On 11 January 2021, the PRA published Consultation Paper 2/21 ‘International banks: The PRA’s approach to branch and subsidiary supervision’ (CP2/21).
The proposals in CP2/21 are relevant to existing or prospective PRA authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK. The proposals cover the PRA’s approach to supervising the UK activities of these banks and investment firms (collectively referred to in CP2/21 as ‘international banks’) and includes those entities operating in the UK through a branch. It sets out the PRA’s expectations for receiving information concerning risks in the wider group, and for co-operation from regulated entities and their supervisors, in order that the PRA can be satisfied that firms are meeting the threshold conditions.
The PRA currently supervises approximately 250 international banks, both branches (including firms in the temporary permissions regime (TPR)) and subsidiaries, which are part of around 180 international groups. The PRA states that the vast majority of these groups are based in jurisdictions which the regulator considers to have sufficiently equivalent regimes. However, having reviewed the level of information that it regularly receives from the largest international groups with a UK presence, the PRA has found a few that provide substantially less information than their peers do and the areas that require particular attention appear to be in the provision of information on financial performance and capital.
In terms of Brexit, the PRA reports in CP2/21 that it has seen a significant restructuring of firms’ operations. With the end of passporting rights the PRA has seen UK incorporated entities establish subsidiaries in the EU and this shift has corresponded to a proportion of the revenues and assets of UK based investment banks moving to their EU entities. Also, approximately 66 former EEA passporting firms are pursuing authorisation to operate through UK branches, and have moved into the TPR. This means that there is a significant increase in the proportion of UK banking assets represented by branches. The number of systemic wholesale branches that the PRA supervises has risen by almost one-half, and the assets held by such branches by around two-thirds. The PRA states that this has led to an associated increase in intragroup flows of business and changes in the international footprint of many firms, including in relation to booking arrangements. These developments constitute one of the drivers for the proposals.
Open to international banks
The PRA explains that it is open to international banks operating in the UK and in line with its “responsible openness” approach all international banks need to meet its prudential standards. The precise approach will vary according to the legal forms adopted and the nature of the regulatory regimes to which the group is subject in its home jurisdiction although the PRA seeks to achieve the same outcomes. Therefore while the PRA expects to achieve the same outcomes whether business in the UK is undertaken through a branch or subsidiary, the steps necessary to achieve these outcomes will differ.
The PRA’s approach to the supervision of international banks that are branching into the UK, in particular the circumstances in which authorisation as a subsidiary may be more appropriate than authorisation to operate through a branch, are currently set out in Supervisory Statement 1/18 ‘International banks: the PRA’s approach to branch authorisation and supervision’ (SS1/18). The PRA is proposing to replace SS1/18 with a new Supervisory Statement that will consolidate its expectations including those being consulted on in CP2/21. The PRA states that its substantive approach to the supervision and authorisation of branches “would be materially unchanged” but it has “made structural and grammatical changes to improve readability”. The PRA recognises that firms operating with deemed authorisation under the TPR may need additional time to adjust and it is therefore proposing that such firms will not need to meet the expectations in the proposed new Supervisory Statement immediately, but will need to do so as soon as practicable (taking into account their individual business models and systemic impacts), and in any event by the time they are authorised by the PRA and exit the TPR. Notwithstanding this, as part of pre-authorisation discussions, the PRA proposes that such firms demonstrate how they intend to meet these expectations.
In CP2/21 the PRA sets out proposals concerning certain factors that would be relevant when considering an international banks’ compliance with the threshold conditions, taking into account its membership of a group, its potential impact on UK financial stability, and the degree of integration between operations inside and outside the UK. The PRA’s expectations for the information that it requires to supervise a firm varies according to the way in which such a firm’s affairs are integrated or separated from the rest of the group. The proposed Supervisory Statement describes the PRA’s expectations for the appropriate degree of separation and controls around the firm’s governance and independent risk management in different circumstances.
At a more granular level the PRA’s proposals are grouped under three sections in CP2/21:
- General expectations, size, and systemic importance.
- Information, co-operation, and the controls required to be effectively supervised.
- Degree of independence.
In terms of general expectations, the proposed Supervisory Statement summarises some of the thresholds which will be taken into account when assessing the appropriate operating structure, information, co-operation, and controls. The size thresholds proposed in the new Supervisory Statement, some of which apply to retail business and others to wholesale business, are unchanged. In addition, the PRA does not propose differentiating its expectations for retail businesses that are above the thresholds at which operating through a branch would generally not be appropriate, but below the threshold at which the ring-fencing regime applies. International banks are, however, reminded that they need to comply with the requirements concerning the ‘single customer view’. The proposed Supervisory Statement also highlights the need to follow rules on outsourcing, including where functions are outsourced to other group entities abroad.
In the proposed Supervisory Statement the PRA proposes to provide more detail on information sharing and booking arrangements. In relation to the latter the PRA expands on the core expectations already set out in SS1/18 and makes clear that these expectations apply to both subsidiaries and branches. In particular the PRA states that the key areas are the need for:
- Firms to have effective pre- and post-trade controls, and where they have a particularly global, highly integrated booking model, they will need stronger pre-trade controls. These expectations reflect some of the weaknesses that the PRA has found when undertaking reviews of front office controls and the feedback given to firms as a consequence.
- Sufficient risk management resource to be dedicated to the UK entities’ booking arrangements to ensure that the fundamental rules on risk management can be met.
The PRA adds that it remains open to highly integrated global booking arrangements, provided that they are effectively controlled and the PRA has sufficient visibility of the group risks. This is unchanged from SS1/18.
In terms of degree of independence the PRA clarifies how it may adjust its approach to supervision if it does not have sufficient information or is not satisfied with the degree of cooperation it has, or if the controls over risks to UK business appear to be inadequate. The proposed Supervisory Statement does not extend the range of supervisory tools and powers that the PRA has but rather sets out the way in which they could be applied to international banks.
The deadline for comments on CP2/21 is 11 April 2021.
When finalised the proposals in CP2/21 will result in a new Supervisory Statement ‘International banks: The PRA’s approach to branch and subsidiary supervision’, which will supersede SS1/18.
The PRA proposes that the implementation date for the new Supervisory Statement would be Q2 2021.
FCA consultation on international banks
On 23 September 2020, the FCA issued Consultation Paper 20/20: Our approach to international firms (CP20/20). The deadline for comments on CP20/20 was 27 November 2020. The FCA is currently considering its final policy and implementation.