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Regulatory framework

Key policies

What are the principal governmental and regulatory policies that govern the banking sector?

The United Kingdom’s banking sector is regulated for prudential purposes by the Prudential Regulation Authority (PRA), which is part of the Bank of England, the UK’s central bank, and the Financial Conduct Authority (FCA) for conduct purposes. The Financial Policy Committee (FPC), which operates from within the Bank of England, acts as the macro-prudential regulator for the UK’s financial system.

The Financial Services and Markets Act 2000 (FSMA 2000), as amended, sets out the PRA’s and the FCA’s statutory objectives. The PRA’s principal objective is to promote the safety and soundness of the firms it regulates. On 28 March 2018, the PRA published Supervisory Statement (SS)1/18 ‘International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision’, which replaces SS10/14 ‘Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision’. SS 1/18 is relevant to all PRA-authorised banks and designated investment firms not incorporated in the UK that form part of a non-UK headquartered group (international banks) and which are operating in the UK through a branch, as well as any such firm looking to apply for PRA authorisation in the future. The new approach came into effect on 29 March 2018. For European Economic Area (EEA) firms currently branching into the UK under ‘passporting’ arrangements and intending to apply for PRA authorisation in order to continue operating in the UK after the UK’s withdrawal from the European Union, this approach will be relevant to authorisations. The PRA will keep the policy under review to assess whether any changes will be required due to changes in the UK financial system or regulatory framework, including those arising once any new arrangements with the European Union take effect after the United Kingdom’s withdrawal from the European Union, which is expected to take place on 29 March 2019.

The FCA’s strategic objective is to ensure that the relevant markets function well. The FCA’s operational objectives are:

  • the consumer protection objective;
  • the integrity objective; and
  • the competition objective.

The FPC’s primary responsibility is to protect and enhance the resilience of the UK’s financial system. This involves identifying, monitoring and taking action to reduce systemic risks. Its secondary objective is to support the economic policy of the government.

Primary and secondary legislation

Summarise the primary statutes and regulations that govern the banking industry.

The principal statutes governing the banking industry in the United Kingdom are FSMA 2000 (as amended), the Banking Act 2009, the Financial Services (Banking Reform) Act 2013 and the Bank of England and Financial Services Act 2016. A number of regulations, generally expressed in statutory instrument form as well as the PRA’s Rulebook and the FCA’s Handbook contain detailed rules applicable to the banking industry in the United Kingdom.

The Payment Services Regulations 2017 (SI 2017/752) (PSR) govern the provision of payment services in the United Kingdom. Those providing such services are required to adhere to the business conduct provisions laid out in PSR.

The primary regulatory framework for consumer credit activities is set out in FSMA 2000 and in the Consumer Credit Act 1974 (as amended).

The Banking Act 2009 established a Special Resolution Regime (SRR) to facilitate the orderly resolution of banks in financial distress. It includes pre-insolvency stabilisation options, a bank insolvency procedure and a bank administration procedure. An insolvency regime that applies to investment banks (including banks carrying on investment banking activities) is set out in the Investment Bank Special Administration Regulations 2011 (see question 19).

On 1 January 2018, the Benchmarks Regulation (Regulation on indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds (Regulation (EU) No. 2016/1011) (BMR) came into force. The FCA is the UK’s national competent authority under the BMR. The principal objectives of the BMR are restoration of investor and consumer confidence in the accuracy, robustness and integrity of indices used as benchmarks in financial instruments and financial contracts or to measure the performance of investment funds, and the benchmark setting process itself. The BMR aims to achieve this by ensuring that benchmarks are not subject to conflicts of interest, are used appropriately, and reflect the actual market or economic reality they are intended to measure.

On 27 February 2018, the Financial Services and Markets Act 2000 (Benchmarks) Regulations 2018 (SI 2018/135) (Benchmarks Regulations) came into force in the United Kingdom. The Benchmarks Regulations:

  • designate the FCA as the UK competent authority for the purposes of the BMR;
  • permit the FCA to exercise powers over persons who are not authorised and are involved in the provision of, or contribution of input data to, a benchmark, but are not benchmark administrators as defined in the BMR as ‘miscellaneous BM persons’;
  • give the FCA the power to impose requirements on persons needing them to administer or contribute to a benchmark; and
  • make provision for the FCA to regulate benchmark administrators, including the recognition of third country administrators.

The Benchmarks Regulations amend secondary legislation, including the Financial Services and Markets Act 2000 (Exemption) Order 2001 (SI 2001/1201) and the Consumer Credit (Disclosure of Information) Regulations 2010 (SI 2010/1013) to reflect the BMR. In addition, they make a minor amendment to section 293 of FSMA 2000 relating to the implementation of Cybersecurity Directive 2016/1148/EU.

The Financial Services (Banking Reform) Act 2013 (Commencement No. 12) Order 2018 (SI 2018/1306) was published on 5 December 2018 as were The Bank of England (Amendment) EU Exit) Regulations 2018 (SI 2018/1297).

Regulatory authorities

Which regulatory authorities are primarily responsible for overseeing banks?

The PRA is responsible for the prudential regulation and supervision of the banking sector. Under FSMA 2000 (as amended), it is a criminal offence for a person to carry on a ‘regulated activity’ in the United Kingdom unless authorised to do so or exempt from the authorisation requirement. Regulated activities are defined in secondary legislation. Deposit taking is a regulated activity that requires authorisation. Other regulated activities that require authorisation include:

  • dealing in investments as principal;
  • dealing in investments as agent;
  • arranging deals in investments;
  • managing investments;
  • safeguarding and administering investments (ie, custody); and
  • providing investment advice and mortgage lending.

Investments include:

  • shares;
  • debentures (including sukuk);
  • public securities;
  • warrants;
  • futures;
  • options;
  • contracts for differences (ie, swaps); and
  • units in collective investment schemes.

On 20 December 2018, the PRA and the Bank of England published a joint consultation paper on further Brexit-related changes to the PRA Rulebook and binding technical standards (CP32/18).

The FCA is the conduct regulator of businesses in the banking sector. The FCA acts a prudential regulator for persons that are not prudentially regulated by the PRA. The FCA took over the responsibility of regulating consumer credit firms in 2014, with these firms being subjected to the FCA’s consumer protection rules and principles of business. The Bank of England aims to ensure that if and when a bank fails, it does so in an orderly manner with as little impact on the UK’s financial system as a whole as reasonably practicable and in line with the SRR. The Treasury is responsible for drawing up the Code of Practice as guidance on how and when the SRR is to be used. The payment services regulator is responsible for the payment services in the UK’s banking sector.

