UK supervision of international banks: issues

The PRA’s Supervisory Statement is intended to provide clarity over the PRA’s approach
to the authorisation and supervision of international banks in the UK, but there remains
uncertainty as to the PRA’s process and methodology for assessing the equivalence of
home state supervisory and resolution regimes.
It is the whole bank, and not just the UK branch, that will be under the PRA’s review.
Going forward, specific individuals with oversight of the foreign branch will be more
explicitly accountable for the bank’s UK activities.
Authors Rachpal Thind and Alice Bell
UK supervision of international banks:
issues impacting non-EEA branches
In September 2014, the Prudential Regulation Authority (PRA) published a
supervisory statement1 (the Supervisory Statement) setting out the PRA’s approach
to the authorisation and supervision of existing and prospective international banks
in the United Kingdom (UK). The Supervisory Statement is directed at PRA supervised
deposit-takers and designated investment firms incorporated elsewhere in, and
outside of, the European Economic Area (EEA). Notwithstanding that the Supervisory
Statement applies to all foreign banks operating in the UK, there is a particular
focus on non-EEA bank branches (the foreign branches). This article sets out the key
considerations arising from the Supervisory Statement with respect to the future
direction of foreign branches within the UK.
The PRA is responsible for the
prudential supervision of deposittakers, insurance companies and designated
investment firms. The Supervisory Statement
expands on the PRA’s general approach to
supervision as set out in its banking approach
document2 with fuller details on its approach
to the supervision of international banks.
Although the Supervisory Statement is
not intended to change the UK’s historical
approach to the supervision of international
banks, it does clarify this approach and
provides a platform for the way in which the
PRA authorises and supervises branches.
As a general matter, given that a foreign
branch is not a separate legal entity from
the bank of which it is a part, it is primarily
supervised by its home state supervisor
(HSS) as part of the supervision of the
banking group as a whole. In contrast, the
UK subsidiaries of international banks (as
separate legal entities from their parents)
are authorised and regulated in the UK on
a standalone basis and are required to be
separately capitalised.
The primary objective of the PRA’s
supervisory approach is to promote the safety
and soundness of foreign branches and it
focuses on the harm that a branch can cause
to the stability of the UK financial system. In
this regard, the PRA has introduced a twiceyearly branch data return to enable it to assess
the potential impact that foreign branches
would have on UK financial stability.
As part of the PRA’s authorisation
process, and on an ongoing basis, foreign
branches will be assessed on the basis of three
factors: (i) the extent to which the supervision
of the foreign branch by its HSS is equivalent
to that of the PRA; (ii) the foreign branch’s
activities and the extent to which it performs
a critical economic function in the UK; and
(iii) the level of assurance that a HSS can
give the PRA that the home state resolution
regime will deliver appropriate outcomes for
the PRA’s objectives, as well as the credibility
of the foreign branch’s own resolution plan, if
things were to go wrong.
While the Supervisory Statement provides
an element of uniformity in the PRA’s
approach, it is clear that the PRA will be
retaining discretion through the whole process.
The assessment factors will be considered
in the round, on a case-by-case basis, which
means that the PRA’s determination on
acceptable standards will vary from bank
to bank, even amongst those from the same
jurisdiction. Therefore, the existence of
another branch from the same home state will
Butterworths Journal of International Banking and Financial Law
not automatically mean that other banks from
that jurisdiction may establish branches in the
UK. Further, each foreign branch will need to
assess the PRA’s supervisory criteria within the
context of not only its home state regulatory
regime, but also its business model, systems
and controls, and group resolution plans.
In circumstances where the PRA is
satisfied in respect of such matters, the
PRA will seek to agree a split of prudential
supervisory responsibilities between itself
and the HSS. The agreement will be tailored
to each foreign branch and will set out the
allocation of supervisory responsibilities on
matters such as business risks, capital and
liquidity, risk management and management
In other cases, the PRA will consider
the most appropriate course of action with
respect to the foreign branch which may,
in some cases, include: (i) refusing the
authorisation of a new foreign branch or
cancelling the authorisation of an existing
foreign branch; or (ii) imposing limitations on
the nature and scale of activities performed by
the foreign branch.
