Simon Lovegrove: Hello everyone, and welcome to our latest Brexit and Financial Services video. In this video, I'm joined by Peter Snowden, who is a Consultant in our London Financial Services team. And we'll take a brief look at the PRA's recent consultation paper on branch authorisations, CP29/17, and also its Dear CEO letter. The PRA mentions that the authorisation process shouldn't be underestimated by firms.
Peter Snowdon: That's right. I mean, there are a lot of branches, a lot of EEA branches, in the UK, more than 70, as we've already mentioned, and that will take a lot of time for them to review applications, and so on. These are full applications, they're not cutting any corners, so that's quite a significant burden for them.
Simon Lovegrove: And the key message is that, if firms are already in their discussions with the PRA, to continue doing so. And if you haven't already started your discussions, do so without delay.
Peter Snowdon: Yes, that's really important. And I think firms should be aware that quite often the regulator doesn't know an awful lot about individual bank branch businesses, particularly for passporting branches, because so much of the regulation has been done by the home state regulator. Also, there's quite a turnover in the PRA. So, it may well be that you're dealing with supervisors who don't really know your business that well. So, bank branches need to think about that.
Simon Lovegrove: And the Dear CEO letter also mentions about firms being encouraged to take into account the proposals in CP29/17.
Peter Snowdon: Yes, that's right. And it's useful to read all that, in some ways, and as you know, we've had discussions here, in some ways there's nothing new in it, in that it pretty much picks up the existing third country branch regime. But I would still recommend firms, EEA branches, to look at that paper, because there's some important stuff in there, which will impact on their applications.
Simon Lovegrove: And there were some comments as regards UK branches, the EEA banks. What are your thoughts?
Peter Snowdon: Well, I think the Dear CEO letter seems to be quite clear that branches can make certain assumptions that, unless you're doing significant retail business, you are going to be able to put in a branch application. I have to say, there have been some comments from the bank officials, and PRA officials, in the last couple of weeks, which suggest that it may not be quite as plain sailing as the Dear CEO letter, and indeed, the consultation paper suggests. But I think that's one to watch.
Simon Lovegrove: And I think it's very much linked to the Brexit negotiations as well.
Peter Snowdon: It is. I mean, I think the bank and the PRA have tried hard to sort of avoid getting involved in the political discussions, but were there to be a lack of cooperation from non-UK regulators, it would appear that the PRA, and the Bank of England, may well revisit its, at the moment quite inclusive, approach, I suppose, one could say, towards branch applications, rather than subsidiarisation.
Simon Lovegrove: Peter, let's now look at CP29/17. And let's go back to basics. Just tell us a little bit more about the general approach of the PRA.
Peter Snowdon: Yes, actually, it is back to basics. So, it's all the things that we are familiar with in authorisation applications: the threshold conditions, a degree of equivalence, in terms of regulation in the EEA home state, the degree of supervisory cooperation between the home Member State and the PRA. And that's something we've already touched on already. And if there is a lack of cooperation, that may well put a spanner in the works. And finally, it's the degree, and the substance, of resolution regimes in the home Member State.
Simon Lovegrove: And importantly, they also said in the paper, that the authorisation framework applies to the whole of the international bank, not just to the branch itself.
Peter Snowdon: It does. And if you've worked on third country branch applications, I mean, we've done these in the firm, you'll know that's the approach they generally take. So, if you are applying from an existing third country, I mean, whether it be Australia, the United States, or wherever, the whole bank makes the application. And that's important for firms to realise, because it does also mean the likelihood that the PRA will be looking at elements of the bank’s business which they wouldn't have looked at in the past because of the way that the directives work.
Simon Lovegrove: And the more important the branch to the UK's financial stability, the greater importance on supervisory cooperation.
Peter Snowdon: Absolutely. And the PRA, as we have said already, are emphasising this point, at the moment.
Simon Lovegrove: Peter, let's now turn to wholesale business. I think it's fair to say that the PRA has taken a fairly pragmatic approach. There is discussion in the consultation paper about systemically important branches, and there's a test in there. But even if that test is satisfied, the PRA talks about exercising powers on a case by case basis, and when they cannot do that, that's when thinking about subsidiarisation occurs. So, what are your thoughts on that?
Peter Snowdon: Well, I think we've touched on some of this already, in that they will be looking to the quality of regulation in the home Member State, and the ability for them to get proper cooperation from the home Member State, and I think those are important. But I think the general backdrop to this is that the PRA has always been, and the Bank of England has always been very positive about branches in the context of wholesale business. As we know, there are some challenges to this view globally. So, the US has taken a more restrictive view, and has looked at holding companies for foreign banks, effectively meaning that foreign banks operating in the US might have to subsidiaries and sit under local holding companies. And unfortunately, the EU has picked up this idea as well. So, this kind of more business-friendly, expansive approach, which the PRA has taken traditionally is being challenged elsewhere, and I think that is something to watch.
Simon Lovegrove: And now turning to UK branches conducting retail activities. The PRA proposes that where significant retail activities are taking place in the UK, it would expect a subsidiary, rather than a branch.
Peter Snowdon: I think anybody who is undertaking retail business from a branch needs to look quite carefully at what they're doing. The PRA has set out certain sort of limits, and guidelines, as to where it thinks the branch would trigger that sort of problem. And I think firms need to look at those quite carefully. There is a degree of interpretation around some of them, and I think if a branch thinks it's coming up against some of those criteria, it should just step back, and think, "How can we talk to the PRA about this", because there may be some flexibility, but certainly for larger retail businesses operating out of a current EEA branch, I'm afraid it looks as if they're going to have to subsidiaries.
Simon Lovegrove: Peter, we've spoken a lot about UK branches of EEA banks, but what's the message in the consultation paper for UK branches of non-EEA banks?
Peter Snowdon: Well, there isn't, in a strict sense. I mean, it's business as usual, I think, for them. And they obviously don't have the passport at the moment, so they're not going to lose anything. I think work that we've seen done, for example, by the Association of Foreign Banks suggests that some of them are concerned that Brexit may impact negatively on the activities to the City in the wider sense. But I think, apart from those commercial interests, the key messages here is that regulatory regime is not going to change for them.
Simon Lovegrove: Peter, at the start of this conversation, we discussed the PRA's Dear CEO letter, particularly where it said that the authorisation challenge shouldn't be underestimated. You've done a lot of authorisations, as have other members of the Financial Services team in London. What do you think are the key challenges?
Peter Snowdon: First thing I would mention is, do look at the notes produced by the PRA. There's some very helpful guidance in there for branch applications, and there are some important concessions made to branch applications, and it's useful to be aware of those. The second thing I want to mention is think about governance. The governance of a third country branch is different from the governance of an EEA branch, and that has a number of ramifications, not least the scope of the senior managers regime for third country branches is wider than it is for EEA branches. So, firms, branch applicants, are going to have to think about that quite carefully, and by the way, there's a greater possibility of capturing people in the home Member States. So, people in head office, outside the UK, may well need to be senior managers, in some circumstances, in a third country branch application.
Simon Lovegrove: Thanks, Peter. That concludes this Financial Services video. Goodbye.
Peter Snowdon and Simon Lovegrove take a look at the PRA's recent consultation paper on branch authorisations, CP29/17, and also its Dear CEO letter.