UK regulators targeting foreign bank branches with new reporting requirements and increased accountability

Out-Law Analysis | 12 Jun 2015 | 12:24 pm | 3 min. read

FOCUS: UK branches of foreign financial firms will be required to submit certain information to the Prudential Regulation Authority (PRA) from next month, signalling the start of a shift in the way UK regulators supervise these firms.

Authorised banks, building societies and investment firms that are not UK-headquartered must submit their first 'branch returns' to the regulator from 1 July. They will then be required to update this information twice yearly. The new requirement comes into force ahead of the UK financial regulators' intention to extend new rules governing senior management in banks to UK branches of foreign banks when they are introduced in March 2016.

The Branch return requirement will undoubtedly allow the PRA to keep a firm hand on the operation of branches. The PRA has said that that a resolution plan in place 'reduces the impact on financial stability in the UK' in the event of that bank's failure'. It is also fuelled by a desire to bring UK branches and subsidiaries onto a level playing field with UK-relevant firms that share similar regulated activities, and to increase accountability for all those sharing similar responsibilities regardless of their employer's legal status.

However, the challenges faced by UK branches or subsidiaries will naturally be different to those faced by UK firms. In particular, the supervisory and regulatory regimes in the bank's home country may not share the same emphasis and focus as the UK regulators, or be able to investthe same resources that similar UK firms apportion to ensure regulatory compliance. Branches and subsidiaries affected by the new rules should seek advice now.

The branch return

The PRA published its final policy statement and rules on the format and content of the branch return last month. The initiative was first proposed in February 2014 and the PRA has been trialling it as a means of gathering information about the UK operations of foreign PRA-supervised firms ever since, with a high rate of response.

The new requirements will apply to UK units or branches of foreign banks and firms that are headquartered abroad. These branches still form part of the parent bank and are not separate legal entities like subsidiaries, which are subject to the same supervisory model as any PRA-regulated UK bank. As branches are not a separate legal entity, they remain subject to the capital requirements and supervisory regime of the parent bank's home country, which may not be equivalent to the UK rules.

The new requirement will enable the PRA to more closely supervise the operation of foreign branches and to ensure that preparations are in place to minimise the impact on the UK of that bank's failure. This approach would, for example, have cushioned the UK economy from the type of destruction caused in 2012/13 by the collapse of the Laiki Cypriot Bank and its UK branch, Laiki Bank UK, which was a branch of the Cypriot bank rather than a subsidiary.

Despite not being obliged to, the PRA worked with banks in both the UK and Cyprus and with the Cypriot regulator, the Cyprus Securities and Exchange Commission (CySEC), to ensure that UK depositors were protected when the bank collapsed. The Laiki UK savers were transferred to the UK subsidiary of the Bank of Cyprus, which falls under the protection of the PRA. This resulted in deposits being covered by the UK's Financial Services Compensation Scheme (FSCS), which guarantees up to £85,000 per depositor, and avoided a repeat of the 2008 crisis when Icelandic banks collapsed and thousands of UK savers with Icesave, the UK arm of Landsbanki, were left unprotected.

The senior managers and certification regimes

The PRA's intention to more closely regulate foreign branches is also echoed in its intention to extend the new rules governing senior management in banks to UK branches of foreign banks when they are introduced in March 2016.

In Spring 2015, the regulators began consulting on proposals to apply the new individual accountability regime for banks, building societies, credit unions and PRA-designated investment firms - collectively, 'relevant authorised persons' - to individuals working in UK branches of foreign banks or 'incoming branches'. In short, this would require compliance with the Senior Managers Regime, Certification Regime and Conduct Rules, and aims to encourage individuals to take greater responsibility for their actions and make it easier for both firms and the regulators to hold individuals to account.

The consultation process concluded on 25 May and the regulators intend to publish a policy statement containing final rules for incoming branches this summer. Branches and subsidiaries in need of further legal and compliance support should seek assistance and legal advice in advance of the regulators' increased focus in this area.

Elena Elia is a barrister and financial regulation and enforcement expert at Pinsent Masons, the law firm behind Out-Law.com.