Prudential Regulation Authority Rulebook

3.1

The PRA has general expectations that underpin its ability to effectively supervise banks and designated investment firms which are part of international groups or headquartered overseas. Subject to these, the PRA’s expectations then vary according to the nature, size, and systemic importance of the UK operations. This, coupled with the degree of information available, effectiveness of co-operation with the home state supervisor, and controls that are in place, influences the degree of separation or integration that is acceptable to the PRA as an operational outcome.

3.2

For firms that are part of international groups carrying on banking business in the UK, the PRA first assesses the general factors that must be in place for effective supervision to be possible, and then assesses the factors specific to each international bank and any group of which it is a member.

3.3

The general factors the PRA considers are:

1. (a) whether the home jurisdiction’s prudential supervision regime is sufficiently equivalent to the UK regime;
2. (b) whether there is sufficient supervisory co-operation with the home state supervisor; and
3. (c) the efficacy of the arrangements for resolution. Consistent with the expectations set out in the PRA’s Fundamental Rule 8 and the Bank of England’s (the Bank) Resolvability Assessment Framework where relevant, these arrangements will be assessed in consultation with the Bank as the UK resolution authority.^[10]

3.4

The PRA assesses the degree to which the home jurisdiction’s prudential supervision regime is equivalent, taking account of the following characteristics of the home state supervisor (this is not an exhaustive list):

• its regulatory framework;
• powers;
• general approach to the supervision of individual firms and the consolidated group;
• information sharing;
• confidentiality; and
• the competence and independence of supervision.

3.5

The PRA will make an overall assessment of whether the home state supervisor is sufficiently equivalent, and whether its regime is consistent with the UK regulatory framework in delivering appropriate outcomes that meet the PRA’s objectives.^[11] The PRA assesses these factors in their totality, but will place considerable weight on assessing the extent and quality of co-operation with the home state supervisor. The PRA will take into account the supervision of individual firms (including branches) and their consolidated group, and it will consider the nature and scale of a firm’s activities in the UK.

3.6

The PRA’s supervisory equivalence assessments are reviewed periodically. The frequency of review is determined by the number, size, and systemic importance of the firms from a home state. The assessments of the home state supervisor focus on the degree to which the home state supervisor’s regime is compliant with the Basel principles in terms of supervisory approach, tools, and practices. In performing the assessments, the PRA will base its analysis on the Basel capital and group supervision standards, the Basel Committee’s Regulatory Consistency Assessment Programme reviews,^[12]; the International Monetary Fund’s Financial Sector Assessment Programme reviews,^[13] and the Financial Stability Board’s (FSB) peer reviews^[14] where appropriate, supplemented by other sources as necessary. The PRA will also take account of its own experiences in its interactions with the home state supervisors. It will also be important for the PRA to factor in any conduct concerns that the FCA may raise concerning a jurisdiction.

3.7

Where, in the PRA’s view, a home state supervisor is sufficiently equivalent but there are weaknesses in the way the firm operates, the PRA may propose to add limitations to the nature and scale of activities performed in the UK. In exceptional circumstances, the PRA may not be satisfied that a home jurisdiction delivers equivalent outcomes, but may still authorise a firm to operate as a subsidiary in the UK. However, in those circumstances the PRA will expect the UK subsidiary to operate with a very high degree of independence from the overseas operations, and that the PRA has a high degree of direct supervisory influence on the group in relation to the activities of the subsidiary.

3.8

In considering whether there is sufficient supervisory co-operation with the home and other relevant supervisors, the PRA has the following approach.

3.9

Supervisory co-operation is usually underpinned by the PRA entering into a memorandum of understanding (MoU) with the relevant home state supervisory authority.^[15] These establish a formal basis for: co-operation, including the exchange of information and investigative assistance; the facilitation of timely and effective supervision; and for the identification of risks to the financial system, including emergency situations.

3.10

In developing this co-operation framework, the PRA has taken account of the following Bank for International Settlements publications: ‘High-level principles for the cross-border implementation of the New Accord’,^[16] ‘Principles for effective supervisory colleges’,^[17] and Principle 13: Home-host relationships in ‘Core Principles for Effective Banking Supervision’. ^[18]

3.11

The PRA considers not just whether such arrangements have been agreed, but how well in practice their aims are achieved. The high-level outcomes the PRA expects to see include: transparency over the financial and operational resilience of the group, and the group’s capacity to support the international bank; appropriate equivalence of the home state supervision in practice; and transparency over when and how the home state regulator might intervene to remedy noncompliance with prudential standards along with any triggers for pre-emptive action. To achieve this, the PRA expects there to be regular structured engagement with the home state supervisor, either through a college or bilateral meetings or both, as appropriate, which should facilitate a technical discussion of the material risks and risk management practices at the firm.

3.12

The degree of co-operation with the home state supervisor that the PRA expects is commensurate with the size of the firm, the degree of cross-border integration of its business, and the systemic nature of any wholesale branches operating in the UK.

