Thinking of becoming a bank

This page sets out some of the factors to take into consideration when deciding whether to set up a bank.

Key points

  • A bank is an entity that carries out deposit-taking business.
  • Before going through the new bank authorisation process, firms should consider whether setting up a bank is right for them.
  • Before contacting us, firms will need to consider what functions their bank will carry out and their business plan for doing so.
  • Firms cannot call themselves a ‘bank’ until they are authorised.

What is a bank?

A ‘bank’ is an entity that carries out deposit-taking business. The PRA and the FCA glossaries describe a ‘bank’ as a firm with a Part 4A permission, which includes accepting deposits and is a credit institution but is not a credit union, friendly society, or a building society.

The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 sets out the definition of the regulated activity of accepting deposits (see Chapter II Accepting Deposits). This definition stipulates that a) money received by way of deposit is lent to others or b) uses the deposits to materially fund a business line. Firms need to consider if their business plans fall within this definition.

Is setting up a new bank right for everyone?

Depending on the firm’s business plan or the activities they plan to undertake, setting up a bank may not be the only option, or the most appropriate. There are a number of alternatives to becoming a bank which allow firms to provide some of the services that banks offer at a potentially lower cost. However, there may be legal restrictions on the scope or size of some of these alternative options.

What are the alternatives?

Before proceeding further through this page, we recommend that firms review Should I become a bank? and Alternatives to being a bank. These documents help firms to identify which area of the financial services industry their proposition falls into and the correct regulatory body to contact for further detail.

  • Should I become a bank? – This existing guide helps firms to understand whether being a bank is the appropriate model for them.
  • Alternatives to being a bank – Should a firm determine that a bank is not the most appropriate model for their proposition, this guide includes further information on some of the alternatives.

What factors to consider if setting up a bank is the chosen option?

If a firm has considered the alternatives and concluded that setting up a bank is the right option, there are some important factors to consider before contacting us to start the authorisation process.

Does a firm need to go through the authorisation process?

If the prospective new bank plans to have their headquarters located in the UK, they will need to go through the new bank authorisation process. International banks may operate in the UK through a branch, a subsidiary, or both and must also be authorised by the PRA (again with the consent of the FCA) and regulated by the PRA and FCA. Please also refer to the International banks factsheet for further details.

What will the bank do and how will they do it?

Before contacting us, firms should consider the following key areas, which we will initially focus on:

  • business model and the associated risk management framework and controls;
  • Senior Management, the Board, and the governance arrangements;
  • financial resources, including capital and liquidity; and
  • IT, infrastructure and outsourcing strategy.

Further detail can be found at Regulatory expectations. Providing us with the appropriate level of detail in these early stages helps to ensure that the rest of the process runs efficiently.

How can a firm access payment systems?

Firms should consider their options for accessing payment systems as early as possible in order to adequately reflect this in their plans. Payment systems are critical to allow the transfer of funds between people, businesses and financial institutions – new banks are unlikely to be able to operate without access to a payment system. We encourage firms to consider the guidance on payment systems access.

New banks can access a payment system in a number of ways:

  • Full direct access – where the new bank will have a direct technical and settlement relationship with the payment system operator (PSP);
  • Direct technical access – where the new bank will have a direct technical relationship with the PSP but use a sponsor for settlement; or,
  • Indirect access – where an Indirect Access Provider (IAP) acts as the new bank’s sponsor for both technical and settlement sponsorship.

There are a number of software vendors that have products and services that may reduce the cost and complexity of the direct access option and a number of IAPs that provide indirect access offerings. Further information about direct and indirect access can be found on the Payments Systems Regulator and Payment System Operators’ websites, and in the Code of Conduct for Indirect Access Providers.

What if the firm is already authorised?

If the firm is already FCA solo-authorised (for example an investment firm seeking to broaden their funding base to take on retail deposits), they will need to apply to vary their permissions to add deposit-taking. While this is a different type of regulatory transaction, they should follow the same process as unauthorised firms. In this instance we recommended that the firm go through the pre-application stage before applying to us to become a bank. In addition, we encourage FCA solo-authorised firms, which are seeking dual authorisation, to consider their capital and ownership structures and ensure that those are as simple as possible.

For firms that had passporting rights and that are now in the Temporary Permissions Regime (TPR), we encourage firms to review the PRA’s Temporary Permissions Regime page and the FCA’s Temporary Permissions Regime page, and to contact their supervisory contacts.

Does the firm need to undertake any other regulated activities?

Depending on the firm’s business plan and the products they plan to offer, they will also need to consider any other regulated activities that they will undertake. For example, firms will also need permission to offer; (i) mortgages; (ii) consumer credit; (iii) insurance mediation; and (iv) E-money authorisations.

When can firms call themselves a bank?

The use of certain sensitive words such as ‘bank’ and ‘banking’ in registered company names is controlled by legislation in order to prevent the public from being misled. Firms cannot call themselves a ‘bank’ until they have been authorised. Firms must take care when liaising with press, prospective investors, and posting on social media, in referring to said firm(s) prior to obtaining authorisation.

Firms may begin the application process as ‘Example Ltd’ but only when they are authorised as a bank can they call themselves ‘Example Bank Ltd’.

Firms must seek the FCA’s consent before using domain names that include sensitive words including ‘bank’ and ‘banking’. There is further information on the FCA’s Sensitive business name page.

This page was last updated 15 April 2021

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