Prudential Regulation Authority Rulebook

2.1

The PRA’s supervisory approach is grounded in the risks to its statutory objective of promoting the safety and soundness of PRA authorised firms, particularly by seeking to avoid adverse effects on the stability of the financial system of the UK. The PRA has to be satisfied that a firm is capable of meeting threshold conditions on an ongoing basis, including the requirement that it is capable of being effectively supervised by the PRA. For international banks, this will depend in part on the risks in the wider group being visible to the PRA, and the level of co-operation and information it is receiving from the firm and relevant overseas supervisory and resolution authorities.^[7] This is because the PRA needs to understand what risks the UK branch or subsidiary is exposed to and how these are dependent on the business and risk profile of the rest of the firm or the group.

2.2

For UK subsidiaries of groups based outside the UK, the PRA applies the same regulatory requirements and follows the same supervisory framework as for firms that are based in the UK and are either not part of a group or are part of a group based in the UK. However, its supervisory approach takes into account the links between the subsidiary and the rest of the group of which it forms a part. Where that group is not based in the UK, the PRA will typically have less information on the risks arising in the group, and less ready access to those responsible for group risk management. The PRA tailors its supervisory approach according to the nature, scale, and complexity of a firm’s UK operations and potential impact on financial stability in the UK, and also according to the extent to which the UK operations are integrated with overseas operations. Accordingly, the PRA’s expectations of subsidiaries of groups based outside the UK may well differ in some areas from those of subsidiaries belonging to groups based in the UK. Details of how the PRA’s expectations vary in this regard are set out in this SS.

2.3

For firms that operate through a UK branch, the branch forms part of a legal entity incorporated outside the UK. It follows that its operations are necessarily dependent on those of the legal entity as a whole. It will be subject to prudential regulation by its home state supervisory authority according to where it is based. Unlike UK subsidiaries, the PRA applies a different set of rules to such firms, recognising that while PRA authorisation applies to the whole firm, it is appropriate to rely on the home state supervisor for certain aspects of supervision. The expectations that the PRA has for information relevant to the PRA’s objectives will therefore also vary in this regard.

2.4

The Financial Conduct Authority (FCA) is the conduct regulator for all banks and investment firms operating in the UK. Therefore, for such firms, whether operating as subsidiaries or through branches in the UK, the FCA’s threshold conditions and conduct of business rules apply, including in areas such as anti-money laundering. Authorisation can be granted only where both the FCA and the PRA are satisfied that their respective requirements have been met. The FCA will independently assess applicants against its own requirements and objectives.

2.5

Subject to these foundations, the PRA recognises the efficiency benefits that banks’ international operations can bring. As such it is open, in principle, to hosting subsidiaries of international groups that operate a highly integrated global business model, and to allowing firms to operate in the UK through a branch or subsidiary.

2.6

The PRA recognises that many wholesale businesses, and investment banking and trading in particular, are operated on a global and highly integrated basis.

2.7

The PRA has different expectations for businesses that engage in retail banking activities, since those activities tend to have a greater effect on financial stability. Additional requirements would apply to firms that would fall within the scope of the UK’s ring-fencing regime.^[8] Large retail banking activities can be more effectively supervised if they are separated from other activities in the wider group. Above certain thresholds, the PRA will consider authorising firms as subsidiaries in the UK rather than permitting them to operate through a UK branch, thereby increasing the separation of the UK retail business from risks arising overseas.^[9] However, below the threshold at which ringfencing requirements apply, the PRA does not have any greater expectation for the separation of retail business. It does, however, expect to receive more information on any financial and operational dependencies (including cross-subsidies) between that retail business and wholesale business, whether within the same firm or between related group entities.

2.8

The PRA’s overall approach is summarised in Figure 1 below (which may be read in conjunction with Figure 2, which specifically covers branches).

2.9

Each element in Figure 1 is considered below in more detail.

2.10

It should be noted, however, that apart from ring-fencing requirements, there is no automatic or fixed outcome that the PRA applies in terms of the degree of integration or separation that is appropriate. The PRA applies a graduated set of expectations which are tailored to each firm’s circumstances. The exact measures that the PRA may take, according to the degree of integration or independence appropriate for a subsidiary or branch, are described in Chapter 5. The requirements imposed by the ring-fencing regime are in addition to the PRA’s expectations concerning the information and controls required for a firm that is a ring-fenced body to be capable of being adequately supervised as a consequence of its membership of a wider group. Specifically, with respect to branches, where the PRA identifies concerns that a branch would fail to meet the PRA’s expectations for effective supervision, the PRA may exercise its powers under the Financial Services and Markets Act 2000 (FSMA) to apply specific regulatory requirements at the level of the branch on a case-by-case basis. These would principally be intended to ensure there are sufficient financial and operational resources, and appropriate governance at the UK branch level.

Figure 1: PRA expectations for effective supervision