3.13

This will be a factor in the PRA’s judgements when forming a view on its risk appetite towards subsidiaries and branches operating in the UK. For subsidiaries and branches that perform critical functions in the UK^[19], the PRA, in consultation with the Bank as UK resolution authority, will assess:

• the credibility or feasibility of the home state supervisor and home resolution authority’s approach to resolvability and resolution execution (including its compliance with the FSB Key Attributes);^[20]
• the ability of the PRA, in consultation with the Bank, to rely on the home state supervisor and home resolution authority to deliver resolvability and if necessary execute the resolution strategy for the group and firm, including the home state supervisor and home resolution authority’s operational capability to implement a resolution and to put in place adequate coordination mechanisms between home and host authorities;
• the adequacy of the group’s and firm’s resolution arrangements:

1. 1. (i) for the relevant subsidiaries^[21], taking into account the Bank’s views as to whether the capabilities of the resolution group would deliver resolvability outcomes that are broadly comparable to those set out in the Statement of Policy (SoP) ‘The Bank of England’s Approach to Assessing Resolvability’;^[22]
   2. (ii) for branches, although the Bank’s Resolvability Assessment Framework (RAF) does not apply to these entities,^[23]  the resolvability outcomes set out in the Bank’s SoP provide relevant context for the Bank’s engagement with the PRA in respect of the authorisation and supervision of the UK branches of overseas banking groups; and

• the willingness of the home resolution authority to share resolution plans with the PRA on request, and to engage in a dialogue with the PRA and the Bank regarding progress on resolvability and the implications of the resolution strategy for any UK subsidiary or branch operating in the UK.

3.14

The PRA has a minimum expectation that UK subsidiaries of international groups should be on a path to being structurally profitable on a standalone basis (or that the group’s viability depends on supporting the UK operations). That is, they should not be solely cost centres for the group with accumulated costs that are extinguished by periodic capital injections from the group. Rather, the firm should be capable of accreting at least some of its own capital (or contributing to the accretion of group capital), so that operating costs of the international bank are covered on a day-to-day basis by income that it generates. That income may be in the form of service charges to the rest of the group or cross-subsidies built into the pricing and funding arrangements between wholesale and retail business in the firm or other group companies. It is important that the firm and PRA understand the extent of such cross-subsidies in order to assess the soundness of the business. The PRA may request that firms provide evidence that parental support will be provided and the parent has a clear strategy to do so.

3.15

New retail businesses in particular may be loss-making, but as they mature and grow, the PRA expects them to become more profitable and secure. Accordingly, the PRA expects to receive information on the degree of cross-subsidy between the UK retail business and wholesale business within the firm and between the firm and the rest of the group.

3.16

The PRA’s expectation of structural profitability for UK subsidiaries of international groups does not preclude the use of group service companies by firms, whether engaged in retail business or wholesale business, provided operational resilience and operational continuity expectations are met.

3.17

The consideration of retail business is of sufficient weight that the PRA considers that good visibility of the risks in the wider group and good supervisory co-operation are not always sufficient to mitigate risks to the PRA’s objectives without separation from the wider group. Chapter 6 of this SS sets out the additional factors that the PRA considers when deciding whether authorisation for a firm to operate a UK branch is appropriate, including certain thresholds above which retail deposits may lead the PRA to conclude that separation of the UK business into a UK subsidiary would be more appropriate (see Chapter 6). Significantly greater amounts of UK retail business may take a firm above the threshold at which it is required to ring-fence its ‘core activities’ under Part IX B of FSMA (as amended).^[24] This effectively leads to that business being required to have a further degree of separation from the rest of the group.

3.18

Where ring-fencing is not required, the PRA does not expect any greater separation to be necessary to mitigate risks to retail business in the UK operations. In general, the degree of separation appropriate will therefore follow the same framework as for wholesale business, as set out below. However, there are three areas which are worth emphasising for firms that are part of international groups regarding their compliance with PRA rules applicable to international banks:

• When branches or subsidiaries outsource to parent or affiliated companies outside the UK, they should ensure that the outsourced service is provided in compliance with UK legal and regulatory requirements, even if these firms are bound by policies, procedures, or written agreements set by their overseas group or parent companies.
• Depositor protection in the UK may be different from that applicable to the overseas group or head office, and so the PRA will pay particular attention to compliance with the Depositor Protection Part of the PRA Rulebook, including the Single Customer View Requirements.
• While the PRA does not require any separation of a firm’s retail business from the rest of the group, or from its wholesale activities, the PRA does expect to receive information on the degree of financial, operational, and other business dependencies (including cross-subsidies) between the UK retail business and wholesale business within the firm, and between the firm and the rest of the group.
  

3.19

Wholesale business poses risks to financial stability, particularly when it reaches a scale in the UK that significant losses or operational dependences could cause problems in financial markets or the failure of other financial institutions. The PRA considers size to be a factor when deciding whether to designate investment firms as PRA-regulated firms. The PRA’s approach to this is set out in the SoP ‘Designation of investment firms for prudential supervision by the Prudential Regulation Authority’.^[25] This SoP sets out the factors that the PRA considers, which include a firm’s total gross assets, or the total gross assets of investment firms in the same group, exceeding £15 billion.

3.20

For international banks with UK branches undertaking wholesale business, in assessing whether the branch is systemically important, the PRA considers (among other things) a similar threshold, where the total gross assets attributed to the branch, and where relevant other UK branches in the group, exceed an average of £15 billion. This is discussed in detail in Chapter 6.