On 20 December 2017, announcements from the PRA, the FCA, the Bank of England and the Treasury revealed a framework for approaching cross-border business in a post-Brexit world, with a particular focus on facilitating the business of EEA banks post-Brexit. Other firms affected by the day’s developments include insurers, designated investment firms and central clearing counterparties (CCPs).
The PRA’s position
An open letter from Sam Woods (link), the Deputy Governor of the PRA, sets out the regulator’s approach to EEA firms, who provide PRA-regulated activities, currently passporting into the UK through a branch. Generally, firms will need to apply to the PRA for branch authorisation, with the PRA encouraging engagement as soon as possible. The PRA will apply its current approach to third-country firm authorisation – requiring applicants to meet certain standard conditions (relating to e.g. capital, liquidity and business conduct) and will consider these in light of the firm’s home state regulatory environment, and the level of co-operation between its home regulator with the PRA. Firms which are more entrenched in the UK economy will be expected to measure up to higher standards in this respect.
PRA consultation paper CP 29/17 reveals a new approach to the UK branches of banks which are either systemically important to the UK economy or those serving retail customers. For systemically important banks, the PRA sets out new powers to apply tailored regulatory requirements where concerns remain about a bank’s supervisability. For banks providing significant retail services, the PRA will likely require an application for authorisation as a subsidiary rather than a branch.
The PRA also released consultation paper CP 30/17, modifying its position relating to whether international insurers providing services in the UK should seek authorisation as branches or subsidiaries. For insurers highly integrated into the UK financial system, the PRA has indicated it will expect the firm to incorporate. The PRA has expanded the criteria it will consider for such applications. If an insurer’s default would be likely to cost the ‘lifeboat’ fund, the Financial Services Compensation Scheme (FSCS), more than £200 million, the PRA will usually expect a subsidiary application. Such an application will also be expected if a branch could cause financial instability in the UK – and the PRA will consider numerous factors here, such as the insurer’s market share in a niche market or the level of connectivity to other stakeholders within the industry.
In a letter from Sir Jon Cunliffe (link), the Bank of England announced it has been granted new powers to recognise non-UK CCPs. Non-UK firms providing clearing services in the UK will need to apply for recognition. Although there is currently no UK domestic framework for CCPs, a translation of EU law in the European Markets Infrastructure Regulation into UK law is anticipated, with the hope of a smooth transition as a result.
The Government’s safety net
Providing further clarity and assurances, the FCA and the Treasury communicated an announcement from the Government, aiming to preserve continuity in the financial services sector in the event no transitional arrangements with the European Union are made. It stated the Government will bring forward legislation to:
- enable EEA firms and funds operating in the UK to obtain a temporary permission to continue their activities in the UK for a limited period after withdrawal; and
- ensure contractual obligations e.g. insurance contracts can continue to be met.
This provides a welcome indication that firms and funds will be able to undertake new business within the scope of their permission and perform their contractual obligations. It is hoped that such businesses will be able to manage their existing business with more certainty and mitigate the risks involved with a sudden loss of permission.
Although these announcements indicate the Government’s and regulators’ intentions to smooth the potential disruption in the financial services sector which Brexit represents, we would recommend affected firms take action straight away. The PRA has stressed that immediate communication is essential, with authorisation applications being considered early in the New Year. Crucially, at this stage, there is nothing in the announcements that would indicate that the transition from an EEA passported branch in the UK to a UK authorised branch will be any easier than setting up a new UK authorised branch for the first time.