Paving the way for new models of local finance

Susan KramerBaroness Susan Kramer was one of several peers who fought a successful battle to amend the new Financial Services Bill to make it easier to set up small banks. She talks to David Boyle about the potential for new models of local finance to emerge.

The key element of change in the bill was giving the new Financial Conduct Authority (FCA) a duty to ‘have regard to’ – though it is only a ‘have regard’ to – people’s ability to access financial services. When we first started this process, the Treasury was initially very opposed to it, but that changed over time. As a result, it is now a different world for the UK regulator: they can no longer just ask ‘is the competition out there fair?’, but need to ask ‘are there people who are not being served at all?’. They will have to ask whether the existing players are effectively acting as barriers preventing people coming in to serve those markets. I think what we have done now is to create a framework so that, for the first time, it is seriously possible that community or local banks could come forward, get approval and become successful. It will still take, however, an incredible amount of drive from the people who want to see those banks happen; it’s going to take charities, social enterprises, local authorities – and big banks which recognise they are not serving part of the market. I’m not sure who the players are, but they need to come forward and take advantage of it. The ‘access provision’ is a real shift in thinking for the FCA. Before, the attention of regulators was just on two things: risk and abuse. Access had never been on the agenda before. Well, it is on the agenda now, but it does require people to really put the pressure on.

The second thing we managed to get into the bill was the so-called ‘CRA provision’ – which has elements of the Community Reinvestment Act (CRA) in the USA. Essentially, the banks will now need to report on the distribution of financial services in a very granular way, by postcode and by bank, showing how they are lending to small business and other kinds of groups, so we can see where the vacuums are. Once people see where the service is not happening, then they can go to the banks and ask why it isn’t happening here. My guess is that, again, we will see local authorities, charities, social enterprises, community development finance institutions (CDFIs) and others, going to engage with the banks, and saying that they want to deliver financial services in this area – and why don’t they give us some support to help deliver them?

I think it can potentially be a turning point. The opportunity is there and it has to be seized. It isn’t going to happen by magic, and it’s going to take thought, planning, energy, resources and dedication. There’s not going to be one model; different organisations in different areas will come forward with different solutions – which is rather a British way of doing things. But once we start having some successful models, then there will start to be some energy out there.

It is crucial that people should be able to set up banks in a cost-effective way. We are expecting to hear shortly from the regulators about the results of their review on barriers to entry. One is how to get banking licence; at the moment you almost need to have set up the bank before you can get a licence for it. I am hoping they will move to a much more supportive process. The second thing is that I’m hoping to get a multi-step process so that you don’t have to put in significant investment until you have all approvals in principle, and so that you know with confidence that – if you achieve the requirements – then you will get the final stamp of approval. I do think there is real understanding for the first time at the FCA that these barriers are a mark of failure, not of success. Also the cost of setting up the whole IT side of a bank is insane, because each individual bank has to set up its own internal IT workings. In the US, they have what they call a ‘bank in a box’, which means that basic banking platforms are available. It essentially brings down the cost of setting up banks dramatically. There are number of people interested in this in the UK. There is also more pressure coming from the credit unions because they have to meet the requirements of the universal credit, which means that everybody needs some kind of functional bank account.

What has to give the regulator confidence is to have a way to resolve banks that fail. Some new banks will not work and regulators need to be confident that depositors are protected and banks can be very rapidly resolved. In US, the Federal Deposit Insurance Corporation (FDIC) closes several banks a week; they are closed on Friday night and under new ownership and open by the following week. But small banks also need more capital because, historically, small banks and new banks have needed more capital than the traditional big banks. Mervyn King (Bank of England governor) says that has to be changed, but I am concerned that we won’t get enough action on this front. Big banks work out how much capital they need using models that risk weight their assets. They need a substantial history to see what kind of risks they face, and they also need substantial volumes so they can see the real character of the loans. New banks and small banks find that an exceedingly difficult barrier to cross. They can’t take advantage of lower capital requirements they get from risk-weightings. Over time, that will probably disappear under Basel III, but what do we do in the interim?

The truth is I don’t know, but they have been rising in other countries, and I can’t imagine why the UK would be excluded from that desire. Also the other countries found ways for these banks to be successful and profitable. We are not asking people to come in and support failing institutions; we are looking at role models that succeed.


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