Contingency planning for Brexit by U.K. financial institutions should aim to mitigate the risk of unexpected breaks in the provision of financial services to EU customers. There is a risk that the safety and soundness of individual firms will be affected if they are insufficiently prepared, with potential impacts on the provision of services to customers.
While many firms are well advanced in their contingency planning, U.K regulators have assessed that the level of planning is variable. In April 2017, the Prudential Regulation Authority wrote1 to the Chief Executive Officers of PRA- regulated banks, insurers and large investment firms undertaking cross-border activities between the U.K. and the EU. This included U.K.-headquartered firms passporting into the EU, U.K. subsidiaries of large groups passporting into the EU and U.K. branches from EU countries. The letter requested written confirmation that firms' senior management had considered the firm's contingency plans, a short summary of those plans and an assurance that the plans address a wide range of scenarios by July 2017. Firms were also required to provide the PRA with details of any proposed authorizations, business transfers or business restructuring activity that would involve regulatory engagement prior to Brexit. In other sectors, the Financial Conduct Authority has taken a more risk-based approach, informally asking more systemic or larger firms about their plans. Where EEA firms envisage that they will need to obtain U.K. authorization for branches or subsidiaries, the conditions for authorization, particularly for systemic entities, will include a certain degree of co-operation established between U.K. and EU regulatory authorities via a MOU or similar.
In late December 2017, the Bank of England, the PRA and the FCA published consultations and planning considerations affecting international banks, large investment firms, insurers2 and CCPs3 conducting cross-border activities into and from the U.K. Those consultations closed on February 27, 2018 and final policy is awaited. The PRA does not propose to change its current supervisory approach to U.K. subsidiaries of international banks (as stated in its current supervisory statement, SS10/14). However, the consultation paper4 set out a new 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 level5.
The U.K. Government has also announced6 that, if necessary, it will legislate to enable EEA firms and funds operating in the U.K. to obtain a "temporary permission" to continue their activities in the U.K. for a limited period after withdrawal. Alongside the temporary permissions regime, it stands ready to 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 U.K. authorities to carry out functions currently carried out by EU authorities relating to CCPs, central securities depositaries, credit rating agencies and trade repositories.
Footnotes
2 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.
3 The Bank of England 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 following Brexit. 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 "Dear CEO" letter is available at https://www.bankofengland.co.uk/-/media/boe/files/letter/2017/letter-to-ccps.pdf.
4 The consultation on authorization and supervision of international banks is available at https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/consultation-paper/2017/cp2917.pdf.
5 The PRA consultation was accompanied by a "Dear CEO" letter summarising its proposals, available at https://www.bankofengland.co.uk/-/media/boe/files/prudential-regulation/letter/2017/firms-preparations-for-uk-withdrawal-from-the-eu.pdf.
6 The announcement by HM Treasury is available at https://www.parliament.uk/business/publications/written-questions-answers-statements/written-statement/Commons/2017-12-20/HCWS382.
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