FSA proposes a new type of bank

Michael Foot, Managing Director of the FSA, said:

A separate category of wholesale-only bank will allow the FSA to concentrate more of its regulatory resources on those banks which have retail depositors who are in greater need of regulatory protection.

Because it wont be able to accept deposits from retail customers, a wholesale-only bank will pose fewer risks to the FSAs objective of protecting consumers. We shall obviously assess also whether it would constitute a material risk to the market confidence or financial crime objectives. If not, it can expect a less intensive regulatory relationship with the FSA and somewhat lower regulatory costs.

A wholesale-only deposit taking permission would be open both to existing banks in the UK as well as new applicants. Wholesale-only banks would be required to meet the same minimum standards as other authorised institutions, both in terms of initial and continuing requirements and in adhering to the Rules and Guidance in the FSAs Handbook. Although it is not possible to be precise at this stage, there may be some cost savings to wholesale-only banks through fewer regulatory visits and lower compliance costs if they pose less risk to the FSAs statutory objectives. This proposal should encourage new entrants to the UK banking sector.

Wholesale-only banks should also benefit from lower costs by having to make only the minimum contribution to the Financial Services Compensation Scheme and, possibly, by exemption from participation in, and funding of, the Financial Ombudsman Service.

Wholesale depositors should be capable of making their own informed assessments of the banks with whom they place funds and should therefore be less in need of the FSAs protection. The FSA is consulting on a precise definition of wholesale depositors. Broadly speaking, the FSA proposes to define them as other banks, supranational institutions such as the IMF and World Bank, central banks, government bodies and large companies. Wholesale-only banks would only be able to accept deposits from this range of customers.

The FSAs analysis of the existing population of banks and discussions with potential applicants, suggests there should be wide interest in these proposals.

Notes for editors

1. The Consultation Paper Wholesale-only Deposit Takers was published by the FSA today and can be accessed via the following link www.fsa.gov.uk

2. The FSA is due to take on its powers under the Financial Services and Markets Act 2000 no later than end-November this year. Under the current legislation, the Banking Act 1987, an authorised institution may accept deposits from any person. Under Part IV of FSMA, it will be possible, in the permission regime, to create a separate category limited to institutions which accept deposits from wholesale depositors only.

3. The precise definition of wholesale is one of the main areas where the FSA would value feedback on its proposals. The starting point the FSA used was to attempt to define a class of depositor who has the means at its disposal to make its own risk assessments and decide whether or not to place funds with a particular deposit-taker. The FSA has set out some criteria to define a large company, on which it would particularly welcome comment.

4. The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; the protection of consumers; and fighting financial crime.

5. The FSA aims to maintain efficient, orderly and clean financial markets and help retail consumers achieve a fair deal.