Third country branches in the spotlight

The UK regulators have long acknowledged that international banks which operate in the UK play a vital role in the openness and competitiveness of UK markets. However, regulators want to ensure that ‘responsible openness’ does not lead to increased risks in a post-Brexit environment.

This means that international banks need to ensure the structure of their UK operations, whether through a branch or subsidiary, meet the regulatory standards being set for effective supervision.

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have already made their intentions clear with the publication of their respective approaches last year:

  • The PRA’s Supervisory Statement, SS 5/21, set out its approach to branch and subsidiary supervision for international banks. The PRA expects proportionate and timely access to information relating to the group business model and other financial and regulatory information. Firms also need to demonstrate they have appropriate arrangements in place between the group and their UK operations with respect to governance, booking models, operational resilience and resolution planning to enable effective supervision of their UK operations.
  • The FCA’s Approach to International Firms sets out the minimum standards expected of international firms seeking authorisation, but also applies to existing firms who want to continue to operate in the UK. The FCA identified an increased potential for harm when certain activities are conducted through a branch rather than a subsidiary. The three broad areas of focus relate to retail harms, client asset harms and wholesale harms. The FCA set out the factors that may be considered when deciding if it would be more appropriate for the firm to be structured as a subsidiary rather than a branch in the UK.

European banks which previously relied on passporting to operate branches in the UK must now go through potentially more rigorous assessments by the UK regulators if they want to achieve authorisation as Third Country Branches (TCBs). Many branches are also required to undertake a gap analysis of their arrangements against SS 5/21 as part of the assessment. These newly authorised branches will join the existing cohort of TCBs who are likely to face an increasing level of regulatory scrutiny going forward.

Existing branches who may be planning changes to their business activities, which require a variation of permission, will also need to consider how they meet these regulatory standards when preparing their applications. 

Furthermore, changes to booking models, or how services are provided between the branch and head office, need to be assessed to ensure they do not impede the regulators’ ability to effectively supervise these arrangements.

As the UK continues to refine the post-Brexit regulatory framework, TCBs need to be prepared to demonstrate compliance with heightened regulatory expectations both at the authorisation gateway, and on an ongoing supervision basis. Meeting expectations requires information sharing and cooperation from head offices which, for some branches, may have been somewhat challenging historically. Evidently, head offices will need to overcome any such reluctance if they want to reduce the risk that the regulators require them to subsidiarise.

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