PRA's responses to its consultation on the supervision of international banks

Earlier this year, the PRA published a Consultation Paper (CP) on their approach to the supervision of international banks’ branches and subsidiaries. We shared our insights on the CP around the same time. We will now focus on the key changes that the PRA has made in response to the feedback that they received on that CP; and share our guidance on how firms might be able to navigate the highly judgmental facets of PRA’s supervision, that could determine their classification as a branch or a subsidiary. 

The PRA published its feedback to responses to CP2/21 – ‘International banks: The PRA’s approach to branch and subsidiary supervision’ – as part of a subsequent Policy Statement (PS).  It contains the PRA’s final Supervisory Statement (SS) 5/21 ‘International banks: The PRA’s approach to branch and subsidiary supervision’, which replaces SS1/18 ‘International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision’.

While the SS is final, firms do not need be fully compliant immediately. Also, it does not seem that the final SS makes international banks’ path to compliance any less onerous; however, the PRA’s clarifications – including those on timelines – would reasonably enable firms to maintain greater focus on the most critical aspects of the supervisory regime and ease the burden of time on their endeavours to comply. 

The PS reaffirms that firms with assets in excess of £15bn could operate in the UK as a branch or a subsidiary, with the classification being determined by the extent to which firms meet the PRA’s tailored expectations of them. These expectations entail the availability of firm-specific information, the group entity’s capacity and willingness to support the firm, governance, risk management, booking arrangements, operational resilience and the group entity’s resolution strategy.

The PRA’s feedback has clarified a number of vaguely worded areas of the CP and, whilst most of these amendments are self-explanatory, we have identified four areas that might benefit from additional clarification on what firms can do to meet the PRA’s expectations.

• The PS clarifies that firms operating under the TPR will not need to meet the expectations in the SS immediately, but will need to do so as soon as practicable, but at the very latest, by the time they exit the TPR as a PRA-authorised firm. The PRA expects such firms to demonstrate how they intend meet the obligations under the SS.

All other authorised firms within the scope of the SS are required to meet the expectations set out in it within a reasonable time, and must be transparent about any gaps they need to address and their proposed timeframe for doing so.

Our guidance to firms is that they should undertake an internal review to identify the areas where they might fall short of meeting the requirements outlined in the SS. They should maintain an action plan with interim measures in place, keeping the PRA’s objectives in mind. They should also plan to implement a more permanent solution, and determine possible hurdles to achieving those solutions, and have reasonable timelines for execution and embedding.

• The PRA clarifies their three key expectations on Operational Resilience:

1. Firms should be able to identify and understand the services that they provide to external end users and should articulate points at which disruption to these services could adversely impact the PRA’s objectives.
2. Firms should have an understanding of these services, and should implement the resources necessary to smoothly run them, regardless of the geographic location of such resources.
3. The PRA’s level of intervention will depend on the home state’s operational resilience regime, and the extent to which firms outsource key functions to jurisdictions that are not broadly equivalent to the PRA’s supervisory regime.

Our guidance to firms is that they should adopt a top-down approach – starting from the Bank of England’s definition of “Financial Stability” – and then narrowing it down to the extent to which it might be impacted by the failure or outage of the specific services that the firm provides. Firms should then ensure that the provision of those services that could disrupt financial stability the most, adhere to the standards that the PRA has set on the matter of operational resilience. They should also ensure that there are viable operational risk mitigants in place for the services that have lesser impact.

• The PRA has clarified that it will first discuss the information they need with firms’ home state supervisors (and for the smallest firms, expect to obtain the vast majority of the necessary information from them). They will then approach the firm for any additional information. Such information could be made available by a number of avenues, such as MI or BAU supervisory engagement. However, there remains a great deal of subjectivity around the basis on which the PRA might flex its approach.

Despite the burden of information sharing now falling largely on home state regulators, we would advise that firms proactively form an expectation of the type of information that the PRA would need to receive in order to meet their “safety and soundness” objective, and make every attempt to align their internal MI to reflect these.

• The PRA has also clarified that the booking lifecycle entails front to back controls from trade origination, to trade settlement. There is an expectation that firms should have robust controls in place that cover every step of the booking lifecycle, and for firms that are exposed to a similar quantum of risk through their banking operations, such controls should extend to cover their banking book operations as well.

We advise that firms develop a one-pager outlining their entire process from trade origination to trade settlement, across all their trading book products, and map them to relevant controls. Firms should ensure that there is a plan for remediating any control gaps, and existing controls are tested at least on an annual basis by internal audit.

With regard to assessing whether the PRA might expect to have sight of the controls that apply to the banking book, firms should apply their judgement on the basis of the relative size of the banking book, and associated services that might have the potential to impact financial stability. They should be able to discuss their judgement with the PRA if and when required.