Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Regulators Confirm Approach to Authorization and Supervision of International Banks, Investment Firms, Insurers and CCPs Post-Brexit
Financial Regulatory Developments Focus
  • UK Regulators Confirm Approach to Authorization and Supervision of International Banks, Investment Firms, Insurers and CCPs Post-Brexit
    The Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority have published consultations and planning considerations affecting international banks, investment firms, insurers and CCPs conducting cross-border activities into and from the UK. The UK Government has also made an announcement that, if necessary, it will legislate 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. Alongside the temporary permissions regime, it will also legislate, if necessary, to ensure that contractual obligations, such as insurance contracts, which are not covered by the temporary regime, can continue to be met. It will also bring forward secondary legislation to empower UK authorities to carry out functions currently carried out by EU authorities relating to CCPs, central securities depositaries, credit rating agencies and trade repositories.

    The Bank of England has published a "Dear CEO" letter which it has sent to the Chief Executive Officers of non-UK CCPs, setting out how it envisages recognizing them for the provision of services in the UK once the UK has withdrawn from the EU. CCPs are currently recognized by the European Securities and Markets Authority to operate in the EU under the European Market Infrastructure Regulation. Under proposals from the UK Government, the Bank of England will be given new powers under UK law to recognize non-UK CCPs. The BoE anticipates that the recognition regime for non-UK CCPs will, immediately after the UK's withdrawal, largely mirror the current regime in EMIR to provide certainty to non-UK CCPs and their users for the period immediately following EU withdrawal. The BoE intends to review the UK recognition framework in due course. The BoE invites the CEOs of non-UK CCPs to consider whether, based on its activities, the CCP will require UK recognition post-EU withdrawal and invites non-UK CCPs that will be seeking UK-recognized status to engage in pre-application discussions in early 2018.

    The Prudential Regulation Authority has also published a "Dear CEO" letter which it has sent to the CEOs and branch managers of banks, insurers and designated investment firms that undertake cross-border activities between the UK and the rest of the EU. The PRA confirms in the letter that firms may submit authorization applications from January 2018. It also encourages those inbound firms that have not done so already to approach the PRA for pre-application discussions where necessary. The PRA has also published two consultation papers setting out proposals on its approach to the authorization and supervision of international banks and international insurers.

    The PRA's consultation on authorization and supervision of international banks is relevant to all PRA-authorized deposit-takers and designated investment firms operating in the UK that are part of non-UK headquartered groups and to international banks that may seek PRA authorization in the future. The PRA does not propose to change its current supervisory approach to UK subsidiaries of international banks (as stated in its current supervisory statement SS10/14). However, the consultation paper sets out a general approach, applicable to all branches, along with PRA’s additional expectations for significant retail and systemic wholesale branches.

    Under the new approach, banks undertaking material retail activity above de minimis thresholds will (as now) need to establish a subsidiary. Other banks must satisfy the PRA's minimum expectations. Where the PRA deems the branch to be systemically important, there must be adequate means to enable the PRA to gain sufficient assurance over the supervisability of the branch. This includes enhanced co-operation with the home regulator and greater reassurance over resolvability. The PRA can also impose additional specific regulatory requirements at branch level.

    The PRA's consultation on authorization and supervision of international insurers proposes some new factors to be considered alongside its current requirements for third-country branch authorization, namely: the scale of UK branch activity covered by the Financial Services Compensation Scheme and the extent to which the PRA is satisfied that the protected amount covered by the FSCS can be absorbed by insurers liable to contribute to the FSCS; and the impact of the failure of a firm with a UK branch on the wider insurance market and financial system.

    Comments on both PRA consultations are invited by February 27, 2018.

    All regulators have welcomed the outcome of the European Council meeting on December 14-15, 2017, including agreement of the need to negotiate a transitional period during which firms would be able to continue undertaking cross-border activities between the UK and EU. The FCA also issued a statement welcoming the UK Government's commitment to legislate for a temporary permissions regime if necessary and confirming its intention to work closely with the UK Government and co-operate closely with the home state regulators of EEA firms and the European Supervisory Authorities to ensure a smooth transition to the post-Brexit regime. The FCA proposes to monitor the ongoing negotiations and provide further information to firms as appropriate. It will also set out further details of its approach to notifications and authorizations under a temporary regime in 2018.

    View the BoE "Dear CEO" letter to non-UK CCPs

    View the HM Treasury announcement on legislative proposals for financial services.

    View the PRA "Dear CEO" letter.

    View the PRA consultation on authorization and supervision of international banks (CP29/17).

    View the PRA consultation on authorization and supervision of international insurers (CP30/17).

    View the FCA statement on EU withdrawal.