On 25 October 2021 leaders from Starling Bank, Citigroup, Santander and Paragon Bank gave oral evidence to the Treasury Committee regarding the Future of Financial Services. Here's what they had to say.
On 25 October 2021 leaders from Starling Bank, Citigroup, Santander and Paragon Bank gave oral evidence to the Treasury Committee regarding the Future of Financial Services. The Future of Financial Services inquiry is tasked with recommending changes to the Treasury in light of Brexit and the onshoring of a number of EU pieces of legislation.
The speakers focused on:
All speakers told the Treasury Committee that the existing regulatory framework is too complex and often contradictory. Anne Boden, CEO and Founder of Starling Bank, told the committee that the rules need simplifying and limit the growth of financial services firms in the UK which provide essential services to the public, including the creation of jobs.
Anne also expressed concerns about murky regulatory objectives that often conflict, citing that in some areas competition is the key driver of requirements, whereas in others, consumer protection is the focus. All speakers were in agreement that these sorts of contradictions should be resolved and that regulators need to be clearer about the risks they are willing to accept.
We want proportionate regulation but, at the moment, it is just a little too complicated.
A particular regime that was cited was the Bank of England’s minimum requirement for own funds and eligible liabilities, commonly known as MREL. MREL requires banks to hold sufficient resources that can absorb losses and provide for recapitalisation in resolution. In principle, this sounds good, but in practise, the requirements of MREL are far less accommodating than the rules that enable the growth of banks in the U.S.
Nigel Terrington, CEO at Paragon Bank, whilst praising the PRA’s authorisation of 28 banks since the financial crisis, went as far as stating that MREL harms profitability of smaller banks by forcing them to issue debt, ultimately making them less attractive to investors and limiting their ability to really compete with the massive incumbents.
Nigel also expressed concern that some rules are drafted fundamentally incorrectly and overstate the risk associated with certain assets. He gave the example of mortgages whereby the price of a particular property from 25-years ago must be used to determine its present Loan-to-value ratio, which overstates the risk on a bank’s balance sheet. This is particularly deleterious in light of the fact that property is a robust asset class and Paragon Bank has had less than 0.1% of bad debts per annum.
David Livingstone, CEO at Citigroup, focused on the EU’s onshored Markets in Financial Instruments Directive (MiFID II) requirements that came into force in 2018. He stated best execution (achieving the best price on the best terms for a client when trading) is harmed by arbitrary rules requiring particular shares to be traded inside a physical venue in the EU.
The concept of ‘same activity, same risk, same regulation’ arose amongst the speakers, reflecting the approach the Treasury is currently exploring. The idea here is that if an activity in its presentation looks the same as another activity, they should be regulated in the same way, since retail consumers are none the wiser. Anne Boden, for example, said that many consumers think that their e-money is just as safe as a bank, when it most certainly is not due to a lack of Financial Services Compensation Scheme (FSCS) protection.
John Collins, Chief Legal and Regulatory Officer at Santander UK, focused on limitations of the current anti-money laundering framework. He stated that information sharing between the private and public spheres is essential to deterring and disrupting criminals. He also said that the rules should be proportionate and risk-based. Finally, he advocated for the Online Safety Bill to include both fintechs and platforms to give them accountability for the risks they introduce to the overall system. Anne Boden echoed her support for including financial scam ads in the Online Safety Bill.
The EU withdrawal agreement contained very little in respect of financial services other than a high level commitment to some form of cooperation and coordination in the future. As a result, the passporting regime no longer applies to the UK and UK firms can no longer provide services on a cross-border basis in the EU without obtaining regulatory approval. We saw many firms opt to set up sister branches in the likes of Dublin, Amsterdam and Estonia.
On the question of how important free trade agreements are to financial services, there was broad consensus that in and of themselves, not very much so. Free trade agreements notoriously lack sufficient detail to be of real benefit to UK financial institutions. Instead, the banking leaders giving evidence expressed a desire to see regulators such as the FCA and Bank of England increase their coordination and liaison directly with other regulators and international standard setting bodies.
A salient point relevant to free trade agreements was the desire to see FTAs in the future include adequate provision for the sharing of data. Data needs to move freely across borders and is critical to be able to keep KYC and AML information up-to-date and manage risk effectively.
We don't regard free trade as the high-water mark for financial services.
The Financial Ombudsman Service (FOS) has ballooned to a level of importance unanticipated by lawmakers. For example, decisions made by FOS are often contrary to FCA expectations, setting worrying precedents for how FCA rules should be interpreted. The banks expressed their desire to see the role of FOS reigned in and its precedent-setting capacity curtailed.
In terms of FSCS, it is not a straight forward deposit insurance scheme like in other countries because it applies to more than just banks (it includes investments, insurance etc). More problematic, however, is that when a claim is made, it is effectively paid in arrears by the financial sector; there is no pre-existing pot of money. If the claim exceeds £1.5 billion, the financial sector does not bare the brunt, the public does. The system is also fragile by design forcing banks to issue MREL debt - a reinforcing feedback loop. Nigel Terrington recommended to the committee that the Treasury instead builds up a fund as suggested by the World Bank and IMF.
Open Banking was cited as a failure by Anne Boden. Her reason was that its initial intent was to encourage users to switch banks by being able to port their data across providers. In her view, uptake has been low, and people still aren’t switching banks in the numbers hoped for. Moreover, according to Anne, Open Banking firms struggle to establish a revenue model.
We disagree with Anne’s comment on Open Banking. There is now a healthy Open Banking ecosystem within the UK that has created hundreds of jobs and delivered real value to consumers, whether that’s in the form of budgeting and savings apps, to mortgage and credit approvals, or to give merchants a viable alternative to the likes of PayPal and Stripe and leverage account-to-account (A2A) payments.
A particular criticism of Open Banking was the requirement for 90-day re-authentication. Incidentally, this limit is already being considered by the FCA for removal in certain circumstances - see section 3.6 of CP 21/3. Nigel of Paragon Bank pertinently put it that customers would be shocked if they had to re-authenticate direct debits or standing orders every 90-days. Anne Boden called Open Banking’s implementation ‘clunky’.
Faster Payments, whilst a pride of the UK for payments innovation, is severely lacking in consumer protections. There was consensus that more protections are needed against financial crimes like Authorised Push Payment (APP) fraud but that changes should be proportionate rather than be arbitrarily imposed.
We hope to see positive changes to both the payments and Open Banking sectors. See our recent blog post on the future of UK payments regulation for more details.
On the question of whether CBDCs present a risk or opportunity, Anne Boden stated that the UK needs to embrace change and new business models, otherwise as a country we will become irrelevant. She further noted that CBDCs would challenge the revenue models of most banks.
David Livingstone observed that the Bank of England’s consultation on CBDCs failed to articulate the problem they are supposed to be solving . By failing to have first identified the problemsentiment was that this must be identified in order to progress, otherwise we are simply entertaining a nice idea rather than something that can solve practical problems.
The Treasury Committee’s inquiry is ongoing, but prescient founders may wish to scope out opportunities and threats the future framework might pose. Our Strategic Advisory service is particularly suited for this. Contact us today to find out more.
Kayne Osbourne is ComplyEasy's Founder. Kayne is a Chartered Fellow of the Chartered Institute for Securities Investments, CAMS certified and has advised dozens of fintech and traditional financial services businesses with turning compliance into an engine of growth.
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