Sustainable finance regulation: Foreign Banks operating in the UK

Hello, I am Hannah McAslan and I am a senior associate in the financial services team at Norton Rose (Fulbright). Recently, we have been helping a number of international banking clients who have either branches or subsidiaries in London, to work through the PRA’s expectations from a sustainable finance perspective.  

We will be sharing some of that learning over the coming weeks but what we wanted to do in this short video was to give you an idea of some of the key takeaways. The PRA’s expectations are set out in its policy statement, enhancing banks’ and insurers’ approach to managing the financial risk from climate change and the accompanying supervisory statement.

The supervisory statement applies to UK-incorporated firms and whilst, from a purely technical perspective, the supervisory statement and the expectations contained within it, do not strictly apply to UK branches of third country firms, the PRA is increasingly expecting all firms to consider sustainable finance considerations when they are performing banking activities in the UK.

We are aware of a number of UK branches of third country firms that have recently received letters from the PRA in which the regulator seeks to understand what action the firm has taken to advance the sustainability agenda within its business. This reflects the regulators expectations that most firms’ business will be impacted by climate change to some extent and therefore the firm should be taking appropriate measures at this point to consider changes required.

There are a number of practical challenges we are aware of that third country banking groups are facing when considering how to apply the PRA’s expectations in their business, the range of requirements and expectations. There’s a range of regulatory expectations globally and working out a way to structure your business to incorporate all the considerations is very complicated.

Data: there are a range of data sources with very little commonality so it is very difficult to make comparisons and firms are struggling to find the data required to make the changes and managing head and local office interactions.

Another challenge for international banking groups is how to manage the dynamic between local branches and head office in ensuring that local branches have the ability and the power to escalate concerns appropriately to head office, including whether a local regulatory considerations like climate change that need to be considered.

The starting point is that the obligations apply to G-SIBs (globally systemically important banks) as well as to smaller financial institutions as the PRA’s approach is that financial risk from climate change can affect all firms regardless of their size. For instance, smaller firms with particular sector or geographical focus could be disproportionately affected by climate change, therefore the PRA is keen to avoid being overly descriptive in terms of how it applies its requirements.

There is also an important overlay with the UK’s SMCR regime and the PRA expects firms to allocate a senior manager with responsibility for managing the financial risk from climate change. Their sustainability agenda also has a very important and interesting overlay with the share hold engagement agenda, in particular SRD2, which is due to be fully in force by the 3^rd of September and we will explore some of these issues in a number of coming briefings but in the meantime, do feel free to get in touch if you have any questions on some of the issues that we have raised.

Many thanks.