The FCA has a ‘free-standing duty’ in respect to financial crime, to which it must have regard when discharging its general functions (section 1B(5) of FSMA 2000, as amended). By virtue of this duty, the FCA must have regard to the importance of taking action intended to minimise the extent to which it is possible for business carried on by FSMA-authorised firms to be used for a purpose connected with financial crime. The FCA is responsible for supervising compliance with the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 and for taking enforcement action for violations. On 13 December 2018, the FCA published guidance on financial crime systems and controls: insider dealing and market manipulation (FG18/5). On 20 December 2018, the FCA published an evaluation paper (EP18/3) on reducing barriers to entry into the UK’s banking sector.

Government deposit insurance

Describe the extent to which deposits are insured by the government. Describe the extent to which the government has taken an ownership interest in the banking sector and intends to maintain, increase or decrease that interest.

The UK government does not insure bank deposits. The Financial Services Compensation Scheme (FSCS), established under FSMA 2000, as amended, is funded by the industry through levies collected by the FCA. It guarantees deposits up to £85,000 in any given account, including several accounts in respect of the same person, subject to certain exceptions. The PRA and the FCA determine the rules within which the FSCS operates, including eligibility of claims and the level of compensation. These are reviewed and revised from time to time. The FSCS is free to consumers. Banks are required to develop and maintain a method of identifying all depositors who would be eligible if the bank in question were to fail. This is intended to provide the information required to meet claims within seven days from default. Eligible deposits under the FSCS are treated as preferential debts and given a higher priority within the class of preferential debts than other deposits, ranking ahead of unsecured non-preferred creditors on an insolvency.

During the 2008 global financial crisis, the UK government adopted a number of emergency measures in the banking sector, including liquidity assistance, recapitalisations and an asset protection scheme. Some UK banks were required to increase their tier 1 capital significantly. Royal Bank of Scotland Group plc (RBS) and Lloyds Banking Group (LBG), unable to raise additional capital externally, received government capital support. RBS received a second capital injection at the time of its accession to the UK government’s asset protection scheme in 2009. The government’s support to banks included the nationalisation of Northern Rock and Bradford & Bingley.

In August 2015, the UK government began the process of selling RBS shares back to the private sector. The UK government still owns about 71.5 per cent of total voting rights. LBG returned to full private ownership in May 2017. The viable division of Northern Rock’s business was sold to Virgin Money in November 2011. The closed mortgage books of Bradford & Bingley and Northern Rock are managed by UK Asset Resolution Limited, a holding company established by the UK government, which is pursuing a strategy of reducing its balance sheet, while creating value for the taxpayer and ensuring continued fair treatment of customers.

Transactions between affiliates

Which legal and regulatory limitations apply to transactions between a bank and its affiliates? What constitutes an ‘affiliate’ for this purpose? Briefly describe the range of permissible and prohibited activities for financial institutions and whether there have been any changes to how those activities are classified.

Group restructuring is dealt with in Part 9B ring-fencing of FSMA 2000, as amended. If a bank is a member of a group the shares of which are listed on the London Stock Exchange, the Listing Rules set out requirements in respect of ‘related party transactions’. ‘Affiliates’ are ‘related parties’ for these purposes. The PRA imposes restrictions on large exposures (LEs), defined as exposure of 10 per cent or more of a bank’s tier 1 and tier 2 capital to a single counterparty or a group of connected counterparties. A bank’s total exposure to the rest of the group is limited to 25 per cent of its eligible capital. Banks can apply to the PRA for a zero per cent risk weight for exposures to certain UK entities within the consolidated group that are exempt from the LE limit. Entities included in this exemption are known as the bank’s core UK group. Conversely, a bank may apply to the PRA to increase its total exposures to certain cross-border group entities from 25 per cent to 100 per cent of its own eligible capital. These entities are known as the non-core LE group. On 28 June 2018, the PRA published Policy Statement 14/18 which sets out changes to the PRA’s large exposures framework. It contains updates to:

  • the PRA rules on Large Exposures and Regulatory Reporting;
  • Supervisory Statement (SS) 16/13 ‘Large exposures’; and
  • SS34/15 ‘Guidelines for completing regulatory reports’.

It also contains a simplified worked example of the application of the large exposures (LE) limits for a UK consolidated group.

A ring-fenced bank is required to treat intra-group exposures to entities outside the ring-fenced bank sub-group as equivalent to third-party exposures. Ring-fenced banks are prohibited from carrying out certain ‘excluded activities’ under FSMA 2000, as amended, which include investment and wholesale banking activities considered to pose a risk to the provision of ‘core’ retail deposit-taking services, because they may result in losses to the bank or make the bank’s resolution more difficult. A bank may not carry on insurance activities but may own an insurance subsidiary. One of the duties of the directors of a bank is to promote the success of the bank. While directors can take into account a bank’s membership of a wider group, they are not entitled to subordinate the interests of the bank to those of other group companies, for example, by lending to an insolvent parent or other group entity.

Regulatory challenges

What are the principal regulatory challenges facing the banking industry?

One of the regulatory challenges faced by the UK’s banking industry is the separation of core retail banking from investment banking known as ring-fencing. The requirements for ring-fencing were introduced under FS(BR)A 2013. Banks with a three-year average of more than £25 billion core deposits are required to comply with ring-fencing requirements from 1 January 2019.

The appropriate regulatory framework for crypto assets remains at the forefront of the legislative and regulatory agenda. In January 2019, the Monetary and Economic Department of the Bank for International Settlements published ‘Proceeding with caution - a survey on central bank digital currency’ (CBDC) (BIS Papers No 101). The paper is based on a survey of 63 central banks. Although a majority of central banks are researching CBDCs, this work is primarily conceptual and few central banks intend to issue a CBDC in the short to medium term. On 9 January 2019, the European Securities and Markets Authority (ESMA), published its Advice on Initial Coin Offerings and Crypto-Assets that sets out ESMA’s concerns about the risks to investor protection and market integrity, the most significant risks being fraud, cyber-attacks, money laundering, and market manipulation. Pursuant to a request by the EU Commission to evaluate developments in crypto assets, on 9 January 2019, the European Banking Authority (EBA) published the results of its assessment of the applicability and suitability of EU law to crypto assets. Typically, crypto-asset activities do not constitute regulated services within the scope of EU banking, payments and electronic money law, and risks exist for consumers that are not addressed at the EU level. Crypto-asset activities may also give rise to other risks, including money laundering. In the light of these issues, the EBA recommends that the European Commission carry out further analysis to determine the appropriate EU-level response. The EBA also identifies a number of actions that it will take in 2019 to enhance the monitoring of financial institutions’ crypto-asset activities and consumer-facing disclosure practices.

