Regulation redux: Dreams, confusion, gateways and hurdles

Gavin Stewart looks back at last week’s regulatory events, featuring challenger banks, crypto promotions, FCA authorizations and BNPL schemes.

The recent FT interview with Metro’s new owner, with its praise for the branch model, inadvertently highlights the immense problems facing mid-sized “challenger” banks, forced to look for a distinct (riskier) business model as a route to growth.

There has always been an element of smoke and mirrors about the attitude of government and regulators towards this cohort of banks; in previous times, Co-op, Clydesdale and Alliance & Leicester, all with their own distinct business models would, in the regulator’s eyes, have fallen into the same category. They are big enough – about Northern Rock size or bigger – to have to meet high standards for capital, liquidity, systems etc, but not big enough to seriously challenge NatWest, Barclays et al.

The PRA’s heavily touted “strong and simple” approach may solve this conundrum but Sam Woods’ recent Mansion House speech was short on detail, so I’m not yet holding my breath.

Crypto confusion

It’s not easy to know what to make of the FCA’s imposition of restrictions on, which prevent it approving the financial promotions of cryptoasset firms.

It won’t have escaped observers’ notice that the announcement came shortly after the Thomson Reuters article on how Binance had “partnered with Limited to approve its marketing and communications materials”, which (at least slightly) suggests that the regulator might have been unaware until that point that Binance was legally marketing in the UK. Irrespective of whether appeals, this story probably has some way to run.

More important in the long term, however, is that it exposes the paucity of the tools the Government has so far given the FCA to work with. Whatever your view of crypto, and Binance, trying to regulate it solely through financial promotions’ rules makes no sense. This week’s Government consultation may finally fix this, but not for several years.

Revolut hurdles

The simplification of Revolut’s ownership structure, part of its bid to obtain a UK banking authorization, provides a window on the clash of cultures represented by the length of time it is taking for Revolut, currently only an e-money firm in the UK, to become authorized as a bank, or not…

Having a clear ownership structure is a fairly central requirement for a bank, not least for the resolution plan in the event of it failing, as banks sometimes do. So the surprise is that it has taken so long for this to be sorted.

When I spoke to Laura Noonan for her recent FT article, I suggested that Revolut would be getting a good deal of senior attention, given its size and profile, and that the standards expected of it would be necessarily high given the scale of its existing business. And, at the authorization stage, that the burden of proof lay with Revolut to demonstrate that it met them.

We also spoke about the turnover in Revolut’s own management, including Chief Risk Officer, and I said that the PRA, among other matters, might well hold exit interviews to understand why people had departed.

In short, there are good reasons why Revolut’s authorization may be taking a long time and it’s not evident that the firm has always been in the best position to answer the regulator’s reasonable questions.

Gateway deterrence

Also on authorization, the FCA’s research paper into its deterrent effects, conducted by London Economics, suggests that its effectiveness as a gateway test for those wishing to undertake regulated activities has often been underestimated.

This contributes to a longstanding debate, going back to the 2005 centralization of the FSA’s authorization activities, ahead of taking on the regulation of Mortgages & General Insurance Intermediaries. In the years since, authorization has often been seen internally as something of a poor relation to other areas of the regulator, the first port of call for efficiency drives and cost-cutting, and with its staff on lower pay bands.

On various occasions, proposals to assess the effectiveness of Authorization were successfully resisted by other areas of the regulator, not always for disinterested reasons, so it’s good to see a genuine effort to measure its impact.

Waiting for BNPL

The FCA’s findings detailing the growth of BNPL (Buy Now Pay Later) and the degree to which the vulnerable are exposed to it make depressing reading. Bearing some similarities to crypto, BNPL will almost certainly prove much harder to regulate when legislation is finally enacted, with more harm to consumers as a result, than if Government had kept to its original, still quite leisurely, timetable.

Gavin Stewart is an independent commentator on financial regulation; former regulator; novelist; ex-international rower and sports administrator. He has 27 years’ experience working for financial services’ regulators (Bank of England, FSA & FCA), holding a wide variety of roles including as a Bank of England Supervisor, FSA Head of Strategy, Planning & Performance, and FCA Chief Risk Officer.