Understanding the PRA’s proposed treatment of bank branches

17 January 2018

The UK has traditionally been open to foreign financial services firms, something that has helped put London at the heart of global markets. On 20 December 2017 the Prudential Regulation Authority (PRA) set out how it hopes to maintain that stance post-Brexit, by publishing CP 29/17 International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision. The proposals in the consultation are pragmatic and if implemented would contribute to the UK’s position as an open and well regulated financial centre.

Branches of foreign banks play a vital role in the UK’s financial sector, and it is encouraging that the PRA is proposing a future framework which would allow branches to operate in the UK, subject to a number of conditions designed to protect financial stability. Allowing banks to operate as branches (rather than requiring subsidiarisation) enables them to more easily allocate capital efficiently around the group and reduces the local regulatory burden. But accepting the branch model does reduce local supervisory control. The PRA’s proposals strike the right balance between protecting UK financial stability and encouraging an open global financial system.  

Many of the branches operating in the UK are headquartered in other European Economic Area (EEA) countries. In 2017 EEA branches made up around 30% of the total UK banking system- assets of £4 trillion or more than twice UK GDP. Currently EEA branches operate in the UK under passporting rights. Post-Brexit it is expected that these passporting rights will fall away and EEA bank branches will need to seek authorisation in the UK.

Because of this the PRA has chosen to revise its risk appetite for bank branches and has invited EEA branches to apply for authorisation. The proposals apply to all branches wishing to operate in the UK but the PRA does not expect that they will impact non-EEA branches currently operating in the UK. In future though non-EEA banks applying to operate as branches will also be subject to the approach set out in CP 29/17.

Consistent with the PRA’s risk appetite established in 2014, the PRA will not accept branches undertaking retail activity in the UK beyond de minimis levels. But the PRA will be content for banks with a primarily wholesale business model to operate through a branch in the UK, subject to a number of conditions. Operating as a branch in the UK will be contingent on:

  • the whole firm (rather than just the branch) meeting the PRA’s threshold conditions
  • an outcomes based assessment of the home state supervisor’s equivalence to ensure robust home state supervision
  • an adequate degree of supervisory cooperation between the PRA and home state supervisor (a particularly important consideration in light of Brexit)
  • assurance over resolution arrangements for the group.

Reflecting the significance of some of the branches operating in the UK, the PRA will identify some branches as ‘systemic wholesale branches’. When determining whether a wholesale branch is systemic the PRA will consider its size (with branches with greater than £15bn in assets generally considered to be systemic) and the degree to which the branch undertakes critical economic functions in the UK. For systemic wholesale branches the PRA will expect more oversight over the wider group and a greater degree of assurance over supervisory cooperation and resolution arrangements than for non-systemic branches. If this is not forthcoming the PRA will apply additional supervisory tools to these branches (potentially additional liquidity, governance or risk management requirements).

The PRA’s proposals are welcome and suggest concerns over many EEA bank branches being forced to subsidiarise in the UK are wide off the mark. There is a lot of work for EEA branches to do though. The authorisation process in the UK can be challenging and of course EEA banks will need to ensure their plans for branches in the UK post-Brexit are acceptable to home state supervisors in the EU-27. The European Central Bank (ECB) has recently stated that it does not expect that branches in third countries should perform critical functions for the credit institution itself or provide services back to customers based in the EU.

Those EEA branches that have not begun their authorisation discussions with the PRA should do so now, and aim to submit an application as soon as possible. From our experience of gaining approval for third country branches in the UK the PRA (and FCA) will be particularly focused (amongst other things) on issues such as a robust business plan, governance, management team, risk management, IT and outsourcing arrangements. Time is also short to gain authorisation prior to Brexit, meaning speed is of the essence.  

David Kenmir | Partner
Profile | Email | +44 (0)7850 907754
Conor MacManus | Senior Manager
Profile | Email | +44 (0)7718 979428
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