HSS equivalence test
The Supervisory Statement sets out the broad
principles on which the PRA will assess
HSS equivalence. The list is not intended
to be exhaustive but includes: (i) the HSS’
rules, powers, consolidated supervision,
information sharing, confidentiality, and the
competence and independence of supervision;
(ii) the capital, liquidity and resolution
regimes for consistency with international
standards; and (iii) the PRA’s previous
experiences in its interactions with the HSS.
The focus on HSS equivalence is
not unexpected and can be seen as part
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February 2015

of a general trend towards assessing the
equivalence of domestic regulatory regimes,
most notably within the context of European
Union (EU) regimes such as the European
Market Infrastructure Regulation (EMIR),3
the Alternative Investment Fund Managers
Directive (AIFMD)4 and the recast Markets
in Financial Instruments Directive5 (MiFID
II). However, given the differences between
EU and non-EU regulatory regimes, it has
proved difficult in practice for equivalence
decisions to be made. Therefore, agreeing
the split of supervision between the PRA
and the HSS could potentially be a lengthy
and challenging process. Furthermore, the
assessment process is outside the control of
foreign branches and even the HSS, so there
may be little transparency while the review
process is under way.
Equivalence assessments will be reviewed
periodically, as determined by the number
and size of foreign branches in a particular
jurisdiction. Foreign branches can derive
some comfort from the fact that this is not a
new process, so they will have a good sense
of the PRA’s assessment of, and relations
with, their HSS to date. However, given
that regulatory regimes around the globe
are constantly evolving, the PRA’s approach
to HSS equivalence will similarly have to
develop and change over time; this, in turn,
may impact the ability of foreign branches to
plan business strategies going forward.
Critical economic function
In addition to the HSS assessment, the
PRA will also evaluate the UK activities
of a foreign branch to determine whether
it undertakes a critical economic function
(CEF). Those foreign branches engaged
in a CEF will be subject to a closer review
and the PRA will be seeking a higher level
of assurance from them with respect to
resolution. The Supervisory Statement
defines a CEF as a “function whose disruption
or withdrawal could have an adverse material
impact on financial stability in the UK”,
based on a foreign branch’s activities in:
(i) retail banking; (ii) corporate banking;
(iii) payments, clearing and settlement; (iv)
custody; (v) intra-financial system borrowing
and lending; and (vi) investment banking.
February 2015
The PRA’s determination will turn on
a quantitative assessment of each foreign
branch, taking account of the overall level of
deposits covered by the Financial Services
Compensation Scheme (FSCS), the value
and type of accounts the foreign branch
holds, number of customers, substitutability
of services and planned growth. Although
not a defined threshold, the PRA: (i) expects
foreign branches to have under £100m
of retail and small and medium-sized
enterprises (SME) covered transactions
or instant access account balances; and (ii)
considers that retail and SME accounts in
excess of 5,000 may be of concern. As such,
any foreign branch that is currently engaged
in (or that will, going forward, be looking to
undertake) activities beyond this de minimis
threshold will only be able to do so if the PRA
receives a high enough level of assurance from
the HSS regarding resolution.
It should also be noted that from 2 July
2015, the scope of the EU deposit protection
regime will be extended under the recast
Deposit Guarantee Scheme Directive6 to
include all commercial depositors, irrespective
of the company size (which is currently
limited to SMEs). The Supervisory Statement
describes the de minimis threshold by reference
to just retail and SME transactions, but a
CEF is defined more broadly to cover all
deposits within the ambit of the FSCS. There
is, therefore, some uncertainty as to whether
corporate deposits will be included in the
calculation of the de minimis threshold going
forward. While it is hoped that the PRA
will be pragmatic and limit the de minimis
threshold to “retail deposits” in the proper
sense, the volume of corporate deposits held by
a foreign branch will nonetheless increase its
aggregate exposure to the FSCS, which in turn
will impact the PRA’s quantitative assessment
of the foreign branch’s risk profile.