Cyber security remains a hot topic, particularly, inter alia, following the recent cyber attacks on LBG, HSBC Plc, Tesco Bank and RBS Group Plc and the identification of cyber vulnerabilities known as Meltdown and Spectre that enable easier hacking identified on 3 January 2018.

In November 2018, the Bank of England announced its plan to carry out a simulated ‘cyber-attack’ test on 40 regulated firms to assess their level of resilience. The objective is to establish if further improvements are needed by each firm independently and of the financial sector as a whole to strengthen cyber resilience. On 3 December 2018, the European Central Bank published a paper setting out its cyber resilience oversight expectations for financial market infrastructures (FMIs). On 4 December 2018, the Basel Committee on Banking Supervision published a report that identifies, describes and compares the range of observed bank, regulatory and supervisory cyber-resilience practices across jurisdictions.

The United Kingdom is currently in the process of negotiating its exit from the European Union. Once the United Kingdom leaves the European Union, currently expected on 29 March 2019, depending on the terms of the UK’s withdrawal from the European Union agreement, if any, the United Kingdom may be treated by the European Union as a ‘third country’, which could result in the need for the United Kingdom to comply with additional regulatory requirements. On 11 December 2018, the House of Commons Treasury Committee published a report on the analyses carried out by the UK government and the Bank of England on the Brexit withdrawal agreement.

Consumer protection

Are banks subject to consumer protection rules?

The Consumer Rights Act 2015 (CRA 2015) deals with unfair terms in contracts, the level of information to be provided to consumers, the rights and remedies available to consumers in the event their rights are breached and sanctions on those who breach consumer rights. The Supply of Goods and Services Act 1982 (SOGSA) deals with consumer protection in the context of the supply of goods and services. Banks are required to comply with these consumer protection rules, just as any other service provider. The FCA is responsible for enforcing the consumer protection framework, including distance selling and consumer credit provisions, in the banking sector. Its primary objective is to ensure that consumers of financial services are appropriately protected and to promote effective competition in the interests of consumers. Banks in the United Kingdom are subject to the FCA’s Treating Customers Fairly (TCF) regime, which is enforced vigorously.

Where banks fail to participate in the effective promotion of competition, the FCA and the Competition and Markets Authority (CMA) have the power to investigate and take enforcement action against such breaches. The FCA has the power to require the disclosure of information about suspected breaches and refer this to the CMA for a more detailed investigation. On 17 July 2018, the FCA published ‘Our Approach to Consumers’, which sets out the FCA’s approach to consumer protection.

Future changes

In what ways do you anticipate the legal and regulatory policy changing over the next few years?

At the time of writing, the terms of the United Kingdom’s exit from the European Union continue to be uncertain. There are calls for a second referendum on the UK’s membership of the European Union. Although impossible to opine with any certainty, a second referendum is unlikely and the United Kingdom is expected to leave the European Union in March 2019. Regardless of the outcome of the Brexit negotiations between the European Union and the United Kingdom, cybersecurity is likely to be one of the top legal and regulatory policy priorities in the United Kingdom over the next few years as is the development of an appropriate and effective regulatory framework for crypto assets. Developments in artificial intelligence, algorithmic solutions, green finance and climate change are likely to require an appropriate legal and regulatory framework in due course.

In the PRA’s Approach to Banking Supervision, published in October 2018, Sam Woods, the CEO of the PRA said:

‘ . . . having successfully implemented a ring-fence to separate retail banking from global trading, we will now police the fence as an integral part of our supervisory approach. We will ensure there is continued compliance with restrictions on activities performed by the ring-fenced banks and independence from the rest of the group. In particular, we will closely monitor governance arrangements, seeking evidence that they can identify conflicts of interest and are able to make decisions on their own. Second, in a context of firms’ increasing reliance on digital systems and platforms and the risk of cyber-attacks, operational resilience is on track to become as embedded in our supervisory approach as financial resilience. In this area, we are primarily focused on the continuity of the business services that a firm’s customers and the wider economy rely upon. We will prioritise our interventions proportionally based on safety and soundness and any potential financial stability implications of potential operational disruptions. Third, having fully embedded the Senior Managers Regime for banks (and soon also for insurers), individual accountability has become a key tool through which we deliver our supervisory approach. We expect firms to identify the most senior individuals responsible for key areas and activities, including the delivery of supervisory priorities, and to document their responsibilities. We can and will take supervisory or enforcement action if our red lines are crossed. Fourth, we are working with the aim of ensuring that the transition to the UK’s new relationship with the EU is as smooth as possible in financial services in order to minimise risks to our objectives, through mechanisms such as the Temporary Permissions Regime, which will allow us to bridge incoming EU27 firms for three years while they seek an authorisation to continue business in the UK. Our approach to advancing our objectives will remain the same as the UK withdraws from the EU. Our main focus is on trying to ensure that the transition to our new relationship with the EU is as smooth and orderly as possible in order to minimise risks to our objectives.’

The UK government established the Cryptoassets Taskforce in early 2018 with the objective of:

  • ascertaining the risks and benefits of the application of distributed ledger technology in financial services; and
  • the impact of crypto assets.

The Taskforce published its final report in July 2018. There have been calls by the Treasury for the FCA to regulate crypto currencies. On 20 December 2018, the House of Commons Treasury Committee published its eighth special report of session 2017 to 2019 in which it set out the UK government’s and the FCA’s response to the House of Commons Treasury Committee report on crypto assets.

The New Payments Architecture (NPA) was introduced in June 2018 as a new conceptual model for the shared retail payment infrastructure in the United Kingdom, which is expected to process £6.7 trillion of Bankers Automated Clearing Services (Bacs), faster payments and, potentially, cheque payments per year from 2021. Its aim is to ensure that payments made through this system are safe while encouraging innovation in banking and payments services.

The NPA aims to simplify the rules, standards and processes that banks must follow to use the systems. The New Payment System Operator (NPSO) will conduct a further consultation in 2019 on plans for the migration of payment volumes currently cleared through Bacs and potentially, subject to a suitable business case being identified, the migration in future of payments being processed using the Image Clearing System for cheques.

The practical implications of implementing the ring-fencing regime for banks separating core banking services from wholesale and investment banking services from 1 January 2019 is likely to require further regulatory fine tuning in due course.

The global, regional and national capital and prudential regimes for banks continues to evolve with relevant reforms set out in the EU Capital Requirements Directive V (CRD V) (adopted by the European Commission in November 2016) amending the Capital Requirements Regulation (EU) No. 575/2013 (CRR) and the Capital Requirements Directive 2013/36/EU (CRD IV). The reforms include the introduction of Basel III measures into EU law, such as the leverage ratio and the net stable funding ratio, the implementation of the total loss absorbing capacity standard and revisions intended to improve lending to SMEs and to infrastructure. A new package of capital adequacy measures (known as Basel IV) was agreed by the Basel Committee on Banking Supervision in December 2017.

