Brexit, restructuring and the proposed EU Intermediate Parent Company requirement
06 March 2017
Prime Minister May’s January Brexit speech and the government’s subsequent Brexit White Paper of February mark a watershed: confirmation that the UK will not seek membership of the European Union's (EU) Single Market post-Brexit. Banks must now plan on the assumption that passporting across the EU from London will cease, and quite possibly as soon as the spring of 2019. Banks located in the UK will therefore need to establish or increase their presence within in the EU-27 to enable them to continue to serve clients and transact with counterparts. This may require a degree of group restructuring.
Banks will have considered many factors when considering their group structure post-Brexit, these challenges are explored in a report commissioned by Association for Financial Markets in Europe (AFME) from PwC on the operational challenges for capital markets participants posed by Brexit.
But a relatively new development is the proposal in CRD 5 that large non-EU banks be required to establish an EU-based Intermediate Parent Company (IPC). It’s important that banks fully factor this development into their planning or potentially face costly changes to these plans down the line.
The IPC proposal
The recent CRD 5 proposals includes a provision which requires all non-EU Global Systemically Important Banks (G-SIBs) and non-EU banks with assets of over €30bn in the EU (including branch assets) with multiple subsidiaries in the EU to form an IPC. The IPC will sit above all the other group entities in the EU. The IPC can be an existing subsidiary or newly formed holding company. If firms choose to establish a new IPC it will require authorisation and approval as an EU institution, but regardless of the approach followed, the changes are likely to be costly.
While the discussions in the EU on the IPC proposal are at an early stage, they come at a time when many banks are already considering their group structure in light of Brexit. As such, banks would also be prudent to factor these proposals in when devising their plans.
What other challenges do banks face?
There are a myriad of regulatory challenges that banks will face when attempting restructuring in response to Brexit. Banks will need to navigate existing regulatory hurdles such as important authorisation and approval processes, resolution planning implications as well as understanding the prudential and supervisory implications of their proposed new structure.
What should banks do?
Banks have been considering their post-Brexit options for some time. With a greater degree of clarity on the UK’s likely relationship with the EU post-Brexit, and Article 50 about to be triggered, now is the time to begin enacting these plans. It’s vital though that these important decisions are fully informed by these latest regulatory developments.
You can find out more on this and the IPC requirement in our downloadable Hot Topic “Brexit, restructuring and the proposed EU Intermediate Parent Company requirement.”