What’s going on with the Banking Competition Remedies fund?

Returned funds, missed targets and plenty of outrage in the media. How have things gone so wrong for the BCR?

The Banking Competition Remedies (BCR) fund has been grabbing headlines for all the wrong reasons lately. Last month, Metro Bank announced it will return £50 million of a £120 million grant after adjusting its targets and finding itself unable to meet its BCR commitments.

While the National Audit Office has said it could review the case, it currently has no plans to do so. Meanwhile, bank executives have been leaning on both the Treasury select committee and the European Commission to take action, though the latter seems unlikely in the wake of Brexit.

These stories generated a great deal of controversy in the industry, with one bank board member telling the Financial Times that the fund “has been ill-judged, non-transparent, and a pretty good example of how not to do it”. Questions still remain about the BCR’s transparency and whether applicants committed to inflated targets with little idea of how to achieve them.

So what’s happening now?

At the heart of the matter is the lack of transparency in the BCR’s decision-making process. The agency hired Baringa, a management consultancy, to help select the grant winners. According to The Times, it advocated for Metro Bank even after news of the misclassification broke, but its reasons for doing so remain scant.

Compounding the issue is BCR’s oversight process, which offers little recourse or accountability for any party involved.

The case has also been plagued with conflicts of interest. BCR director Aidene Walsh has worked with Starling Bank founder Anne Boden, while BCR non-executive director Nigel Vooght left his post last year after an applicant compromised his impartiality.

In addition, BCR chairman Lord Cromwell’s history with the All Party Parliamentary on Fair Business Banking may have coloured decisions on RBS and CYBG, with analysts telling The Times that these incidents “could have been black marks against them”.

Compounding the issue is BCR’s oversight process, which offers little recourse or accountability for any party involved. Neither the Treasury nor Mazars, a consulting firm tasked with overseeing the BCR’s judgements, say they have any power (or responsibility) in the matter. Meanwhile, the BCR itself has remained mum on how it came to its conclusions.

To better understand the issue, let’s briefly take a step back and look at the BCR’s mandate and recent history. From there, we can determine why its choices have proven so controversial.

What is the BCR?

During the financial crisis, the Royal Bank of Scotland (RBS) received a £45.5 billion bailout from the UK government.

To receive that money, the bank was ordered to divest some of its subsidiaries to create greater competition in the small- and medium-sized enterprise (SME) banking sector. Initially, the plan was to sell 300 RBS branches rebranded as the independent Williams & Glyn. That didn’t happen, though; RBS retained Williams & Glyn and closed 216 of its branches by September 2018.

In practice, this meant awarding funds to established banks and start-ups that already had products for SMEs

The bank was then ordered to hand over £835 million, of which £425 million was earmarked for a “capability and innovation” fund, while £350 million was allocated to incentivising businesses to switch their accounts to eligible challengers.

To distribute that money, the BCR was created as a body independent from both the UK government and RBS. The capability and innovation fund was divided into four pools and allocated as follows:

Who competed for the grants?

Each pool was devoted to a separate area of SME banking.

Pool A was meant to award grants to create “more advanced business current account offerings and ancillary products,” according to the BCR website. In practice, this meant awarding funds to established banks and start-ups that already had products for SMEs, and sought to offer “next-level products,” as 11:FS Head of Research Sarah Kocianski wrote last year.

In the end, Metro Bank took home the biggest amount, £120 million, beating competitors such as Starling and ClearBank/Tide (which respectively took home £100 million and £60 million), as well as challengers like Nationwide and CYBG.

Meanwhile, Pool B was intended to award funds to organisations that either modernised or created new SME accounts. Nationwide received the £50-million prize in this category, while Investec and the Co-Operative Bank took home £15 million apiece.

Pool C focused on institutions expanding into SME payments or loans. Four companies –Atom Bank, The Currency Cloud Group, iwoca and Modulr Finance – were each awarded £10 million.

Finally, Pool D represented a broad category of companies that “facilitate the commercialisation of financial technology” for SMEs. Codat, Fluidly, Form3, Funding Options and Swoop Finance each won £5 million grants.

Currently, the BCR is set to announce how the £50 million will be reallocated.

Why were these choices controversial?

As Sarah notes in her piece from last year, the competition in Pool A was bound to be controversial from the get-go.

Santander abandoned its bid in January 2019. CYBG had also been a favourite to win in Pool A, but was shut out in that category as well as Pool B.

Even at the time, Metro Bank’s win was contentious. A misclassification in its loan books led to a plummet in both its stock and valuation a month before the BCR results were unveiled. The next month, Metro announced it was seeking additional funding, driving its price down further.

These announcements drew both regulatory investigation and uncertainty in the bank’s future performance. Even in March 2019, there were doubts that the bank could follow through on the plans needed to retain its grant.

What comes next?

Currently, the BCR is set to announce how the £50 million will be reallocated. Whether it can get banks to reapply – or regain their confidence in its ability to distribute funds – is another matter altogether.

While the BCR has insisted its processes are transparent, there’s been little communication about how it came to its decisions regarding Metro Bank. And with more eyes on the agency than ever before, the pressure’s bound to increase from here on out.