From 1 January 2019, the Securitisation Regulation (EU) No. 2017/2402 and CRR Amendment Regulation (EU) No. 2017/2401 apply within the European Union.

Supervision

Extent of oversight

How are banks supervised by their regulatory authorities? How often do these examinations occur and how extensive are they?

Banks are subject to annual supervisory filings and disclosures, as well as an ongoing duty of disclosure and cooperation with the regulators. Consequently, if and when a matter arises that may be of regulatory or supervisory interest outside the regulatory reporting time frame, this should be brought to the regulator’s attention as soon as reasonably practicable. The PRA and the FCA are proactive in their approach. Proportionality is at the heart of regulatory intervention.

The PRA generally takes a three-step approach to the supervision of banks:

  • judgment-based;
  • forward looking; and
  • key-risk focus.

The PRA established the Proactive Intervention Framework (PIF) to capture the position of a regulated firm’s proximity to failure. There are five PIF stages and levels of intensity. The PIF framework assists the PRA to focus on identifying and responding to emerging risks in banks at an early stage. The PRA gathers and analyses information from banks on a regular basis. It may request additional, firm specific information. The PRA conducts on-site visits and inspections that can be extensive. The stress testing regime allows the PRA to examine the potential impact of a hypothetical adverse stress scenario on the banking system and the largest banks within it.

In October 2018, the PRA published its Approach to Banking Supervision in which it sets out its approach to the supervision of banks.

The FCA carries out conduct regulation of banks based on the following three pillars:

  • proactive supervision for the biggest firms;
  • event-driven, reactive supervision of actual or emerging risks; and
  • thematic work that focuses on risks and issues affecting multiple banks or the banking sector as a whole.

The FCA adopts a pre-emptive approach to supervision based on forward-looking judgments about a bank’s business model, product strategy and how it runs its businesses, to enable the FCA to identify and intervene earlier to prevent problems crystallising.

Enforcement

How do the regulatory authorities enforce banking laws and regulations?

The PRA’s and FCA’s enforcement powers where a breach of rules or principles has been established include:

  • the imposition of a financial penalty on a firm or authorised person;
  • public censures (the making of a public statement);
  • suspension of or the imposition of conditions on an authorised person or firm from carrying out regulated activities;
  • disciplinary prohibition orders; and/or
  • withdrawal of a bank’s authorisation to carry out regulated activities.

The PRA and the FCA have powers to prosecute those suspected of carrying out financial crimes, for example, insider-dealing, market manipulation, carrying on a regulated activity without authorisation, money laundering and fraud. The PRA and the FCA are required to cooperate in taking enforcement action. The PRA may veto enforcement action by the FCA if this may threaten the stability of the UK’s financial system, or cause the failure of a PRA-authorised person in a way that would adversely affect financial stability. As the conduct regulator, the FCA is generally the regulator responsible for prosecuting financial services offences.

What are the most common enforcement issues and how have they been addressed by the regulators and the banks?

The most common issues in respect of which enforcement action has been taken include:

  • failing to be open and cooperative with the regulator;
  • failure to have appropriate anti-money laundering controls;
  • failure to provide fair treatment and protection to customers;
  • failures by individuals responsible for not complying with regulator’s rules and objectives; and
  • breaches of the Senior Manager and Certification Regime, for example, failure to exercise due skill, care and diligence in carrying out controlled functions.

Recent enforcement actions include the FCA’s imposition of a £32,817,800 fine on Santander Plc in December 2018 for failing to treat customers fairly by effectively processing the accounts and investments of deceased customers, and act on information provided. In October 2018, the FCA imposed a £16.4 million fine on Tesco Personal Finance Plc for failure to exercise due care, skill and diligence in protecting its personal accounts holders against a cyber-attack. In June 2018, The FCA fined Canara Bank and imposed a restriction in relation to a financial crime carried out in its retail sector. In May 2018, the FCA fined Barclays’ CEO, Mr James Edward Staley in relation to conflicts of interest involving his accountability as a CEO and whistleblowing. In January 2018, Interactive Brokers (UK) Limited was fined £1,049,412 by the FCA for having poor market abuse controls and failure to report suspicious client transactions.

The Criminal Finances Act 2017 came into force on 30 September 2017. Pursuant to the Criminal Finances Act 2017, it is an offence for an entity to fail to prevent the facilitation of (United Kingdom or foreign) tax evasion by its associated persons. This places additional due diligence requirements on the managing body of a bank.

Resolution

Government takeovers

In what circumstances may banks be taken over by the government or regulatory authorities? How frequent is this in practice? How are the interests of the various stakeholders treated?

By virtue of the Banking Act 2009, the Bank of England has responsibility for the resolution of a failing bank, and their group companies. The Special Resolution Regime (SRR) applies to banks, building societies, systemically important investment firms, recognised central counterparties (CCPs) and banking group companies. The SRR prescribes a number of stabilisation powers that are exercisable in relation to a bank. The aim of the SRR is to provide a mechanism for resolving failing banks that would only be used in situations where failure is imminent and other powers of the relevant UK authorities are inadequate. The measures available include the transfer of all or part of the bank in question to a ‘bridge bank’ owned by the Bank of England or the temporary public ownership of the bank in question or its holding company.

On 31 August 2018, the PRA published Supervisory Statement (SS)19/13 ‘Resolution Planning’ that sets out the resolution planning information banks are expected to provide to the PRA.

In October 2017, the European Banking Authority (EBA) consulted on changes to the Implementing Technical Standards (ITS) on information for resolution planning with the aim of further harmonising data collections and facilitating data exchange within resolution colleges. The ITS was submitted to the EU Commission for approval on 17 April 2018. Banks are expected to start reporting using the new templates by the end of May 2019.

Bank nationalisation in the United Kingdom is rare. Northern Rock was nationalised on 22 February 2008; Bradford & Bingley was nationalised on 28 September 2008, although the deposits and branch network were sold to the Santander Group. The interests of depositors were fully protected. In the event of a bank’s insolvency, deposits protected by the FSCS are ‘super-preferred’ in the creditor hierarchy. Employees may be protected under employment law where a business unit is transferred, or if redundancies are made. Certain employee claims rank as preferred debts if a bank is wound up.

Under the Banking Act 2009, if the Treasury decides to take a bank or a bank holding company into public ownership, it must pay compensation if shareholders suffer a loss compared to the position they would have been in had the failed bank been subject to insolvency proceedings (referred to as the ‘no-creditor-worse-off’ safeguard). No account is taken of any financial assistance provided by the Bank of England or the Treasury in valuing the shares of the bank.

