Treasury asks PRA to ensure banking surcharge will not hurt competition

In a letter to Andrew Bailey, chief executive of the PRA, Tyrie asked: "In the PRA's view, does the new corporation tax surcharge for banks make the retail banking sector more open to competition from new entrants, or does it further entrench the large incumbents?"

Tyrie also asked about adaptations that the PRA has made to capital requirements for new, 'challenger' banks, to help them to lend more "in the context of the new … surcharge".

Many of the newer banks have not traded for long enough to qualify for lower risk rules available to established banks, and a group of challenger banks has called for a change to the approach used to calculate capital requirements, Tyrie said.

"Challenger banks have long argued that the difficulties of satisfying the conditions required to use the internal ratings-based approach to calculating credit risk puts them at a competitive disadvantage," he said.

"How effective does the PRA think that the adaptations it has made to its capital requirements for new banks will be in overcoming the competitive advantage that they face in not being able to use the … approach used by established banks?" Tyrie asked.

UK chancellor George Osborne announced the 8% tax on UK banks' profits in his summer budget. It will be introduced next year, while the existing annual levy charged on the total value of banks' balance sheets will be gradually reduced

The announcement came as part of a "long-term roadmap" for banking tax reform, designed to "take account of the very significant improvements in banking sector regulation and underlying profitability" since the levy was first introduced in 2011, according to the government's Summer Budget. The rate of the overall levy will be gradually reduced from 0.21% to 0.1% between 2016 and 2021, and UK banks' overseas subsidiaries will be excluded from the levy entirely from January 2021.

The government said at the time that the changes would increase UK banks' contribution to the country's finances by around £2 billion by 2021, while also developing "a more competitive and sustainable model for raising revenue from the banking sector over the longer term".

Commenting on his letter, Tyrie said it was essential that the tax "does not obstruct parliament’s efforts over the past four years to increase competition in the banking sector". The select committee would want an assurance from the regulator that it had assessed the effect of the change on competition in retail banking, he said.

"The PRA has taken steps to resolve this problem by adapting the capital requirements applied to new banks. The challengers want further adaptations to compensate for the future impact of the new corporation tax surcharge on their bottom line," he said.

"Millions of consumers and small businesses have been getting a poor deal for decades because of inadequate competition and choice in banking. It is crucial that competition from new and smaller banks is not unnecessarily impeded by prudential regulation," Tyrie said.

"Law makers and regulators around Europe have been shifting their attention from solely consumer protection to driving innovation and competition in the banking sector", said financial services expert John Salmon of Pinsent Masons, the law firm behind Out-Law.com.  

"This can be seen in the Treasury's open API initiative and in PSD2, where the regulation has made it far easier for new entrants and innovators to develop new products and services and piggy-bank on the banks’ existing infrastructure," Salmon said.

The chief executive of Nationwide, the building society, said in August that the proposed levy represents a missed opportunity to reform the annual banking levy in a way that would encourage financial services market diversity. The reforms will have a "disproportionate effect" on building societies while benefiting UK-headquartered international banks, he said.