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Parliamentary group on challenger banking says current regulatory model 'isn’t working'

A group including representatives of some of the UK's most important challenger banks has recommended deregulation of the sector, changes to the rules governing branch closures, and increased financial education.

a woman smiling for the camera

Rt Hon Karen Bradley MP.

The All-Party Parliamentary Group on Challenger Banks and Building Societies has issued a report calling for a loosening of the rules challenger banks are subject to, claiming that the current regulatory model "isn't working".

The report claims that the Financial Services & Markets Bill, whilst a "very welcome and overdue update" to the UK's regulatory landscape, does not go as far as is needed to address the issues within the UK financial system.

Attendees at the session which informed the report included Tim Bowen, CEO of Penrith Building Society, Nigel Terrington, CEO of Paragon Bank, Jonathan Thompson, CEO of Bank North, and Mark Davies, regional director of Metro Bank.

The UK's major banks remain "insulated from the forces of market competition" according to the report, despite the increase in licensing of new institutions in recent years.

The report claims the regulatory system and the "dominant market power" of the established banks are stifling Government attempts to rebalance the UK's economy. 

In terms of specific actions, the report suggested that the government should be forcing banks to offer branches to challenger banks before closing them, as well as offer financial incentives for challengers to take over branches and open new ones, especially where there are no other bank branches currently. 

The news comes as banks all across the UK have shuttered their doors in 2022, around 226 banks are set to shut down by the end of this year according to data from cash machine network Link, which would take the total number of closures to 325.

The report goes on to argue that the capital rules which govern expanding and starting new institutions should be removed for firms headquartered or operating in "levelling up" areas so that it is easier to start and grow firms outside London and the South East.

The report also called for rules governing minimum requirements for own funds and eligible liabilities (MREL) to be re-written to make the UK and its regions more competitive places to operate financial institutions. 

These rules, introduced in 2016, were intended to protect smaller financial institutions and their customers in the event of their failure, but the report argues that these minimum capital requirements be brought in line with jurisdictions with higher thresholds such as the EU and the United States.

The report also argued for a Financial Services Compensation Scheme (FSCS) style provision for fintechs, that would enable consumers' deposits to be protected even if they are not eligible for protection under the existing FSCS model.

In addition, the report called for financial education to become a stand-alone curriculum item at the Primary and Secondary School level, calling the current state of financial education in the UK "embarrassing".

The report said this could include more education on the opportunities available in the financial services sector, and that it could be delivered in partnership with banks and available in regions where financial services aren't as dominant of an industry.

Chair of the Challenger Banks and Building Societies APPG Karen Bradley MP said that the cost-of-living crisis emphasises the importance of "levelling up" and that "financial Services providers can play a big role", however she believes that "overly cautious regulation is holding them back".

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