Consultation outcome

Regulating individual conduct in banking: UK branches of foreign banks

Updated 3 March 2015

This was published under the 2010 to 2015 Conservative and Liberal Democrat coalition government

1. Introduction

The Financial Services (Banking Reform) Act 2013 put in place the legal framework for the government’s reforms to strengthen the regulation of individuals who work in the UK banking sector. These reforms implement key recommendations of the Parliamentary Commission on Banking Standards included in its final report Changing banking for good.

These reforms will apply to banks incorporated in the UK, UK building societies and credit unions which all operate deposit-taking businesses. They will also apply to certain UK-based investment firms which do not take deposits but which have been designated by the Prudential Regulation Authority (PRA) and are subject to prudential regulation by the PRA as well as conduct of business regulation by the Financial Conduct Authority (FCA).^{[footnote 1]}

The Financial Services (Banking Reform) Act 2013 also gave the Treasury the power to extend the reforms to cover the UK branches of foreign credit institutions (ie banks) and investment firms. This power is exercisable by statutory instrument (using the affirmative procedure) and the Treasury is required to consult the regulators, organisations which represent interests substantially affected by the proposals and any other persons it considers appropriate before starting the Parliamentary process.^{[footnote 2]}

The Chancellor announced in his Mansion House speech on 12 June 2014 that the government intended to extend the reforms to cover UK branches of foreign institutions. The Treasury consulted the regulators who welcome the proposed extension and confirmed in an exchange of letters between the Chancellor, the Governor of the Bank of England and the Chairman of the FCA that they intended to apply the reforms to branches in an appropriate and proportionate way.

Publication of this consultation document is intended to fulfil the requirements to consult representative organisations and other appropriate persons. The Treasury would therefore welcome responses from foreign banks that operate in the UK, customers of UK branches of foreign institutions and relevant representative bodies. Responses would also be welcome from other financial institutions and financial services businesses (whether or not deposit-taking) and from any other person who wishes to contribute to this consultation.

Responses would be welcome on all aspects of the proposal, the draft Order and the impact assessment. Responses to the consultation should be sent by 30 January 2015.

2. The proposal

Subject to Parliamentary approval, the Treasury proposes to make the Order. The effect of this order would be to make foreign financial services firms that have a branch in the UK and are credit institutions or PRA-designated investment firms into “relevant authorised persons” (RAPs) for the purposes of Part V of the Financial Services and Markets Act 2000 (FSMA). (The Order would not make a senior manager in such a branch potentially liable to the new offence relating to a decision causing a financial institution to fail set out in section 36 of the Financial Services (Banking Reform) Act 2013.)

2.1 The Senior Managers and Certification Regime for RAPs

The Senior Managers and Certification Regime (SM&CR) for RAPs was introduced by Part 4 of the Financial Services (Banking Reform) Act 2013 will apply. The purpose of the regime is to improve standards of conduct and accountability in RAPs. The key features of the regime are:

1. a ‘presumption of responsibility’ so that senior managers can be held to account when a RAP fails to comply with regulatory requirements in their area of responsibility and they failed to take reasonable steps to prevent or stop the contravention
2. mandatory statements of responsibility, setting out the aspects of a RAP’s business a senior manager is responsible for
3. requiring the register of approved persons kept by the FCA to state who is a senior manager in a RAP, and give details of regulatory action taken against them;
4. requiring RAPs to verify before making an application to a regulator for approval of a candidate for a senior management position, or another role requiring regulatory pre-approval, that they are satisfied that the person is fit and proper to perform that role in the firm
5. requiring RAPs to consider at least once a year thereafter, whether there are any grounds on which a regulator might seek to withdraw its approval of a senior manager or another person approved by a regulator and, if so, to notify the regulator of those grounds
6. requiring RAPs to verify before appointing an employee to a role in which he or she could do significant harm to the firm (and annually thereafter), that they are satisfied the person is fit and proper to perform that role in the firm, and issue a certificate of that fact to the employee (which lasts for 12 months)
7. requiring RAPs to maintain up-to-date records of employees who have been issued certificates which could be made available to the regulators when required
8. allowing the PRA and FCA to make enforceable rules of conduct for all employees in RAPs. These rules can apply to senior managers, other pre-approved persons, certified persons and other employees
9. requiring RAPs to notify the appropriate regulator when they take formal disciplinary action against senior managers, other persons approved by the regulators, and other employees (not limited to employees performing significant harm roles). Formal disciplinary action means giving a formal written warning, dismissal, suspension or clawing back remuneration
10. requiring RAPs to notify senior managers, other persons approved by the regulators, and other employees (not limited to employees performing significant harm roles) of the rules of conduct that apply to them

The FCA and PRA will have to make:

• rules specifying the functions performed by individuals in branches that can only be performed by senior managers approved by the regulators (“significant management functions”)
• rules specifying the functions performed by individuals in branches that can only be performed by persons who have been certified by the RAP as fit and proper (“significant harm functions”)
• rules specifying the other types of employee who will be subject to rules of conduct made by the regulators
• rules of conduct for senior managers, certified persons and other employees specified by the regulators in their rules

2.2 Applying the SM&CR to branches

As is the case generally, the PRA and FCA have the flexibility to make different rules for different classes of persons. They will be able to make different rules for different types of branch and need not apply the rules that apply to UK deposit-takers or PRA-designated investment firms to UK branches of equivalent foreign firms. The regulators have committed to applying the new requirements to branches in an appropriate and proportionate way.