On 13 December 2018, a draft of the Financial Markets and Insolvency (Amendment and Transitional Provisions) (EU Exit) Regulations 2019 was published.

Bank failures

What is the role of the bank’s management and directors in the case of a bank failure? Must banks have a resolution plan or similar document?

The PRA requires UK banks and banking groups to develop recovery and resolution plans (known as ‘living wills’).

A recovery plan comprises a series of measures that the bank or its group could take to turn the business around following adverse trading conditions, and sets out a range of options that the bank could take to return to adequate levels of liquidity and capital. Recovery options may include:

  • disposals;
  • raising new equity;
  • elimination of dividends;
  • liability management; or
  • sale of the firm.

Recovery plans are developed by banks but their adequacy is evaluated by the PRA. Banks are also required to produce a resolution pack that sets out information required by the appropriate resolution authorities to enable them to draw up a resolution plan to resolve the bank in the event of its failure.

The Banking Act 2009 and subsequent legislation prescribe the UK’s bank resolution regime. The resolution objectives in the Banking Act 2009 give effect to the Financial Stability Board’s ‘Key Attributes of Effective Resolution Regimes’, which G20 leaders agreed in 2011. The Banking Act 2009 equips the Bank of England with a variety of statutory powers (known as resolution tools) to enable the Bank of England to effect resolutions. The Treasury’s Code of Practice provides guidance on how and when the SRR is to be used.

When using the resolution powers, the Bank of England’s statutory objectives are to:

  • make sure critical banking functions remain available;
  • protect and enhance financial stability;
  • protect and enhance public confidence in the financial system’s stability;
  • protect public funds;
  • protect depositors and investors covered by the FSCS;
  • protect (where relevant) client assets; and
  • avoid interfering with property rights.

The PRA expects a bank’s recovery plan, as well as the processes for producing resolution proposals, to be subject to oversight and approval by the board or a senior governance committee and subject to review by the audit committee. Banks must nominate an executive director who has overall responsibility for the bank’s recovery and resolution plan as well as overseeing governance arrangements. As a bank comes under increasing stress, the PRA will assess its ‘proximity to failure’, which is captured by the bank’s position within the PRA’s PIF, which is designed, in part, to guide the Bank of England’s contingency planning as resolution authority. The PIF assessment is derived from a firm’s ability to manage the following risks:

  • external context;
  • business risk;
  • management and governance;
  • risk management and controls; and
  • capital and liquidity.

There are five stages of PIF (low risk, moderate risk, risk to viability absent action by the firm, imminent risk to viability of the firm, and the firm is in resolution or being wound up) describing different proximity to failure. Each bank will be allocated to a particular stage. If a bank moves to a higher risk category (eg, the PRA determines that the bank’s viability has deteriorated) the intensity of supervision will increase proportionality.

The PRA’s recovery and resolution framework is based on Directive 2014/59/EU (BRRD) establishing a framework for the recovery and resolution of credit institutions and investment firms, which entered into force on 2 July 2014. The United Kingdom implemented the BRRD through changes to primary and secondary legislation, new PRA and FCA rules and amendments to the Treasury’s SRR Code of Practice. On 20 December 2018, the Treasury published the Bank Recovery and Resolution and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (SI 2018/1394).

Are managers or directors personally liable in the case of a bank failure?

The failure of a bank does not necessarily result in the personal liability of the managers and directors of it, if they have acted in accordance with their obligations. Each case will depend on its particular facts, taking into account the relevant surrounding circumstances.

Depending on the circumstances, directors and managers may face disciplinary action, civil liability and/or be criminally prosecuted. The Senior Managers and Certification Regime places onerous duties on the managers and directors of a bank. A certification regime also applies to bank employees who could pose a risk of significant harm to the firm or any of its customers (eg, staff who give investment advice). The framework includes a code of conduct, which replaced the Statements of Principle and Code of Practice for Approved Persons, and apply to all individuals who are approved by the PRA or FCA as senior managers, or who fall within the PRA’s certification regime.

Section 36 of the FS(BR)A 2013, introduced a criminal offence relating to decisions taken or failure to take steps to prevent such decisions being taken by senior managers that cause a bank to fail. The offence relates to decisions on or after 7 March 2016. The offence is punishable on indictment with up to seven years’ imprisonment.

Planning exercises

Describe any resolution planning or similar exercises that banks are required to conduct.

See question 13.

The Bank of England is required to develop a resolution plan for each UK bank setting out the actions that would be taken if the bank in question failed. The bank’s structure and systemic relevance are material considerations in the resolution strategy. The Bank of England carries out resolvability assessments of banks. If necessary, the Bank of England can require banks to take action to remove any identified barriers to resolvability.

Capital requirements

Capital adequacy

Describe the legal and regulatory capital adequacy requirements for banks. Must banks make contingent capital arrangements?

The regulatory capital requirements for UK authorised banks on a solo and consolidated group level are based on the framework agreed by the Basel Committee for Banking Supervision. Basel III is implemented in the EU through the Capital Requirements Directive IV (CRD IV), an EU legislative package that contains prudential rules for banks, building societies and investment firms (consisting of the Capital Requirements Regulation (EU) No. 575/2013 (CRR) and the Capital Requirements Directive 2013/36/EU) (CRD), which entered into force on 1 January 2014. CRD IV is implemented in the United Kingdom largely through PRA and FCA rules.

A bank’s regulatory capital can consist of a mixture of common equity tier 1 capital, additional tier 1 capital and tier 2 capital. With the exception of common equity tier 1 capital, the proportions of each of these types of capital comprising the total regulatory capital of a bank are restricted. The CRR contains detailed requirements for eligibility of capital instruments. Instruments categorised as additional tier 1 capital are, generally, perpetual subordinated debt instruments or preference shares with no incentive to redeem that will automatically be written down or converted into common equity tier 1 upon the bank’s common equity tier 1 ratio falling below a specified level.

Banks can choose to use a standardised approach to credit risk or an advanced internal ratings-based approach. Generally, smaller banks use the standardised approach, which imposes capital charges on exposures falling into particular classes (eg, corporate, retail, mortgage, interbank and sovereign lending). The capital charge generally depends on the external credit rating of the borrower. The requirements include credit risk mitigation (collateral, guarantees and credit derivatives) and securitisation. Banks may seek regulatory approval to use their own internal models to calculate capital requirements for credit risk, including credit risk mitigation and securitisation. Where a bank intends to use an internal model in calculating its regulatory capital requirements, the PRA will expect the model to be ‘appropriately conservative’.

