Banks have the same challenge as any new business: how to convince investors and lenders that your business has a viable model, can generate sufficient returns and can repay its liabilities. Candidate banks face this challenge and one more – they must convince the regulators of the viability and sustainability of their business plan.
Enter the RBP
A coherent and well-researched Regulatory Business Plan (RBP) is the most important document on the path to achieving authorisation. In fact, many who start the process of setting up a new bank never get as far as formally applying for the ‘Part 4A Permissions’ required to set up a bank – the RBP is simply too weak, incoherently articulated or is unable to demonstrate a robust and viable business model.
Even for applicants that are successful, the process can be arduous and painful – therefore starting with a strong RBP is essential to maintaining momentum.
While there is always a reasonable degree of uncertainty in how the bank will operate, the plan must avoid including inaccurate or unsubstantiated information. The RBP should demonstrate that the targets set by the candidate bank are realistic, as well as financially and operationally manageable.
Although this sounds like common sense, reality proves that it is not that easy in practice.
Some fundamental questions that the RBP must answer
Why you? The RBP could create a poor impression if it does not describe to the regulator its intended market and comparative advantage: whether it would offer something new to the banking market and the elements of its services/products that would make them stand out from their competitors. And then – why are you best positioned to offer and deliver on this proposition?
You against the others: A competitive idea and promising business case is backed up with research and facts. This is a challenging part of the project - the candidate’s RBP must demonstrate that there is a market for their products and services, and also be aware of the competition and their expected share in the market. The RBP must also demonstrate its understanding of the dynamics of the market and how the proposed bank will meet customer needs.
Known unknowns: Here, the question is how candidate banks will approach the problem of partial or unavailable information. Some RBPs are extremely ambitious about their target markets and customers; some others are optimistic as to the costs of running a bank, especially operational costs and this may lead to expected costs being presented in a superficial manner in the RBP. All projections and estimates must be backed by thorough and trustworthy market research or accurate business information.
From a regulator’s perspective, stating all the possible expenses and potential financial needs in the RBP provides a useful starting point into assessing business model viability. It also demonstrates that the applicant has a sound grasp of its figures and market. A bank start-up may not have all the information to-hand on day-one when it meets the PRA, but it should have reasonable estimates and a plan of the timeline and actions to get this information and must integrate it into the plan before submitting it.
New entrants will have to describe in their plan how they will comply with complex prudential and conduct regulations. This is not easy – even the UK’s most established institutions have got themselves into significant difficulties due to regulatory breaches.
Balancing optimism with pragmatism: without optimism and a belief in the business plan, the process would not even have begun, but the RBP needs a heavy dollop of pragmatism. The regulator sees a large number of unconvincing, ambitious, cost-heavy proposals that only could make money if unrealistic growth plans paid off. The New Bank Start-Up Unit (NBSU) sees plenty of applications and nurtures the successful ones through their first years – unrealistic plans stick out like a sore thumb.
Being clear: Provide only relevant data – an overly long submission filled with generic or irrelevant data will not fulfill the RBP’s purpose to the regulator. In fact, extra detail can disorientate and make the latter’s job cumbersome. The RBP should only present relevant information that answers the question why the particular candidate bank should be authorized.
So how can candidates maximize their chances to submit a persuasive RBP?
- Understand the areas, topics and granularity of information that the regulator expects.
- Ensure that the RBP meets the regulatory requirements of both the PRA and FCA.
- Be clear that several iterations of the RBP may be required to be submitted before the regulators direct you to move forward with other submissions
- Know the sources and processes to acquire the relevant information and data to estimate and demonstrate their potential position in the market.
- The drafting of the RBP should be conducted with clarity and precision, answering directly and precisely possible questions from the regulator.
- Make sure that the RBP is effectively linked to all other documents (the financial plan, the ICAAP, ILAAP, risk management framework, corporate governance documents etc.)
- Listen carefully to the regulator – the NBSU is there to encourage new entrants to the market, not block them. Feedback from the regulator will be some of the most valuable advice in helping to fine-tune an RBP.