Making Sense of the Metro Bank Remedies Bungle

Posted on the 29th February 2020 by Hamish Anderson in Founders' blog, SME blog, Business, Finance, Founder Insights

Do you recall the controversy surrounding the £120m award to Metro Bank from the RBS Capability & Innovation Fund almost exactly a year ago? Eyebrows were raised at the time for several reasons. Firstly, observers and other participants in the process struggled to grasp how committing to opening additional bank branches in the north of England qualified as "developing more advanced business current account offerings", however worthy the intention. Secondly, throwing £120m at an institution which, days before, had owned up to a £900m hole in its balance sheet, had the most open-minded amongst us scratching our heads.

We’d like to give you a refund

On Wednesday Metro Bank announced that it would be handing back £50m of its award as, after a business review, it would "open a total of 15 rather than 30 branches in the North of England by 2025" and that it would "step away from more niche SME propositions [...] including secured lending transformation, virtual accounts and pooling".

While at first glance handing back £50m looks like a noble gesture (which has already been approved by Banking Competition Remedies ('BCR') - the body established to distribute the Alternative Remedies Package), is the BCR letting off the bank too lightly? Should the other winners and applicants for the funding feel more than a little aggrieved? This is why I think they might be.

It’s all about the commitments

All four pools of the Capability & Innovation Fund ('CIF') were hotly contested. Banks and fintechs alike spent thousands of person-hours and millions of pounds preparing their bids in a process that commenced at the end of 2017. Based on our discussions with applicants for all the pools, a review of the winners' commitments and gruelling pub post-mortems, the BCR's decision-making process appeared to be complex and hinged on a combination of factors. Furthermore, the award of a grant was binary. There was no mechanism for splitting them. In the actual award process, Metro Bank would either have been granted one of the awards in full or not at all. There was no discretion to allocate partial amounts.

What if Metro Bank was awarded funds based on its commitment to launch the niche (innovative?) SME propositions like virtual accounts and pooling? Should the bank's intention to shelve these plans mean that it has to hand back its entire award? While we can argue that funding bricks and mortar branches may or may not be classified as 'capability and innovation', would 15 branches have been enough to justify an award in the first place, or would BCR have considered 30 branches as the tipping point?  Hypothetically, what if an institution won an award based on an application containing elements it knew it could not deliver? Having beaten competitors to the prize, could it legitimately backtrack, hand back some of the grant, keeping the greater part to deliver something which is pedestrian in comparison with its original promise? 

A disturbance in the force

We should also consider the trickle-down effect and the disruption to the entire CIF ecosystem (at this point, readers might wish to refer to an earlier blog in which I take a  look at the Alternative Remedies Package in more detail).  Let me explain. While each applicant could only win one award, many CIF applicants were eligible to apply for more than one Pool of funds. Had Metro Bank been unsuccessful in its Pool A application, it could still have applied for funding in Pool B. In which case its Pool A award would have gone to another applicant who would not need to have applied in one of the latter pools and so on.  Taking it to its logical conclusion, had Metro Bank not been awarded the Pool A grant in the first place, the outcome for the whole sector could have been radically different.

How do you spend £50m?

So £50m has now been returned to the BCR and is being "held in trust until later deployment". I don't really know what this means. No doubt the BCR are applying themselves to it now, but there's nothing to stop us coming up with some ideas. Should the funds be allocated amongst the other winners on a pro-rata basis? Perhaps the BCR should identify the runner-up in Pool A and hand it the funding? Except that the runner-up may well have been awarded a grant in a subsequent Pool, which it would therefore need to return, thus leading to the disruption in the ecosystem I discussed earlier. 

The above notwithstanding, my view remains that the CIF has been a powerful force for good in SME banking. It's prompted the entire sector to take a long hard look at their offering. It has genuinely driven innovation and has stimulated collaboration between the incumbent bank sector, the neo-banks and the fintech community. This is set to drive considerable improvement and enhanced competition in the SME banking sector and will genuinely increase the options available to businesses seeking better financial services.

We’re going to need a new Pool

And the remaining £50m? I think BCR should create a new CIF tranche - a Pool E - consisting of 10 awards of £5m available to fintechs with innovative SME propositions. Many such firms were disqualified from the original scheme due to arbitrary rules about the timing and size of funding rounds. Commentators have noted that entrepreneurial businesses have done as much with £5m as a bank can do with £50m - it's one of the reasons why fintechs have been able to compete with the banks in the first place. Spreading the awards amongst a larger number of participants creates diversification which lowers the risk of similar Metro Bank-type bungles and the potential for negative publicity surrounding conflicts of interest such as 'Boden Gate' in which Starling Bank's award of £100m was questioned in the light of its management's relationship with the BCR board.