Banks are required to assess the adequacy of their capital (known as the Internal Capital Adequacy Assessment Process (ICAAP)), which is subject to review by the PRA (the Supervisory Review and Evaluation Process (SREP)). This process generally results in the PRA providing individual capital guidance to the banks and setting a capital planning buffer. The PRA requires banks to carry out stress testing and scenario analysis, including ‘reverse stress testing’ identifying circumstances in which a bank would no longer be viable, to assess the UK banking system’s capital adequacy.

The countercyclical capital buffer is a measure that enables the FPC to adjust the resilience of the banking system so that banks are required to have an additional layer of capital to absorb potential losses. From 28 November 2018, the UK rate is 1 per cent.

The quantitative capital requirements under the CRD and CRR are supplemented by the obligation, introduced by the BRRD, for banks to satisfy at all times a minimum requirement for own funds and eligible liabilities (MREL), as specified by the Bank of England on a case-by-case basis. The Bank of England has published its Statement of Policy, which sets out its approach to setting loss-absorbing capacity requirements for all financial firms. UK banks will be subject to interim MREL requirements from 1 January 2020, with final requirements coming into force in 2022.

The capital and prudential regime for banks continues to evolve, with reforms set out in the proposed regulation amending the CRR and the proposed directive amending CRD IV. A final package of rules comprising Basel IV was agreed in December 2017.

On 28 November 2018, the Bank of England published the results of the 2018 stress testing for UK banks. The results of the Bank of England’s 2018 stress test show the UK’s banking system is resilient to deep simultaneous recessions in the UK and global economies that are more severe overall than the global financial crisis, and that are combined with large falls in asset prices and a separate stress of misconduct costs. Despite facing loss rates consistent with the global financial crisis, the aggregate CET1 capital ratio of major UK banks after the stress would still be twice its level before the 2008 crisis. All participating banks remain above their risk-weighted CET1 capital and tier 1 leverage hurdle rates and would be able to continue to meet credit demand from the real economy.

How are the capital adequacy guidelines enforced?

The PRA is responsible for enforcing prudential requirements. Banks are required to submit periodic returns and must notify the PRA of any failure to hold adequate capital. The ICAAP and SREP are an ongoing process.

Undercapitalisation

What happens in the event that a bank becomes undercapitalised?

The bank must notify the PRA of the circumstances and agree with the PRA remedial steps. Openness and cooperation with the regulator are key factors in determining the success or otherwise of regulatory interactions. The terms of remedial steps will depend on all the circumstances and are likely to include raising new capital, a reduction of exposures (including divestment of assets or businesses), or a combination of both. If a bank is unable to agree with the PRA on how to remedy the situation, the PRA may revoke the bank’s authorisation. Additional powers to deal with failing banks are set out in the Banking Act 2009, the Investment Bank Special Administration Regulations 2011 (SI 2011/245) (for banks carrying on investment banking business) and FS(BR)A 2013.

Insolvency

What are the legal and regulatory processes in the event that a bank becomes insolvent?

The SRR (see question 12) consists of the following pre-insolvency stabilisation options for banks:

  • the transfer of all or part of a bank to a private sector purchaser (PSP);
  • the transfer of all or part of a bank to a bridge bank owned by the Bank of England;
  • the transfer of a bank or a bank’s holding company into temporary public ownership (TPO);
  • the asset separation tool, which allows assets and liabilities of the failed bank to be transferred to a separate asset management vehicle, with a view to maximising their value through an eventual sale or orderly wind-down; and
  • a bail-in to absorb the losses of the failed firm, and recapitalise that firm (or its successor) using the firm’s own resources.

A stabilisation power may only be exercised if the PRA is satisfied that:

  • the bank is failing, or is likely to fail, to satisfy the threshold conditions for authorisation under FSMA 2000; and
  • having regard to timing and other relevant circumstances, it is not reasonably likely that action will be taken to satisfy those conditions.

In exercising any of the stabilisation powers, or the insolvency procedures, the relevant authorities must have regard to a number of specified objectives. These are:

  • continuity of banking services and critical functions in the United Kingdom;
  • protection and enhancement of the stability of the UK financial systems;
  • stability of the UK banking system;
  • protecting depositors;
  • protecting public funds and client assets; and
  • avoiding unjustified interference with property rights.

The Bank of England may exercise the PSP or bridge bank powers if it is satisfied (after consultation with the Treasury and the PRA) that it is necessary having regard to the public interest in the stability of the UK’s financial systems, the maintenance of public confidence in the stability of the UK’s banking system or the protection of depositors. The Treasury may only exercise the TPO power if it is satisfied (after consultation with the Bank of England and the PRA) that either:

  • the exercise of the power is necessary to resolve or reduce a serious threat to the stability of the UK’s financial systems; or
  • that it is necessary to protect the public interest where the Treasury has previously provided financial assistance to a bank.

The stabilisation powers are supplemented by a broad range of powers to transfer shares or property (including foreign property) and overriding contractual rights that could interfere with the transfer.

A bank insolvency procedure provides for the orderly winding up of a failed bank. It facilitates the FSCS in satisfying depositor claims or the transfer of their accounts to another institution. The Bank of England, the PRA or the Secretary of State may apply to the court to make a bank insolvency order. An order may be made if:

  • the bank is unable, or is likely to be unable, to pay its debts;
  • winding up the affairs of the bank would be in the public interest; or
  • winding up the bank would be ‘fair’ (‘just and equitable’ in the Insolvency Act 1986 (IA 1986)).

In order to participate in the bank insolvency procedure, the bank must have depositors eligible to be compensated under the FSCS. Once a bank insolvency order is made, the liquidator has two objectives. First, to work with the FSCS to ensure, as soon as is reasonably practicable, that accounts are transferred to another bank, or that eligible depositors receive compensation under the FSCS. Second, to wind up the affairs of the bank. The general law of insolvency applies with some modifications to bank insolvency. The liquidator has similar powers to access the bank’s assets and, once the eligible deposits have been transferred, or compensation paid, creditors will receive a distribution in accordance with their rights. A resolution for voluntary winding up has no effect without prior approval of the court.

The SRR includes a bank administration regime, which puts the part of a failed bank that is not transferred to the bridge or private sector purchaser (known as the residual bank) into administration. The purpose of bank administration (which should not be confused with administration under the IA 1986) is principally to ensure that the non-sold or transferred part of the bank continues to provide services to enable the purchaser or bridge bank to operate effectively. Once the Bank of England notifies the bank administrator that the residual bank is no longer required, the bank will proceed to a normal administration where the objective is either to rescue the residual bank as a going concern or, if this is not possible, to achieve a better result for the bank’s creditors as a whole than in a winding up.

