United Kingdom


How can international banks operate in your jurisdiction?

International headquartered banks can either operate in the UK as subsidiaries or branches. A subsidiary is a separate legal entity from its parent, and as such requires its own governance and risk management, as well as meeting capital and liquidity requirements in the UK. A branch forms part of the same legal entity as its head office, and therefore will not have its own capital base or board as this is covered in the head office, though local governance is required. Despite their structure branches of international banks form an important part of the UK banking sector.

The above structure is mirrored in relation to supervision. For subsidiaries the Prudential Regulation Authority (PRA) has the same legal powers and follows broadly the same supervisory framework as for UK headquartered firms. However, the responsibilities for prudential supervision of branches are split between the regulator where the bank is headquartered and the PRA. In terms of establishing a branch in the UK, non-EEA bank branches need to be authorised by the PRA whereas EEA banks have EU Treaty rights to passport into other Member States (or provide their business remotely through cross border services). For EEA banks seeking to passport into the UK, the notification procedure involves their Home State regulator liaising with the PRA.

The Financial Conduct Authority (FCA) is the conduct regulator for all banks operating in the UK. As mentioned above EEA banks have the right to passport into the UK and should they establish a physical presence through a branch, the branch will be subject to the FCA’s conduct of business rules. For non-EEA subsidiaries and branches, both new and existing, the FCA’s Threshold Conditions and conduct of business rules apply, including in areas such as anti-money laundering. For new applicants, authorisation can be granted only where both the FCA and the PRA are satisfied that their respective requirements have been met. The FCA will independently assess applicants from a conduct perspective against its own requirements and objectives.

The remainder of this note focuses on the PRA’s requirements for UK branches of EEA and non-EEA banks.

What considerations does your regulator take into account when an international bank wishes to open a branch in your jurisdiction?

For a UK branch of a non-EEA bank, the PRA’s Threshold Conditions, which are the minimum conditions for authorisation, apply to the non-EEA bank as a whole and not just the UK branch. Within this, there is a general provision that allows the PRA to take account of the supervisory work carried out by the non-EEA bank’s Home State regulator.

Where the PRA assesses the Home State regulator to be sufficiently equivalent in relation to supervision and resolution, and it has an appropriate degree of assurance that the actions of the Home State regulator will be aligned to delivering the PRA’s objectives, the PRA will support the Home State regulator’s supervision of the UK branch.

At this point it is also worth noting that the PRA will be content for UK branches of non-EEA banks to undertake retail banking activities beyond de minimis levels only if there is a very high level of assurance from the Home State supervisor over resolution (see question 3 below). The PRA also expects new UK branches of non-EEA banks 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.

Where the PRA determines that the Home State regulator of a non-EEA bank is not equivalent, either in general or in relation to the specific activities undertaken by the bank, the bank will need to operate in the UK as a subsidiary.

In relation to UK branches of EEA banks, the bank’s Home State regulator is responsible for prudential supervision of the whole bank (including the branch). However, in accordance with article 51 of the CRD IV, if as branch regulator, the PRA considers a UK branch to be important to domestic financial stability it may designate it as ‘significant’ under EU law. Where this occurs, the bank’s Home State regulator must provide more information about the bank to the PRA and consult with it on certain issues, such as planning for emergency situations.

Whilst not having direct prudential powers, the PRA will still identify and maintain an up-to-date assessment of those branches that have critical economic functions in the UK (see question 4 below).

Is resolution an important factor in your supervisor’s determination of a branch?

Resolution is a key deciding factor for the PRA and is ultimately where it will place most emphasis when forming a view on its risk appetite towards branches operating in the UK.

The PRA has introduced a rule that requires non-EEA banks to take all steps within their control to have adequate provision made in resolution plans for UK branches. The purpose of the rule is to support the policy by which the PRA will assess the adequacy of the bank’s Home State regulator’s resolution planning in terms of its potential impact on UK financial stability. The rule should be read alongside PRA Fundamental Rule which applies to all firms and requires them to prepare for resolution so that, if the need arises, the firm can be resolved in an orderly manner with the minimum disruption of critical services.

For UK branches of non-EEA banks the PRA will also focus on understanding if the branch undertakes critical economic functions, and will work with the bank’s Home State regulator to gain adequate assurance over how, if things go wrong, these functions would be resolved in line with the PRA’s objectives. Where the PRA identifies concerns it will first raise these with the bank’s Home State regulator. 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. In this circumstance the bank may choose to apply to operate a subsidiary in the UK which would require separate authorisation from the PRA and FCA.

For UK branches of EEA banks, the PRA’s approach is consistent with the CRD IV. The PRA will seek to understand if the branch undertakes any critical economic functions in the UK. If it does, the PRA will seek to work with the bank’s Home State regulator to ensure that its resolution strategy takes into account the branch’s potential impact on UK financial stability and to agree with it how the PRA can support prudential supervision.

Where the PRA has material concerns about the bank’s viability or the branch’s activities which the Home State regulator is not addressing, the usual recourse is for the PRA to refer the issue to the European Banking Authority. In emergency situations, and in accordance with articles 43 and 44 of the CRD IV, where the Home State regulator has not taken appropriate action, the PRA will take precautionary measures that will protect against financial instability that would seriously threaten the collective interests of depositors, investors and clients in the UK.

What are the regulatory reporting requirements placed on branches?

The PRA has introduced a rule requiring all branches, whether of an EEA bank or non-EEA bank, to complete a data collection return (known as the Branch Return).

The purpose of the twice yearly Branch Return is to enhance the PRA’s understanding of the potential impact that branches could have on UK financial stability. The Branch Return gathers quantitative information on economic functions being performed by all bank branches in the UK. The Branch Return is designed to reduce the number of ad hoc requests for data from the PRA.

The Branch Return is also used to provide the PRA with data which will inform its judgment on whether a UK branch of an EEA bank is ‘significant’ and important to UK financial stability.

Do you allow dual licenses whereby a banking group may hold a banking license through the branch and have a subsidiary also holding a banking license?

Yes, it is common for banks to operate both a subsidiary and a branch in the UK with different business activities in each entity. Non-EEA banks should, however, be mindful that where a branch falls outside the PRA’s branch risk-appetite the PRA will not be content with the non-EEA bank operating as a branch in the UK. Further information on the PRA’s non-EEA branch risk-appetite can be found in PRA Supervisory Statement 10/14: Supervising international banks: the PRA’s approach to branch supervision.

Where can I find further information?