Resolution regimes
Arrangements for resolution will be key to
the PRA’s risk assessment of a foreign branch
and are “ultimately where it will place most
emphasis”.7 The PRA’s assessment will include
seeking the appropriate assurances from
the HSS (relative to the scale of the foreign
branch’s UK activities) and understanding the
[2015] 2 JIBFL 128B
bank’s group resolution plan in detail.
A key consideration for foreign branches
in this regard is the wide-ranging powers
that the PRA has recently acquired under
the UK’s implementation of the EU Bank
Recovery and Resolution Directive8 (BRRD)
whereby the PRA now has the ability to
resolve foreign branches on a standalone
basis in certain circumstances. It will be
paramount for the HSS and bank to ensure
the appropriate outcomes with respect to the
assurances that the PRA will be seeking.
A foreign branch with a CEF which
requires continuity of service or a significant
amount of time to wind down will attract
greater scrutiny from the PRA and will need
to demonstrate: (i) a clear rationale for why
the CEF is part of the business model for the
bank and why it is appropriate to be carried
out via a branch; (ii) a resolution plan for the
whole bank and how the branch links to that
plan; (iii) a clear functional and operational
plan for continuity of service for the CEF; (iv)
how the branch will access critical systems;
and (v) how data managed in the home state
will be maintained. Notwithstanding that a
foreign branch may ultimately be able to get
the PRA comfortable with comprehensive
and credible resolution plans, it will have
no control over the PRA’s assessment of
the home state regime. The Supervisory
Statement provides little detail on how the
PRA will embark on this assessment, but
ultimately it will be seeking assurance that,
at a minimum, the foreign branch’s UK
depositors and creditors will rank equally
with their home state counterparts.
While there are international initiatives
in place for the implementation of uniform
recovery and resolution regimes such as
the Financial Stability Board’s (FSB) Key
Attributes of Effective Resolution Regimes for
Financial Institutions,9 jurisdictional regimes
are still in flux. A recent report published by
the FSB10 found that only four jurisdictions11
had resolution regimes in place that were
consistent with FSB standards, which the G20
has committed to implementing.12 Although
the FSB reported that 17 other jurisdictions
were in the process of making such reforms,
those jurisdictions were said to be still in
the policy development stage. Further, only
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five jurisdictions13 reported that their legal
framework allowed for cross-border
co-operation through the prompt recognition
of resolution actions by foreign authorities.
Therefore, in certain jurisdictions, the PRA’s
assessment of the HSS recovery and resolution
regime may be somewhat premature.
SYSC attestation
The Supervisory Statement also places
emphasis on a foreign branch’s risk
management and systems and controls,
and introduces a requirement for a senior
individual within the UK management team
annually to attest compliance with the PRA’s
and the Financial Conduct Authority’s (FCA)
Senior Management Arrangements, Systems
and Control Sourcebook;14 the first attestation
must be submitted by 31 March 2015.
This new requirement reinforces the PRA
and FCA’s focus on improving individual
responsibility and accountability in the
banking sector. The attestation regime may
eventually be replaced by a senior manager
regime whereby at least one individual per
foreign branch will need to be approved by the
PRA as an Overseas Branch Senior Executive
Manager with responsibility for the activities
of the UK branch.15 Full details of the PRA’s
proposals are expected to be published in a
future consultation paper.
Upcoming MiFID third country
access regime
At present, the rules for the provision of
banking and investment services by non-EU
firms vary between individual EU member
states and, insofar as local rules may permit the
establishment of a branch, there is no pan-EU
passport regime that would allow the branch to
provide services throughout the EU.
