Stricter reporting rules and controls for international banks

What information will the Prudential Regulation Authority (PRA) in future require from international banks with a UK branch? Jeremy Jennings-Mares, partner on the capital markets practice at Morrion & Foerster, discusses the proposed changes and what lawyers advising international clients have to keep in mind.

Original news

Consultation: Supervising international banks—The Prudential Regulation Authority’s approach to branch supervision—CP4/14, LNB News 26/02/2014 121

The approach to be taken by the Prudential Regulation Authority (PRA) for supervising international banks is being consulted on by the Bank of England, with a specific focus on branches outside the European Economic Area (EEA). The proposed approach is contained in a set of draft rules and a draft supervisory statement. The proposals are relevant to all existing and prospective PRA-supervised deposit takers and designated investment firms operating in the UK which are not UK headquartered firms. Those wishing to respond to the consultation should do so by 27 May 2014.

What are the proposals under the PRA’s consultation?

The main proposal is setting out the PRA’s approach as to how they are going to supervise the branches of banks which are based outside the EEA. One of the main points is that, from 2015, all firms (whether EEA or non-EEA) operating in the UK through a branch will have to complete and submit, twice a year, a new data collection return to the PRA. The proposal is also to run a pilot scheme in 2014 for some branches, as part of the consultation, just to see how practical the exercise of getting firms to submit this information is going to be. Non-EEA firms will also have to make sure that their resolution plans make adequate provision for the resolution of their UK branches.

What actions will branches have to take as a result of the proposals?

Assuming that these proposals are not changed, firms will have regular, new data collection returns to make and non-EEA firms will also have to show that there is adequate provision in their resolution plans for dealing with the UK branches. One of the things that the PRA will also have to be satisfied about is that the firm’s home country has a supervisory and regulatory system which is equivalent to that in the UK. For instance, it will want assurance that the UK creditors and depositors of the UK branch will be treated equally with creditors and depositors in the home jurisdiction. It will also want a clear acceptance from the home country supervisor that it is responsible for the prudential supervision of the UK branch.

What could the PRA do with information received from branches it receives as a result?

The PRA will use the information to assess what kind of impact the failure of the foreign firm could have on the UK’s financial system. So they would be looking at the systemic impact on the UK of the failure of that firm. They will consider the adequacy of the home country resolution regime, and the firm’s resolution plan, in the light of such information. The more significant they conclude that the branch is (for instance, if it conducts significant retail banking activities), the more assurance they will require that the UK branch will be appropriately dealt with in a resolution situation.

Is there a trend emerging in this area?

Europe is just about to implement the Bank Recovery and Resolution Directive. That already requires firms to provide information to the authorities, to help them draw up plans to resolve institutions in the event of their failure. Some jurisdictions outside the EU already have similar recovery and resolution regimes in place and some are developing them. But, not all jurisdictions have them. The Financial Stability Board (FSB) has made proposals as to the kind of key features that each country should have in its resolution and recovery systems. The Bank Recovery and Resolution Directive is a part of that general theme. These are still proposals from the PRA but I don’t expect that they are going to change very much. I would not expect the final version to be very different from this as a concept, although there may be some discussion around the required content of the data returns.

What should lawyers advising in this area take note of?

The biggest impact is on lawyers who are involved in preparing recovery plans for foreign banks and investment firms and assisting those firms in meeting their information obligations to their resolution authorities. If the institution has a UK branch, they need to make sure that the recovery and resolution procedure addresses the UK branch. The PRA is making it very clear that it expects that, and it will need to be satisfied as to how the UK operations are to be dealt with in a failure situation, if that UK branch is going to retain its licence.

Interviewed by Neasa MacErlean.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

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