In the late 1970s and early 1980s, the UK banking regulatory framework underwent significant changes following the introduction of the Banking Act 1979.
Background
Before 1979, there was no formal statutory system under which institutions were licensed as banks in the UK. Many institutions accepted deposits and carried out banking activities under various legal structures.
The Banking Act 1979 introduced a two-tier system:
1. Recognised Banks
These institutions received full banking recognition from the Bank of England.
They were generally:
- Established commercial banks.
- Considered financially strong.
- Subject to a higher level of confidence by regulators.
- Permitted unrestricted use of the word "Bank" in their title.
2. Licensed Deposit-Takers (LDTs)
Institutions that accepted deposits but did not qualify for recognised bank status were authorised as Licensed Deposit-Takers.
Examples included:
- Finance houses.
- Merchant banking firms.
- Smaller deposit-taking institutions.
- Some foreign-owned banking groups.
The LDT category was not intended to imply wrongdoing or insolvency. It was simply a lower regulatory tier.
Why Some Banks Were Moved to LDT Status
The Bank of England reviewed institutions individually.
Factors considered included:
- Capital strength.
- Ownership structure.
- Management quality.
- Size and track record.
- Consolidated supervision arrangements.
- Availability of information from overseas regulators.
Some institutions that had previously operated as banks found themselves classified as Licensed Deposit-Takers because they did not satisfy all criteria for recognised bank status.
In the case of Bank of Credit and Commerce International, regulatory concerns existed from an early stage regarding:
- Complex international group structures.
- Multiple jurisdictions.
- Difficulty in obtaining a complete picture of the group's activities.
- Reliance on supervision from several regulators.
These concerns did not prevent BCCI from operating, but they contributed to closer scrutiny by regulators.
Operational Differences
In practice, the differences were often less dramatic than many people assume.
Recognised Bank
Could:
- Accept deposits.
- Provide current accounts.
- Make loans and advances.
- Issue trade finance facilities.
- Conduct foreign exchange business.
- Participate fully in interbank markets.
- Market itself as a recognised bank.
Licensed Deposit-Taker
Could generally:
- Accept deposits.
- Provide lending facilities.
- Undertake foreign exchange transactions.
- Offer trade finance.
- Conduct most banking activities.
However:
- They were subject to greater regulatory scrutiny.
- Market perception could be less favourable.
- They did not enjoy the same status as recognised banks.
- Counterparties might view them as carrying slightly higher risk.
Thus, operationally many customers saw little difference in day-to-day services.
Impact on BCCI
For BCCI, the practical impact was probably greater in terms of reputation than business capability.
Potential effects included:
1. Reputational Impact
During the period when the UK operated the Licensed Deposit-Taker (LDT) regime under the Banking Act 1979, institutions authorised as Licensed Deposit-Takers were generally required to make their status clear in official documentation and communications.
Some corporate customers and correspondent banks viewed recognised banks as more prestigious and secure.
Being an LDT could raise questions such as:
- Why is this institution not a recognised bank?
- Is there a supervisory concern?
2. Funding Costs
Interbank counterparties might:
- Impose lower credit limits.
- Require additional documentation.
- Charge slightly higher funding margins.
3. Regulatory Monitoring
The Bank of England generally maintained closer oversight of institutions where concerns existed.
4. Growth Constraints
Expansion plans could attract greater scrutiny than those of recognised banks.
Banking Act 1987
The distinction was later abolished under the Banking Act 1987.
From 1987 onwards:
- The recognised bank category disappeared.
- All authorised institutions became "authorised institutions" under a single regime.
- Regulatory standards became more uniform.
This reform was partly intended to remove the perception that the two-tier structure created confusion and unequal treatment.
Summary
For most retail and commercial customers, there was often little visible difference in the services offered. The main impact was on reputation, regulatory confidence, interbank relationships, and market perception rather than on the ability to conduct normal banking business. In BCCI's case, the classification reflected regulatory caution about the group's complex international structure rather than an inability to undertake mainstream banking operations.
A Recollection from the Period
Although there was generally no requirement for a Licensed Deposit-Taker to display its status prominently on external branch signage, some institutions chose to do so. BCCI, for example, displayed the words "Licensed Deposit-Taker" on branch windows and customer-facing notices at certain locations. This was presumably intended to demonstrate that the institution was authorised and regulated by the Bank of England and entitled to accept deposits from the public.
One former manager of BCCI's Hyde Park Corner branch recalled an interesting incident from this period. A visitor from Nigeria entered the branch wishing to open an account. When asked why he had chosen BCCI rather than one of the major British banks nearby, he pointed to the "Licensed Deposit-Taker" notice displayed on the branch window. He explained that because BCCI openly displayed its authority to accept deposits, while Barclays did not display similar wording, he had assumed that Barclays was not licensed to take deposits. The episode illustrates how regulatory terminology intended to inform the public could sometimes be misunderstood. In reality, both institutions were authorised to accept deposits, but under different regulatory classifications within the UK's banking framework at the time.