Andrew Bailey, the chief executive of the Financial Conduct Authority (FCA), addressed the British Bankers Association (BBA)’s Retail Banking Conference at the end of June 2017. His speech highlighted the lessons the regulator intends to learn from the Northern Rock scandal, namely that the FCA understands the importance of understanding business models, and where banks earn their returns, and how stable those returns are.

Mr Bailey began by stressing the importance and the size of the UK’s retail banking industry, by saying:

“It is hard to think of many more important subjects in our world than the future of retail banking – that is, if we heroically put Brexit to one side for a day. There are over 72 million personal current accounts in the UK, with retail deposits of over £1.5 trillion, comprising current accounts, savings products and SME banking. Retail lending is a key driver of economic activity. On the latest evidence, UK households owe £1.3 trillion in mortgages and £198 billion in consumer credit. There are over 5.4 million SMEs in the UK. There are over 61 million credit cards in issue in the UK.”

Next, he highlighted some recent changes in the banking sector, which include:

• An increase in the number of active players – the FCA has authorised 16 new banks in the last five years, and he claimed that 38 more authorisations are in the pipeline
• The increasing use of digital and contactless payment channels
• The greater desire of customers to have instant access to their financial information
• The growing threat of cyberattacks

The FCA chief went on to summarise the problems that affected Northern Rock when it experienced its ‘run on the bank’ almost a decade ago. Mr Bailey commented:

“It had to generate new mortgages at a faster and faster rate in order to feed the demands of its mortgage securitisation master trust, which was nearly half the overall balance sheet. It is hardly surprising that to do this it became over-concentrated at the lower end of the creditworthiness spectrum of mortgages – it couldn’t be fussy about what it took on. Second, by over-concentrating in wholesale and market funding through securitisation, it had a higher cost of funds than many other retail banks with, in particular, current account funding. In order to earn its target returns, it was pushed towards riskier lending.”

Mr Bailey added that now his organisation would “watch carefully for excessive risk taking in lending”, and that the banking crisis has led to “a radical overhaul of the regulatory tools” available to the FCA.

He also spoke about the level of overdraft charges. He said that the FCA was reviewing this issue, and highlighted that the cost of unauthorised overdrafts was often higher than the price cap the regulator has imposed on payday loans and other forms of short-term credit.

The FCA chief concluded by referring to three important pieces of work the FCA is carrying out:

• A review of banks’ business models, looking at the impact technological advances and other changes are having in this area
• The continuing review of high-cost credit, including overdrafts. More details of this will be published by the FCA before the end of the summer
• A response to a recommendation from the Parliamentary Commission on Banking Standards that banks should be required to assess customers’ understanding of products and services

The information shown in this article was correct at the time of publication. Articles are not routinely reviewed and as such are not updated. Please be aware the facts, circumstances or legal position may change after publication of the article.