The Prudential Regulatory Authority (PRA) has released a policy statement and a supervisory statement which summarizes and clarify the PRA’s approach to supervising branches of international banks. The supervisory statement is relevant to all PRA-supervised firms who operate out of the UK but are not headquartered in the UK, and to any firm looking to operate in the UK in the future.
The PRA’s response to the feedback received on the proposed rules of consultation paper CP4/14 is addressed in policy statement PS8/14, and the PRA’s responses to feedback on the consultation on the supervisory statement are addressed in the finalized version of supervisory statement SS10/14.
Internationally headquartered banks can operate as subsidiaries or branches:
- A subsidiary is a separate legal entity from its parent and therefore requires its own governance and risk management
- A branch forms part of the same legal entity and its capital base and board is covered by the head office (although it does need to adhere to certain local regulatory requirements, principally conduct of business rules)
From a supervisor perspective, the following applies:
- For subsidiaries, the PRA has the same legal powers and broadly follows the same supervisory framework as for UK headquartered firms
- For branches, conduct regulation is the responsibility of the PRA whilst prudential supervisory responsibilities are split between the supervisor of where the bank (home state supervisor – HSS) is headquartered and the PRA
For non-EEA branches the PRA’s authorization applies to the whole firm.
For EEA branches, the home state supervisory state of the headquartered bank is responsible for prudential supervision with the exception of liquidity which temporarily will remain the responsibility of the PRA until it is migrated sometime in 2015.
The PRA received a number of responses to the original consultation paper (CP4/14) and overall these responses were supportive of the PRA’s approach. The PRA considered the responses and minor changes were made to the final supervisory statement. Feedback centered around the following areas:
- De minimis retail deposits – the PRA states that it “will be content for non-EEA branches undertaking retail banking activities beyond de minimis levels only if there is a very high level of assurance from the HSS over resolution”
- HSS equivalence – for non-EEA countries the PRA confirmed this is done on a case by case basis and the supervisory statement now includes clarification that it is the HSS that is being evaluated and not the whole firm
- Critical economic functions (CEF) – the PRA has provided a more detailed definition of what constitutes a CEF stating that “A CEF can be defined as a function whose disruption or withdrawal could have an adverse material impact on financial stability in the UK”. The PRA also noted that they make their judgements on a firm-by-firm basis
- SYSC attestation – the PRA views it as important to have one individual who is responsible for overall attestation for non-EEA branches
- Implementation – for non-EEA branches, the policy will be implemented immediately for all new branches. For existing branches, the PRA will implement the policy over time and will engage on the HSSs and branches on a priority basis
- Branch Return – the PRA is in the process of producing accompanying notes for the Branch Return. The PRA has undertaken a pilot of the Branch Return with 25 branches and they will perform a second pilot with all branches which will need to be returned by 14.11.14 Following a review of this pilot, the PRA will then publish the Branch Return rule.
This new rule was effective from September 5, 2014.
Kinetic Partners’ perspective:
In Kinetic Partners’ experience, it is important for banks to not only consider the FCA as the supervisor of force when it comes to conduct. As evidenced in the policy statement above, the PRA will also have a regard to the officers of the bank and to the evaluation of the bank’s SYSC arrangements. It also appears that individual accountability continues to be on the rise.
While there is nothing unexpected in this policy statement, it does set the tone for what may be to come in terms of PRA supervision in this area. Particularly in relation to branches of non-EEA banks, we would advise banks to pay attention to the structure and content of their documentation relating to all SYSC requirements, and to ensure that such materials reflect the true controls in place. This will enable the banks to demonstrate their ability to articulate its governance arrangements clearly to the PRA, should the question be asked.