UK parliamentary group on challenger banking: ‘current regulatory model isn’t working’

By Gaia Lamperti

The All-Party Parliamentary Group (APPG) 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 group of MPs stated that a “one-size-fits-all” approach to regulation of UK lenders has failed and watchdogs need to “break the chains” holding back the growth of challenger banks. The main spokespeople 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 report says that, while the UK has seen a plethora of new digital challengers enter the market to take on the traditional high street giants in recent years, competition is still being stifled by “regulatory intransigence” and calls on the government to instigate a new “Big Bang”, imitating the 1980s deregulation of financial markets. Only in this way will it be possible to reduce economic imbalances between different parts of the country, the group argued.

Even the announced Financial Services & Markets Bill, a “very welcome and overdue update” to the UK’s regulatory landscape, will not go as far as is needed to address the issues within the UK financial system.

“The UK’s one-size-fits-all regulatory model for banks – challengers, building societies and institutions big and small isn’t working,” pointed out Conservative MP Karen Bradley, Chair of the cross-party group. “This is not being caused by the day-today realities of the UK economy or recent events such as Covid but a deeper structural malaise.”

The report’s recommendations

Among its specific recommendations, the report suggested that the government should be forcing banks to offer branches to challenger banks before closing them, as well as grant financial incentives for neobanks to take over branches and open new ones. calls for more to be done to allow open banking to offer a view of each person’s financial situation.

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 in 2022 only to 325.

In addition, loosening capital rules for banks in so-called levelling up regions should also be near the top of the list for regulators, the group said, with the current framework acting as “regulatory chains” that prevented lenders from being founded in underdeveloped areas.

The report goes on to argue that the regulator should establish a Financial Services Compensation Scheme-style system for fintechs offering consumer access where their money is not protected by the existing FSCS model. Finally, it recommends making financial education a stand-alone curriculum item at primary and secondary school level, which could be delivered in partnership with banks and available in regions where financial services aren’t as dominant of an industry.

“Levelling-up is a key government priority, and the current cost of living crisis only serves to reemphasise how important it is. Financial Services providers can play a big role, but overly cautious regulation is holding them back,” added Bradley. “Regulators’ fear of failure means many are forced to operate with one hand tied behind their back, and this doesn’t have to be the case.”