addition to the members of the management body, information should be provided in respect of (i) the heads of internal control function and chief financial officer, (ii) generally in respect of members of senior management or (iii) in respect of another set of officers (if so, please specify which ones)?

iii) the UK Senior Managers and Certification Regime requires the identification and approval of a number of individuals who are not just in the management body or heads of internal control functions but also those who have one or more of a competent authority defined list of responsibilities. This is a sensible approach to ensure that on a risk-based approach, key individuals beyond the most senior staff are identified and approved.

Question 8: Do you believe that further flexibility along the lines of the sequencing process described in the explanatory box at the end of Article 11 should be provided for? If so, do you consider that the sequencing process as described is suitable or would you propose a different approach?

We believe very strongly that a flexible sequencing approach should be provided for. The experience in the UK of such an approach over the last nearly 4 years has proved very beneficial for potential applicants for authorisation as a credit institution. The UK has authorised 23 new credit institutions since it came into effect with a consequent positive benefit for the UK economy in competition, customer choice, a wider availability of capital and therefore lending capacity to support the real economy.

The current UK “mobilisation” approach requires applicants to provide a significant amount of the information that is envisaged in the Draft Technical Standard in particular in relation to: the regulatory business plan including proposed business, products, customers; details of proposed controllers where known; proposed governance arrangements including Board and executive committees and their detailed terms of reference; indicative balance sheet and p&l; the proposed Risk framework and associated policies (liquidity, Contingency Funding, Credit); indicative capital and liquidity requirements with associated ICAAP and ILAAP documents; a number of core policy documents including AML/KYC, Concentration Risk, Conduct Risk.

There are a number of elements and information that do not however have to be provided at that point: The full management team does not need to be identified and in place although the roles and responsibilities should be; the full set of shareholders do not have to be identified and documented for the new credit institution other than to support initial capital levels at the point of initial authorisation; the full suite of internal controls and procedures do not have to be implemented and documented at the time of application; the relevant IT systems and outsourcing arrangements do not have to be built and implemented at the time of submission, although an initial indication of the proposed arrangements has to be provided.

Assuming the organisation meets the required standards, the PRA and FCA can grant an “Authorisation with Restrictions” which allows the applicant to describe itself as a bank (in UK parlance) but the activities that the credit institution can undertake are severely limited with a cap of £50,000 on the volume of deposits that can be taken. The remaining elements must then be identified and implemented to the satisfaction of the regulators in what is termed the “mobilisation” period which is capped at one year, otherwise the Authorisation with Restrictions will lapse and the entity will no longer be authorised as a credit institution. This can often include: raising / confirming the providers of the longer-term capital required to support the credit institution; recruiting the remaining members of the management team and Board; spending money to build out the IT systems to the framework in the initial application.

Such a logical sequencing approach allows applicants a process which substantially assists in the establishment of new banks. Having an application process that requires all the core elements (management, capital, processes, technology) to be in place and implemented at the point of application is severely limiting for individuals or corporate entities that wish to establish a new bank and acts as a significant barrier to new entrants and stifles innovation to support the real economy. In particular having to have recruited all the relevant staff and pay them through to full authorisation, together with building and implementing all IT and other systems is highly costly with no associated revenue for a considerable period while the regulators review the application and with an uncertain outcome. It has historically proved very difficult to obtain commitments for new capital for new challenger banks where there is no ongoing certainty as to success of the application; the mobilisation approach allows the applicant to demonstrate the validity of its proposed approach through having received Authorisation with Restrictions which then assists with both raising capital, recruiting the right individuals at both senior management and more junior levels and committing substantial funds to building the IT systems.

We do not believe that the current UK approach to mobilisation causes confusion. Specifically all credit institutions working in mobilisation are clearly identified as such on the PRA and FCA list of permissions for credit institutions (the Financial Services Register); there are clear limits set by the UK regulators on the activities and in particular volume of deposits that the credit institution in mobilisation can be involved in; the relevant credit institutions all also make it clear on their websites that while they are authorised as credit institutions there are limitations on their activities until they are fully operational, which is subject to regulatory approval with formal confirmation that the required actions have taken place. As a result there is no question of any diminished confidence in the standing of credit institutions in the UK as their status in mobilisation is clear.

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