Insolvency procedures for banks carrying on an investment banking business are set out in SI 2011/245 (as amended by the Investment Bank (Amendment of Definition) and Special Administration (Amendment) Regulations 2017 (SI 2017/443)). On 4 December 2018, the Deposit Guarantee Scheme and Miscellaneous Provisions (Amendment) (EU Exit) Regulations 2018 (SI 2018/1285) were published by the Treasury.

Recent and future changes

Have capital adequacy guidelines changed, or are they expected to change in the near future?

There have been significant changes to the international prudential framework for capital requirements agreed by the Basel Committee on Banking Supervision. Basel III has been implemented in the EU by CRD IV, which came into force on 1 January 2014. The main prudential requirements are set out in the CRR, which is directly applicable in the United Kingdom without further national implementing measures. The main changes relate to:

  • improving the quality of capital through new definitions of core tier I capital, non-core tier 1 capital and tier 2 capital;
  • raising the minimum common equity tier 1 capital ratio to 4.5 per cent and imposing a further capital conservation buffer of 2.5 per cent resulting in an effective minimum common tier 1 ratio of 7 per cent;
  • increasing the tier 1 capital ratio (including the capital conservation buffer) from 4 to 8.5 per cent and the minimum total capital ratio (including the same buffer) to 10.5 per cent;
  • abolishing innovative tier 1 capital and tier 3 capital. tier 1 capital has been simplified with sub-categories removed;
  • adopting a harmonised approach to deductions from capital, with most deductions being made from common equity;
  • introducing new and more stringent requirements in respect of counterparty credit risk on derivatives, repos and securities financing transactions that will significantly increase the capital requirements for these transactions;
  • adopting a leverage ratio as a non-risk-based measure to curtail excessive growth in banks’ balance sheets;
  • enabling regulators to impose an additional capital buffer in the case of excessive credit expansion where local conditions justify this;
  • introducing two new liquidity standards: a liquidity coverage ratio designed to enable banks to withstand a short-term liquidity stress, as well as a net stable funding ratio requiring banks to have a minimum amount of stable funding based on the liquidity characteristics of their assets and activities over a one-year horizon; and
  • addressing the risks posed by financial institutions that are systemically important.

In December 2017, the Basel Committee published its final documents on the reform of Basel III, commonly referred to as Basel IV. These reforms include changes to the standardised approach for credit risk, internal models, and the final calibration and design of the output floor that will be set at 72.5 per cent. The new rules will take effect in 2022 and have a five-year implementation period.

At EU level, there has been much negotiation regarding the implementation of the Banking Package, which consists of the EU Commission’s proposed revisions to the:

  • CRR-CRR II;
  • CRD IV Directive;
  • BRRD-BRRD II; and
  • Single Resolution Mechanism Regulation (EU) No. 806/2014 (SRM Regulation) (SRM II Regulation) in relation to loss-absorbing and recapitalisation capacity for credit institutions and investment firms.

These discussions were finalised in December 2018 when the EU Parliament and Council reached an agreement on the Banking Package which aims to:

  • reduce risk in the EU banking system;
  • provide a clear roadmap for banks to deal with losses; and
  • protect taxpayers.

It includes the implementation of Basel standards relating to liquidity (leverage ratio and net stable funding ratio), market risk (known as fundamental review of the trading book) but only for reporting purposes for the moment, disclosure rules, large exposures and counterparty credit risk. Proportionality is at the heart of the Banking Package.

Ownership restrictions and implications

Controlling interest

Describe the legal and regulatory limitations regarding the types of entities and individuals that may own a controlling interest in a bank. What constitutes ‘control’ for this purpose?

Part 12 of FSMA 2000 (as amended) implements the requirements of the EU’s Acquisitions Directive (2007/44/EC) into English law. A person intending to acquire or increase ‘control’ over the shares or voting power of a UK-authorised bank or its parent undertaking above 10 per cent, 20 per cent, 30 per cent or 50 per cent must notify and obtain consent from the PRA prior to acquiring or increasing control. Failure to do so is a criminal offence. The PRA must consult the FCA before reaching a decision on whether to approve a proposed change of control.

Change of control forms are detailed and require disclosure of information about the ultimate beneficial owner of the proposed acquisition.

A person wishing to decrease control of the shares or voting power in a UK-authorised bank or its parent undertaking below 50 per cent, 30 per cent, 20 per cent or 10 per cent, must notify the regulator of the intention to do so. Failure to notify is an offence. There is no requirement for regulatory consent to the reduction of control.

The PRA has 60 business days from receipt of the application to approve the acquisition or increase of control (with or without conditions), or to object. This period may be interrupted once by up to 20 business days in cases where the PRA requires further information.

The Acquisitions Directive was supplemented with Level 3 Guidelines published by the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators (together, the Level 3 Committees). The Level 3 Guidelines updated on 1 October 2017 contain guidance on general concepts such as the meaning of the term ‘acting in concert’ and the process for determining acquisitions of indirect holdings.

Foreign ownership

Are there any restrictions on foreign ownership of banks?

Apart from sanctions imposed by the United Nations, the European Union and the United Kingdom on specified persons and countries, there are no restrictions on foreign ownership of UK banks.

Implications and responsibilities

What are the legal and regulatory implications for entities that control banks?

As a general starting point, there are no restrictions on the business activities of a controller of a UK bank. The regulators will look at all relevant circumstances when making a determination about the success or otherwise of a change in controller application. A bank may be controlled by a non-financial entity. Persons who exercise significant influence over the UK-authorised bank, (eg, the directors, officers and/or employees of a holding company of a UK bank, which may be outside the UK, whose decisions or actions are regularly taken into account by the UK bank’s governing body) must be approved by the PRA.

The PRA carries out the consolidated supervision of banking groups. Consolidated supervision applies at the level of the highest EEA group company whose subsidiaries and participants (a 20 per cent holding) are banks or engage in broadly financial activities. The PRA will not normally undertake worldwide supervision of a group headed by a parent outside the EEA. The practical effects of consolidated group supervision will depend on the individual group’s structure. In any event:

  • the group will need to hold adequate capital to cover the exposures and off-balance sheet liabilities of all members of the group (not just regulated entities), including the parent and its subsidiaries or participations; and
  • limits on large exposures will apply.

What are the legal and regulatory duties and responsibilities of an entity or individual that controls a bank?

Controllers of a UK-authorised bank must act in accordance with their regulatory approvals at all times and on an ongoing basis. This includes being open and cooperative with the regulators at all times, treating customers fairly and adhering to the PRA’s and the FCA’s rules and regulations (as reviewed and amended from time to time).