MiFID II introduces a harmonised regime
for third country firms seeking to provide
investment services to EU-based customers
under which depending on their client base,
third country firms may operate in the EU:
(i) from outside of the EU on a cross-border
basis; or (ii) through an EU-based branch.
Additionally, once a branch is established, the
third country investment firm will be able to
passport throughout the EU without having to
establish a branch in each EU member state.
There is no corresponding (nor any
current proposals for a) third country access
regime under the EU Capital Requirements
Directive, which governs the authorisation
and supervision of banking services across
the EU. Therefore, it is not clear as to what
extent foreign branches established in the UK
(or elsewhere within the EU) as “banks” will
be able to utilise the MiFID II third country
access regime for investment services firms.
There does not appear to have been any
discussions or consultations on the point
to date, but it would appear that foreign
branches that want to provide both banking
and investment services across the EU may
need to operate under two separate regimes:
(i) the local rules of each individual EU
member state pertaining to the provision of
banking services/non-MiFID activities (eg
deposit and lending services) on a branch
basis; and (ii) the MiFID II regime with
respect to the provision of investment services
on a cross-border or passported basis.
Furthermore, the MiFID II regime will
be limited to investment services undertaken
with “per se professional clients” and “eligible
counterparties” (as defined in MiFID). It will
also be subject to registration requirements
with the European Securities and Markets
Authority and an equivalence decision from
the European Commission in relation to the
HSS. Investment services directed at retail
clients and opted-out professional clients
will be subject to separate authorisation and
branch requirements in each EU member
state. Consequently, a non-EEA bank
providing both banking services and retail
investment services in 28 EU member states
may have to establish branches in 28 EU
member states.
Therefore, international banks may need
to re-assess their EEA business models as a
whole and not just with respect to the UK.
Going forward, banks may find it preferable
to either operate through an EU subsidiary or
limit their EU branch operations to wholesale
investment services.
The key conclusion to be drawn from the
Supervisory Statement is that the PRA’s
approach will not be homogenous. Foreign
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Biog box
Rachpal Thind is a partner, and Alice Bell is an associate, in Sidley Austin’s EU Financial
Services Regulatory Group in London.
Email: [email protected] and [email protected]
branches conducting a CEF will be subject
to closer review and supervision, and they
will be restricted in terms of their business
development and growth. Ultimately,
subsidiarisation may have longer term
benefits. Foreign branches not engaged in a
CEF and subject to international regulatory
standards in their HSS should still find
it relatively straightforward to obtain and
maintain PRA authorisation.
1 Supervisory Statement (SS10/14), Supervising
international banks: the Prudential Regulation
Authority’s approach to branch supervision,
September 2014.
2 The Prudential Regulation Authority’s approach
to banking supervision, April 2013.
3 Regulation 648/2012.
4 Directive 2011/61/EU.
5 Directive 2014/65/EU.
6 Directive 2014/49/EU.
7 Op cit 1.
8 Directive 2014/59/EU.
9 15 October 2014.
10 Towards full implementation of the FSB Key
Attributes of Effective Resolution Regimes for
Financial Institutions, Report to the G20 on
progress in reform of resolution regimes and
resolution planning for global systemically
important financial institutions (G-SIFIs),
12 November 2014.
11 Japan, Spain, Switzerland and the US.
12 Op cit 9.
13 Germany, Japan, Singapore, Switzerland and
the US.
14 For which, see the FCA Handbook of Rules
and Guidance at
15 Consultation Paper (PRA CP 14/14),
Strengthening accountability in banking: a new
regulatory framework for individuals, July 2014.
Further reading
MiFID II and the AIFMD: is an
onshore model for third country asset
managers inevitable? [2014] 8 JIBFL 497
Twin peaks regulation: breaking
through the mist [2013] 5 JIBFL 309
Lexisnexis Financial Services blog:
Stricter reporting rules and controls
for international banks
[2015] 2 JIBFL 128B
February 2015