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Alongside the larger high street lenders, challenger banks such as TSB, Virgin Money, and Clydesdale and Yorkshire Banking Group must comply with so-called “ringfencing rules” by 2019 because they have gathered more than £25bn of deposits.
But satisfying the new regulations and the extra compliance involved will cost tens of millions of pounds and will weigh on resources for the smaller lenders, analysts have warned.
Tom Merry, a managing director at the consultancy firm Accenture, said: “The regulator is expected to require challengers, who meet the criteria of being ringfenced bodies, to become a direct member of all these payment schemes. This will incur costs.”
Ringfencing rules form the government’s main response to the financial crisis. The regulation requires groups to separate retail banks from riskier investment banking divisions, in order to protect depositors and prevent another government bailout.
One of the key requirements for a ringfenced bank is to have direct access to the UK’s payments systems, which many of the challengers are now attempting to build.
But there are other challenges. One consultant said that because banks have to prove that they are compliant with the rules on an ongoing basis, they will have to implement controls to show they are not selling prohibited products, adding “extra costs and complexity”.
Banks will also have to assess their customer bases, as the rules restrict ringfenced entities from selling and lending to “relevant financial institutions”, such as other banks or small boutique advisers, which might currently be classed as small businesses and sit within the ringfence.
Full article on Financial Times (subscription required)