On 5 September 2014, the Bank of England published its final Policy Statement (PS 8/14) and Supervisory Statement (SS10/14) on the approach of the Prudential Regulation Authority (PRA) to the supervision of branches. The Policy Statement builds on the draft rules set out in the Consultation Paper (CP 4/14), published in February this year (see Supervising international banks - resolution solutions for more detail), and seeks to address concerns raised in response to that CP.

These statements give clarity to banks and systemically important investment firms looking to set up branches in the UK and will help ensure existing branches, particularly those conducting retail business in the UK, can fall into line with the PRA's expectations. Branches, including those already operating in the UK, need to conform to certain standards or face additional requirements that could include reforming as a subsidiary subject to UK capital requirements.

The PRA appears optimistic that it can achieve its statutory objectives of safety and soundness through the measures proposed in CP 4/14 and little has changed since the initial proposals. By providing a supervisory statement and a rule requiring firms to plan for resolution events, the PRA hopes to promote a culture of stability and sustainable growth in the UK, in which branches understand the PRA's expectations.

The PS 8/14 contains a finalised rule, to be found in the Incoming Firms and Third Country Firms section of the PRA's Rulebook. This is relevant to PRA supervision of UK branches: existing and prospective PRA-supervised deposit-takers and designated investment firms operating in the UK that are not UK head-quartered firms.

This rule requires a firm to prepare a resolution plan and take all steps within its control to ensure that its plan provides adequately for the resolution of the UK branch.

While the PS does not set out a standardised supervisory process, the PRA's approach to a non-EEA branch has three strands:

  • What does the branch do? Is it engaged in critical economic functions ("CEFs")?
  • Who is its home state supervisor? Does the PRA recognise its equivalence?
  • What happens if things go wrong? Has the firm undertaken detailed resolution planning?

Is there more detail on what this means?

Critical economic functions

The PRA will consider the branch's business model in detail. When it carries on business that falls into the category of a CEF, the PRA will want to understand why it is carried out in the branch and whether it is of global or UK level criticality. The scope of a firm's activities will determine whether a firm is carrying out a CEF, particularly where these involve: retail banking, payments, clearing, settlement, custody, intra-financial system borrowing and lending, corporate banking, or investment banking. A CEF is defined by the PRA as a function whose disruption or withdrawal could have an adverse material impact on financial stability in the United Kingdom.

In the SS10/14, the PRA clarifies the meaning of "de minimis retail deposits". The PRA will decide whether a branch has undertaken retail banking activities beyond a de minimis level by considering:  the overall level of deposits covered by the Financial Services Compensation Scheme; values and types of account; number of customers; suitability of services; and planned growth.

Equivalence

The PRA will consider the firm's home state supervisor (HSS) and its level of equivalence to the PRA in the way it supervises and regulates its firms. The PRA clarified its home state equivalence criteria, basing its analysis on the IMF's Financial Sector Assessment Programme reviews and Financial Stability Board's peer reviews. It is the HSS and not the firm that is being evaluated. Further, the frequency of determination of HSS equivalence will be based on the combined impact branches from one country have on the PRA's objectives.

International firms looking to open branches in the UK should, therefore, consider their home state supervisory regime and discuss their existing or planned UK operations with their supervisor, with a view to gauging their likely level of co-operation with the PRA's assessment process.

Resolution planning

Non-EEA firms will need to take steps to ensure strong resolution plans for their UK branches, as well as their firm as a whole. Any firm failing to plan adequately for a resolution situation would probably fail to meet requirements around adequacy of non-financial resources and prudent business conduct.

Firms must still plan to have one senior individual being responsible for annually attesting compliance of the branch with systems and controls requirements. The PRA has agreed to review whether there is a continued need for this once it becomes clear how the proposed new Senior Managers Regime applies to non-EEA branches (see PRA CP 14/4 Chapter 3). This should be finalised in early 2015. Retaining the attestation provision accords with general developments in this area.

How to respond to FCA requests for attestations

Branches carrying on or intending to carry on retail activities may, therefore, be forced to operate as subsidiaries unless they are able to give the PRA high levels of assurance on resolution. This is particularly important if branches have retail deposits eligible for the Financial Services Compensation Scheme. Matters such as the treatment of UK depositors compared with home state depositors, as well as home depositor preference schemes will also be very relevant and the PRA will be alert to how the state dealt with the 2007/2008 financial crisis.

These measures support the PRA's policy of assessing the adequacy of the firm's home state authority's resolution planning in the context of possible effects on UK financial stability and it also fits with the PRA's move towards Fundamental Rules. One of the Fundamental Rules requires all firms to prepare for resolution in a way that ensures minimum impact on critical systems in the UK.

Implementation

The policy is to be implemented immediately for all new non-EEA branches, while existing branches will be implemented over time with priority given to those with greatest capacity to impact financial stability in the UK. For EEA branches, the PRA has said it will amend its approach as the final elements of CRD IV are implemented.

The Branch Return

To quell any uncertainty, the PRA is in the process of creating accompanying notes and will conduct a second pilot of the Branch Return, which is not intended to duplicate existing PRA requirements.