Explained: The ECB’s role in the banking licence process & UK’s licensing procedures

Since November 2014 and the introduction of the Single Supervisory Mechanism (SSM), the European Central Bank (ECB) has sole licensing authority over all the banks in the Eurozone.

In the UK, there is no separate licensing process for fintech-orientated banks.

The SSM was launched alongside the Single Resolution Mechanism, which came into force in 2016. Both form the main two pillars of the banking union, initiated in 2012 as a response to the financial and the euro debt crisis that hit European banks and which aims to create a deeper integration of the banking system.

As a result of the SSM, national competent authorities saw the transfer of some of their supervisory tasks to the ECB. However, when it comes to reviewing applications, national competent authorities are not left out of the process.

“The firm usually sends us all their documentation, we make our own assessment and then, we provide all the information to the ECB in order for them to make their own conclusions,” explains Jekaterina Govina, advisor to the board of the Bank of Lithuania and coordinator of its fintech strategy.

Once the national competent authority receives the application from a firm, it reviews all the documentation and decides whether it approves or rejects the application.

If the application is accepted, the national competent authority must prepare a draft decision and send it to the ECB for further review. The ultimate decision to grant a banking licence rests solely upon the ECB.

“The ECB may have some questions or may need further details when reviewing all the documentation, in which case we pass all the extra comments onto the firm,” adds Govina. “And this is only when all the questions have been answered and all the necessary information provided that the ECB eventually reaches a decision and potentially grants the banking licence.”

The ECB and the national competent authorities are bound by clear deadlines, though. Article 15 of the CRD IV directive states that “a decision to grant or refuse authorisation shall, in any event, be taken within 12 months of the receipt of the application”.

For the member states falling outside the Eurozone, the national competent authority is the sole authority in charge of reviewing the application and of granting the licence.

The banking licensing process in the UK

“In the UK, there is no separate licensing process for fintech-orientated banks but there is one common bank licensing process with two possible routes through it,” notes David Strachan, partner at Deloitte’s EMEA Centre for Regulatory Strategy.

The first route is typically taken by firms that have already established operations in the UK, either as branch of a third country or through existing lending operations under the relevant Prudential Regulation Authority (PRA)/Financial Conduct Authority (FCA) permissions. They may decide to apply for a banking licence based on new activities they wish to carry out – typically, raising retail deposits in the UK.

Both the PRA and the FCA review their documentation. If the authorities decide to grant the firm a banking licence, it will be allowed to conduct relevant banking activities from day one.

The other route is called ‘authorisation with restriction’ (AWR) through which the PRA and the FCA give the firm an authorisation to operate as a bank in two stages.

“Firms are required to go through a number of discussions and challenge sessions as well as submit a substantial amount of documentation for their banking application,” says Vishwas Khanna, director at Deloitte in London, specialising in new bank authorisations.

“If the regulators are satisfied with the documentation, and only after a number of further discussions, interviews, and requests for clarifications and documentation, they may decide to give the firm an authorisation. However, they will apply restrictions in terms of what services the firm can provide.”

The restrictions apply to specific activities. For instance, a firm operating under AWR, will be allowed to raise deposits of an aggregate amount of no more than £50,000 a year. But once this restriction is lifted, it can operate as a normal bank.

The AWR runs for up to 12 months. Vishwas Khanna, director at Deloitte’s risk and capital management practice, notes that this allows firms to test their business model, their systems, to undertake further activities and make sure their governance regime is in place, until they’re fully ready to be a bank, at which point the restrictions are lifted and the firm’s fully authorised.

Strachan states that the minimum initial capital requirements of €5 million as set under the Capital Requirements Regulation (CRR) apply to all banking applicants, irrespective of the route they opt for. However, a separate category of ‘small specialised banks’ exists whereby some firms can start operating with a minimum capital of €1 million.

But specific conditions exist for firms looking to apply for the ‘small specialised bank’ status. Among the conditions set by regulators in the UK, firms must look to provide current or savings accounts to customers, lend to SMEs or lend towards residential properties.

In addition to the minimum legal capital requirements, firms also need to maintain a capital planning buffer, which is an amount of capital used to absorb losses that may arise under a severe stress scenario. Firms are expected to assess this buffer themselves and the PRA will then review whether this buffer is appropriate or not given its view of the firm’s projections and risk profile.

“Invariably, the expectation is that banking applicants at the point of authorisation will need to hold more capital than the minimum legal requirements based on an in-depth assessment of the firm’s forward-looking balance sheet and risk profile,” Khanna concludes.

By Cécile Sourbes, freelance writer and editorial contributor to FinTech Futures

Want to read more practical insight on specific procedures within the fintech industry? Our ‘Explained’ series aims to provide a brief overview of technical, legal and practical processes and procedures the industry goes through. Feel free to leave some suggestions in the comment box below or email our editor, Sharon Kimathi, on [email protected]