BoE sets out post-Brexit supervision plans

The Bank of England has set out how it plans to grant authorisations to banks and insurers post-Brexit, offering some clarity on what future supervisory relationships may be.

Currently, branches of EU-headquartered banks and insurers operating in the UK are supervised by home authorities. Post-Brexit, firms will need to apply for authorisation from the BoE’s Prudential Regulation Authority, which will become their new supervisor.

The key points, set out in a series of documents today (December 20), specify how the intensity of the PRA’s supervision will vary according to a firm’s systemic importance, and how firms will be granted permission to act as branches, or be expected to become subsidiaries, or operate somewhere in between.

A total of 77 branches of EU banks currently operate in the UK, plus 80 branches of EU insurers. Those with retail operations will be expected to become subsidiaries, while others may have the option to remain branches, depending on their systemic importance and the quality of resolution arrangements.

EU-based central counterparties will be subject to a similar regime to that of banks and insurers, and will likewise need to apply for recognition. CCPs and their supervisors face a moving target however, as the EU is still reviewing the European Market Infrastructure Regulation. The UK has committed to implement the EU regime, but the UK government today handed the BoE powers to create a temporary regime if necessary.

The BoE is keen to stress its determination to keep the UK open to foreign institutions. “This approach is rooted in the substantial evidence that openness supports economic dynamism through a range of channels, raising growth and boosting living standards,” it says in a statement.

The BoE believes the operational impact on firms will be minimal. The regime is designed to be in line with how the BoE supervises firms from outside the EU.

Staffing challenge

The process represents a headache for the PRA, which must take on oversight work that is currently done by European host supervisors.

The PRA has been increasing its staffing ahead of what it expects will be an avalanche of authorisation requests. It predicts there will be around 200 requests for authorisation between now and March 2019, versus an annual average of just 12 since the PRA formed in 2013.

The supervisor has around 45 staff working specifically on the new authorisation regime, part of around 100 focused on the process as at least part of their role. The PRA had 1,363 staff at the end of the 2016–17 financial year.

The PRA waited as long as possible to set out its stance, since much depends on the outcome of the ongoing Brexit negotiations, but with firms poised to take decisions on their operations in the new year, the supervisor chose to act before the Christmas break.

As such, it remains possible that the BoE’s stance will change, particularly in the event of what it calls a “non-co-operative” supervisory relationship. This could include tougher requirements imposed on branches, or even requiring them to become subsidiaries.

Broadly, supervisors are co-operating with one another, but there are points of friction. One such area is that the Single Supervisory Mechanism wants major banks to establish “intermediate parent undertakings” in the EU, which would be supervised by the SSM, not national authorities. Supervisors outside the EU believe this might not be compatible with national rules separating retail and investment arms of banks.