Why should EEA banks ramp up their post-Brexit regulatory planning?
08 February 2019
With Brexit now less than 50 days away, all firms are well advised to speed up their preparations for the UK’s exit from the EU. Much of the focus on the impact of Brexit on the financial services sector has been on those firms providing services from the UK into the EU-27 and what a loss of passporting will mean for them. But for those European Economic Area (EEA) banks that passport into the UK there will also be significant changes to the regulatory requirements they face. These include changes related to the Senior Managers and Certification Regime (SM&CR) and the Financial Services Compensation Scheme (FSCS), as well as a number of other regulatory reporting requirements for third-country branches.
Temporary Permissions Regime (TPR) and transitional relief
Unless a transition or implementation period is agreed (as part of a deal) between the UK and EU, the TPR will come into force in the UK on 29 March 2019 for three years. The TPR allows EEA branches to operate in the UK prior to authorisation. But under the regime EEA branches will be required to comply with all of the regulatory requirements relevant to non-EEA branches from the point they enter into the TPR, with the exception of certain requirements which will be phased in.
While the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) are considering the use of transitional relief in relation to certain non-EEA branch requirements during the TPR, the final policy is yet to emerge. So in the absence of final rules, EEA branches should ramp up their preparations to be able to comply with all possible outcomes. This includes adjusting to the regulatory reporting requirements that currently apply to non-EEA branches operating in the UK.
Regulatory reporting requirements under TPR
Although the final policy will depend on the PRA’s decision over any transitional relief provisions, regulatory reporting requirements under TPR will include, at the very minimum, SM&CR requirements including applications for ‘deemed approval’ for Senior Management Functions. It will also include entering into the FSCS from 29 March 2019. Other post-Brexit reporting requirements, which will potentially apply from the first day of the TPR, will include a number of submissions that most EEA branches are not currently accustomed to such as branch-level financial reporting requirements and whole firm level liquidity reporting requirements, among many others.
For some branches, regulatory submissions might end up being more onerous than expected if the regulators require more frequent submissions due to the systemic nature, scale and complexity of their business. Some branches may also face additional reporting requirements depending on home state supervisory and regulatory equivalence on areas such as recovery and resolution planning.
What should firms do?
So Brexit-related changes in regulatory reporting requirements will be a step-change for most EEA branches, which will result in significant strategic, operational and regulatory challenges. For most branches, this will require additional staffing, improvements in data reporting systems and IT infrastructure. Implementation of these will take time, incur costs and require careful project management to ensure timely compliance. Firms that consider this a simple compliance exercise may face unexpected challenges or regulatory remedial action at a later stage.
Given the tightness of timescales and lack of room for any contingencies, firms should start preparing now. Implementation programmes should be driven by a comprehensive firm-wide plan where all key functions including Compliance, Treasury and Finance functions actively participate to ensure they have a clear and holistic understanding of the post-Brexit reporting requirements.
Firms would be well advised to take quick action to make the transition to the new regulatory regime less painful.