FCA speaks on retail banking regulation

Andrew Bailey has spoken at BBA’s retail banking conference on FCA’s perspective on retail banking. He highlighted 3 points:

  • the importance of understanding business models, in the light of Northern Rock. FCA needs to understand where banks earn their returns and how stable they are. He noted that, before the financial crisis, the pressure was on raising deposits and funding. Those, with the increased opacity of asset structures, made it hard to assess how creditworthy borrowers were and therefore how solvent banks were. Because of Northern Rock’s business model, he said it was hardly surprising that it ended up having to grant mortgages on the lower end of the creditworthiness scale to meet the demands of its mortgage securitisation trust. The focus on securitisation also gave it a higher cost of funds, which in turn pushed it to riskier lending. Even the half of the bank that was not in the securitisation master trust was heavily funded by the trust’s cash flows. Following the lessons of Northern Rock, the pressure is not to find appropriate lending opportunities;
  • that retail banks are complex, given their model of providing many products of varying lifespans with high scope or cross-subsidies between products and consumers. He spoken of the “free-if-in-credit” model and noted that nothing is ever really free, but that customers may pay more or less for their banking services depending on the mix they choose. He focussed on FCA’s current concerns about unauthorised overdrafts, as the area where retail banking crosses over into high-cost credit. He also explained how FCA is looking at the different concerns caused by this type of shorter-term issue, and long-term products such as mortgages. Some element of cross-subsidy is inevitable and what is hard is assessing how to allocate costs and be transparent about it. Finally, FCA has to consider public policy requirements on access to banking services; and
  • FCA’s decision to carry out a strategic review of retail banking business models with an emphasis on the profitability of and links between different products and services. He described this as initially a piece of discovery work, which should enable FCA better to assess the impact of changes, such as technological changes, on retail banking business models. Alongside this, it is working on CMA’s recommendations. Its other key pieces of work are the review of high-cost credit, and, imminently, a thematic review on how banks assess customers’ understanding of products and services.