Where a banking group is subject to consolidated group supervision, the PRA will apply its prudential rules to the group as a whole. It will not, however, directly regulate non-authorised entities in the group that are outside the United Kingdom. Each regulated firm (including banks) will need to meet the regulatory requirements applicable to it on an ongoing basis. This includes, but is not limited to, capital adequacy and liquidity.

FSMA 2000 (as amended) enables the PRA to give ‘directions’ to the UK parent of a UK bank or investment firm (a qualifying parent undertaking). A direction may require the parent undertaking to take specific action or to refrain from taking specified action. Before giving such a direction, the PRA is obliged to consult the FCA. In April 2013 the PRA published a statement of policy with respect to the giving of directions which includes the following non-exhaustive list of possible directions that the PRA may give:

  • a requirement to meet specific prudential rules applied at the consolidated level;
  • a requirement to improve the system of governance or controls at group level or in relation to (UK or non-UK) subsidiary undertakings, or both;
  • a restriction on dividend payments or other payments regarding capital instruments to conserve capital;
  • a requirement to move funds or assets around the group to address risk more appropriately;
  • a requirement for the group to be restructured;
  • a requirement to block or impose restrictions on acquisitions or divestitures;
  • a requirement to ensure continuity of service is provided between group entities;
  • a requirement to include other entities within the scope of consolidated supervision (including shadow banking entities);
  • a requirement to raise new capital;
  • a requirement to take steps to remove from office directors of the parent that the PRA does not regard as fit and proper;
  • a requirement to remove barriers to resolution; and
  • a requirement to issue debt suitable for bail-in.

The PRA requires banks to have recovery and resolution plans. A recovery plan may include provision for group support in specified circumstances. Under the Banking Act 2009, the Treasury may bring the holding company of a bank into temporary public ownership if certain conditions are met.

Most regulatory decisions may be challenged by way of judicial review.

What are the implications for a controlling entity or individual in the event that a bank becomes insolvent?

See question 19 for a summary of the pre-insolvency stabilisation powers, bank insolvency procedure and bank administration procedure available to resolve banks under the SRR.

A controlling entity or individual is not liable for the debts of an insolvent bank, although the PRA may require the controlling entity or individual to recapitalise an undercapitalised subsidiary before insolvency. Liability will be determined in accordance with insolvency law (which is beyond the scope of this chapter). See relevant proceedings under the Investment Bank Special Administration Regulations (SI 2011/245) (as amended).

Changes in control

Required approvals

Describe the regulatory approvals needed to acquire control of a bank. How is ‘control’ defined for this purpose?

See question 20. Approval may also be required under UK or EU competition law where the proposed acquisition triggers competition considerations. Further, where a bank’s shares have been admitted to trading on a regulated market (eg, the main market of the London Stock Exchange), the relevant listing rules will need to be complied with.

Foreign acquirers

Are the regulatory authorities receptive to foreign acquirers? How is the regulatory process different for a foreign acquirer?

The place of incorporation or nationality of an acquirer is not relevant. There is no difference in the process for approval. See question 22.

Factors considered by authorities

What factors are considered by the relevant regulatory authorities in an acquisition of control of a bank?

See question 21. The PRA may only object to an acquisition on the basis of the following matters (or the submission of incomplete information):

  • the reputation of the acquirer;
  • the reputation and experience of any person who will direct the business of the UK bank;
  • the financial soundness of the acquirer, in particular in relation to the type of business that the bank pursues;
  • whether the bank will be able to comply with applicable prudential requirements;
  • whether the PRA and FCA can effectively supervise the group including the target; or
  • whether there are reasonable grounds to suspect money laundering or terrorist financing in connection with the proposed acquisition.

The Level 3 Guidelines, referred to in question 21, provide further detail on the interpretation of these assessment criteria. The PRA must take into consideration any representations made to it by the FCA in relation to the above matters. The FCA may direct the PRA not to approve the acquisition if it has reasonable grounds to suspect money laundering or terrorist financing in connection with it.

Filing requirements

Describe the required filings for an acquisition of control of a bank.

The first step is usually an informal approach to the PRA. This is followed by submission of the relevant change in control forms that can be found on the PRA’s website. The forms are lengthy and require detailed information about the proposed acquirer right up to the ultimate beneficial owner as well as supporting documents, for example, structure charts, curricula vitae for individual controllers, proof of funding and a business plan. The business plan must contain:

  • a strategic developmental plan;
  • estimated financial statements for the target firm or firms for three years; and
  • information about the anticipated impact of the acquisition on the target firm.

The PRA may request additional information or documents if it considers this necessary and may carry out interviews prior to reaching a decision on the application. Where a proposed acquirer is regulated elsewhere in the EU or European Economic Area (EEA), the PRA must consult the relevant home-state regulator. The reverse applies where a UK bank is controlled by a parent company located in another EU or EEA state.

Timeframe for approval

What is the typical time frame for regulatory approval for both a domestic and a foreign acquirer?

The PRA has 60 business days from the date of receiving a complete application for approval. In practice, the process may be considerably shorter where the controllers are already known to the PRA. The PRA may ‘stop the clock’ up to the 50th business day of the assessment period, for up to 20 business days (or 30 business days in certain circumstances) in order to request further information from the applicant. If approval is granted, the prospective controller must complete the acquisition within one year, or such shorter period as the PRA specifies. The PRA will consider requests for extension of the approval if required.

Update and trends

Update and trends

Recent developments

Virtual or digital currencies, artificial intelligence, algorithmic solutions, mobile banking and green or ethical finance are hot topics that are likely to attract increasing regulatory attention. The practical regulatory issues arising from the UK’s ring-fencing regime (effective since 1 January 2019) may require further fine tuning.

The BCBS’s review programme continues to keep capital issues at the top of the regulatory agenda. Banks will need to assess and respond to the effect of the Basel IV reforms on their individual capital structures and prepare for amended capital calculations across all risk types. Reliance on internal models will need to be reviewed.

As for Brexit-related developments, a number of UK banks have already completed restructuring plans for EU business away from London. In the absence of a clear agreement on ‘equivalence’, Brexit continues to have a destabilising effect on the UK’s financial services industry with questions remaining over access to clearing houses, payment services, or the provision of custody services to certain clients post March 2019 when, in the absence of a second referendum, the United Kingdom is expected to leave the European Union. Given the lack of clarity about the terms of the United Kingdom’s withdrawal from the European Union, the extent of further potential bank restructurings is impossible to predict with any certainty. Irrespective of Brexit, the United Kingdom remains one of the world’s leading centres for financial innovation. It is more than capable, ready and willing to meet the challenges posed by Brexit and embrace the opportunities presented. A fact of life that must be recognised is the imperative behind ordinary day-to-day banking business that drives the markets more than the political activity in Brussels or Westminster.