On 8 August 2018, the FCA published a Dear CEO letter concerning cross-border booking arrangements.
In light of the UK’s withdrawal from the EU, the FCA underlines that its duties gained from regulation such as MiFID II will continue, to ensure the integrity of the UK’s financial markets. The FCA further states that firms expanding into Europe must structure themselves in a way to ensure the FCA can continue to supervise their activities.
The FCA explains that it is open to a broad range of legal entity structures or booking models. This includes those making use of back-to-back and remote booking, providing their associated conduct risks are effectively controlled and managed. The FCA’s starting point is not to restrict business models but to understand the principles and practice involved and how the conduct risks that arise from them are managed. As such the FCA states that booking models should comply with the following principles:
- firms should set out a clear rationale for their booking arrangements, document them and have them approved by the board;
- risk management should be appropriate for the firm’s booking activities including hedging arrangements;
- there should be a broad alignment of risk and returns at the entity level;
- firms should have adequate systems and controls in place to ensure that booking arrangements are followed;
- firms should consider whether responsibility for oversight of booking arrangements should be explicit in statements of responsibilities; and
- booking arrangements should not be an impediment to the firm’s recovery and resolution.
The FCA adds that it expects UK boards and senior managers to ensure that effective governance is in place to identify and mitigate the potential harm which could arise from modified booking arrangements. Firms should also be able to demonstrate how the principles mentioned above have been observed and implemented.