Validación de Expertos

5.95 A few respondents were concerned that regulation not specific to the financial services sector could act as a barrier to entry and/or expansion in retail banking. Areas of concern included:

• the effect of the merger regime

• the regulatory risk of Government intervention, for example the focus on the banking sector by a number of organisations, including the OFT, and

• the existing tax regime (and potential changes to it).¹⁴⁵

5.96 While the merger regime may pose a barrier to expansion for larger retail banking providers, this would be of concern only if the effect of the regime were to reduce the level of competition in the market. The aim of the UK merger regime (in retail banking, as in any other industry) is to prevent harmful effects on competition arising from a merger, and we do not therefore consider it further in this review.

5.97 Respondents indicating that the regulatory risk of Government

intervention might in principle increase barriers to entry or expansion did not provide specific examples of interventions that they considered unnecessary or disproportionate, or evidence on the effects that intervention might have had on the size of these barriers. While any regulatory uncertainty has the potential to deter market entry, we are not aware of any specific areas in which Government intervention has posed a significant problem.

5.98 Similarly, respondents mentioning the tax regime as a potential issue did not provide information on their concerns, or evidence as to the effect or potential effect of the regime. While the tax regime may impact

differently on smaller or larger firms in general, we are not aware of any existing or potential provisions that might increase barriers to entry or expansion for smaller or newer retail banking providers specifically.¹⁴⁶

Summary

5.99 Firms wishing to offer most retail banking products are subject to a range of regulations, many of which are specific to the activities they

145 One respondent also commented that changes to specific accounting rules had the potential to create barriers to entry in certain product markets.

146 On 21 October 2010, the Government announced the introduction of a bank levy on global balance sheets and has set out legislation to this effect

(www.hm-treasury.gov.uk/press_55_10.htm). This appears to affect the largest banks only and we do not therefore consider that it is likely to increase barriers to entry or to achieving scale.

undertake. Before commencing operations firms must obtain

authorisation from the appropriate regulatory authority (FSA or OFT), unless they are covered by an exemption, and prove they satisfy the necessary criteria. Once they commence operations, retail banking providers must continue to meet relevant standards, such as capital and liquidity requirements, conduct of business standards, and anti-money laundering rules. Adherence to these standards is monitored by the regulator. Providers may also choose to meet certain higher voluntary standards.

5.100 Respondents raised a number of concerns relating to the process for gaining a banking licence, indicating that little up front information is available on the licensing process, that uncertainty surrounding the process may make it difficult for prospective entrants to raise the capital required, and that the timescale for obtaining a licence may be lengthy and uncertain. It appears that these problems may collectively in the past have posed a significant barrier to entry. The FSA has recently introduced changes which we consider have the potential to address many of these concerns, though it is to early conclude whether they have lowered barriers. The impact of these changes would merit monitoring and there may be other steps that can be taken to improve the level of information available for potential entrants.

5.101 The OFT has not received any evidence to suggest that the process for obtaining a consumer credit licence constitutes a significant barrier to entry for the vast majority of applicants. Concerns expressed around the home finance authorisation process may be addressed through changes introduced by the FSA, as mentioned above.

5.102 Capital and liquidity requirements emerged as an area of concern among a number of respondents. At present, these requirements, which are designed to protect depositors and improve the overall stability of the financial system, may have a differential impact on smaller and larger firms due to the different methodologies such firms may use to calculate their required capital holdings. Capital and liquidity requirements are currently undergoing significant change as a result of the Basel III process and associated changes to EU law. It appears that new capital

requirements, along with liquidity standards, could have the potential to exacerbate differences between incumbents and new entrants, for example, by imposing higher fixed costs of compliance. However, some parties have argued that other proposed changes may also reduce any discrepancies, such as removing certain financial instruments most commonly used by large banks from the list of permitted capital. As the new requirements take effect, it may be appropriate for the prudential regulators to consider and monitor the impact on competition of these changes.

5.103 Other regulatory requirements did not emerge as widespread concerns, although some smaller financial institutions did consider that money laundering regulations and the rules applying to consumer credit providers might increase barriers to entry.

6 ESSENTIAL INPUTS

6.1 In order to offer retail banking products, providers need to have in place appropriate infrastructure to process transactions and comply with risk management processes, to allow their customers access to industry-wide payment schemes, to be able to accurately determine potential customers' risk profiles and to have access to finance to fund

operations.

6.2 The building blocks of a retail banking provider's IT infrastructure are the hardware, software and staff that support and facilitate banking.

Collectively these building blocks allow a provider to perform essential services in relation to account management such as calculating interest, processing payments and identifying, measuring and managing risks.

6.3 Similarly, providers of most retail banking products need to be able to connect to external payment systems. In the UK, these include clearing schemes (such as Bacs and CHAPS) and plastic card networks (such as Visa and MasterCard). If a provider cannot offer access to such schemes to their customers, their ability to compete successfully will be

constrained.

6.4 In addition to access to banking infrastructure, retail banking providers typically need access to customers' financial and credit information to allow them to accurately identify and appraise the risk associated with selling retail banking products such as credit cards or mortgages. Any difficulties in accessing accurate relevant information may create impediments to opening and managing new accounts.

6.5 Retail banking providers seeking to grow in the market must be able to find viable sources of funding to finance their expansion. If they are hindered from doing so, they may not be able to expand operations, preventing them from exerting competitive pressure on incumbents.

6.6 We collectively refer to the above as 'essential inputs'. If new entrants are prevented from accessing these essential inputs they will be unable to compete effectively with incumbents and the likelihood of them being

successful will be limited. This chapter considers each of the components in turn.

IT systems