The Prudential Regulation Authority (PRA) has published its final policy approach to supervising UK branches of banks based outside the European Economic Area (EEA). The PRA also explains in more detail its approach to subsidiaries and EEA branches.
The PRA has published two documents concerning its final policy approach being:
- Supervisory Statement 10/14: Supervising international banks – the PRA’s approach to branch supervision (SS10/14); and
- Policy Statement 8/14: Supervising international banks – the PRA’s approach to branch supervision (PS8/14).
Supervisory Statement
A Supervisory Statement contains guidance from the PRA on specific regulatory issues.
In SS10/14 the PRA discusses its supervisory approach to international banks. It mentions that internationally headquartered banks can operate in the UK either as subsidiaries or as branches.
For non-EEA branches, the PRA’s authorisation applies to the whole firm. The approach, which applies to new and existing branches, is centred on an assessment of the equivalence of the home state supervisor’s (HSS) supervision of the whole firm, the branch’s UK activities and the level of assurance the PRA gains from the HSS over resolution. Where the PRA is satisfied on these matters it will also require a clear and agreed split of prudential supervisory responsibilities with the HSS.
In addition, 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. The PRA also expects new non-EEA branches to focus on wholesale banking and to do so at a level that is not critical to the UK economy, i.e. an interruption to the provision of service would not cause financial instability in the UK.
For existing non-EEA branches the PRA will focus its supervision on understanding whether the branch undertakes critical economic functions, and working with the HSS will gain assurances over how, if things go wrong, these functions will be resolved. Where the PRA identifies concerns it will first raise these with the relevant HSS. Where it is not content with the response, the PRA will consider using its powers over the branch to address concerns. Where serious concerns exist, the PRA may exercise the power to revoke the branch’s authorisation to operate in the UK.
For EEA branches, the PRA’s supervisory approach is consistent with the Capital Requirements Regulation and the Capital Requirements Directive IV.
The remainder of SS10/14 discusses the meaning of the following important concepts:
- de minimis retail deposits;
- HSS equivalence; and
- critical economic functions.
In relation to critical economic functions it is notable that the PRA states that it makes its judgements on a firm-by-firm basis. The PRA has therefore not provided exact details on when an activity becomes critical but has provided a more detailed definition.
The PRA also briefly discusses the requirement in a non-EEA branch for a senior individual to be responsible for annually attesting compliance with the Senior Management Arrangements, Systems and Controls sourcebook (SYSC) of the PRA Handbook. Whilst the PRA recognises that a number of individuals may be responsible for ensuring compliance with various parts of SYSC it feels that it is important to have one individual responsible for providing an overall attestation. The PRA recommends that this attestation states: “I confirm that [insert branch name] is in compliance with the relevant rules in the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook of the PRA Handbook as at [insert date] and has been for the last twelve months.” The PRA will review if there is a continued need for this attestation once it is clear if, and how the proposed Senior Managers Regime will apply to non-EEA branches.
For a subsidiary of an international bank, the PRA notes that it has the same legal powers and follows broadly the same supervisory framework as for a UK headquartered firm.
Policy Statement
In PS8/14 the PRA sets out a finalised rule implementing the approach to branch supervision. The rule is contained in the Incoming Firms and Third Country Firms part of the PRA’s Rulebook, and requires an internationally headquartered bank (or an international headquartered systemically important investment firm) to take all steps within its control to ensure that their resolution plan provides adequately for the resolution of the UK branch.
The new rule came into force on 5 September 2014.
View Supervising international banks: the PRA’s approach to branch supervision – PS8/14, 5 September 2014