One would normally expect, therefore, that a branch would be treated in broadly the same way as a UK firm in a corresponding position. There would be no obvious reason to do otherwise and it would be hard to justify (for example) a different treatment of a UK subsidiary of a foreign bank and a UK branch of that bank, if they were engaged in broadly the same activities.

However, branches are different from subsidiaries (or UK institutions) in one important respect. A branch is not by definition a separate entity from its parent organisation. A subsidiary is a separate entity from its parent. A UK subsidiary of a foreign bank is, therefore, a UK entity and the SM&CR will already apply to it. Implications for PRA

This difference is particularly important for prudential regulation. A branch does not have its own balance sheet or capital. It follows that the primary responsibility for prudential supervision of a branch must rest with the home State supervisor of the parent entity. The PRA’s role in the prudential supervision of the branch will be reduced accordingly. Moreover, under EU law, the PRA has a limited role in the prudential supervision of UK branches of credit institutions or investment firms incorporated in other EEA States.^{[footnote 3]}

As a result, the PRA does not expect to designate any senior management functions in UK branches of EEA credit institutions or investment firms. The PRA’s regime for non-EEA firms will be subject to consultation, but it has indicated that it expects to specify significantly fewer senior management functions in branches of non-EEA credit institutions and investment firms than in equivalent UK firms, and that many branches may only need one individual approved by the PRA as a senior manager. The PRA is unlikely to designate a large number of roles in branches as ‘significant harm functions’ which will require certification. The PRA’s proposals will be aligned to its wider approach to branch supervision, which it recently clarified in Supervisory Statement 10/14.

2.3 Implications for FCA

The FCA is responsible for regulating the conduct of branches doing business in the UK. These activities take place in the UK and will be carried out by individuals who are based here. The difference between a branch and a subsidiary is much less important, therefore, in relation to conduct of business. EU law also permits host State authorities a greater role in relation to conduct of business in branches of EEA credit institutions or investment firms.

The FCA expects, therefore, that its conduct of business regulation of branches will be more closely aligned with its regulation of UK institutions or subsidiaries. The FCA is likely to designate more senior management functions in branches than the PRA is expected to designate and to designate rather more significant harm functions.

2.4 Impact assessment

The FCA and PRA’s detailed proposals for implementing the SM&CR in UK deposit takers and PRA-designated investment firms were set out in a joint consultation paper published on 30 July 2014, Strengthening accountability in banking: a new regulatory framework for individuals. This paper included detailed cost benefit analyses of the proposed rules.

This material has been used as the starting point for the impact assessment of this consultation. The impact assessment also takes account of the considerations discussed above.

2.5 Conclusion and questions

The government considers that it would be appropriate to extend the SM&CR for RAPS to cover individuals who perform functions in relation to UK branches of foreign credit institutions and PRA-designated investment firms. The Treasury would therefore welcome comments from consultees on any aspect of this proposal, on the draft Order and on the impact assessment. The questions are summarised in the box below.

Questions
Question 1	What are your views on the proposal to extend the SM&CR to UK branches of foreign credit institutions and PRA-designated investment firms?
Question 2	Do you have any comments on the draft Order?
Question 3	Do you have any comments on the impact assessment?
Question 4	In particular, do you have any comments on:
	the assumptions made in the impact assessment?
	the appropriate turnover rate for approved persons working in branches?
	the costs to foreign branches of making approved person applications?

3. Confidentiality

Information provided in response to this consultation, including personal information, may be published or disclosed in accordance with the access to information regimes (these are primarily the Freedom of Information Act 2000 (FOIA), the Data Protection Act 1998 and the Environmental Information Regulations 2004).

If you would like the information that you provide to be treated as confidential, please mark this clearly in your response. However, please be aware that under the FOIA, there is a Statutory Code of Practice with which public authorities must comply and which deals, among other things, with obligations of confidence. In view of this, it would be helpful if you could explain why you regard the information you provided as confidential. If we receive a request for disclosure of the information you provided, we will take full account of your explanation but we cannot give an assurance of confidentiality in all circumstances.

Please include any request for confidentiality explicitly in the body of your response. General confidentiality disclaimers that often appear at the bottom of emails will be disregarded.

1. Most investment firms are only regulated by the FCA (ie the FCA is responsible for their prudential regulation as well as conduct of business regulation). ↩

2. See section 71A of the Financial Services and Markets Act 2000 inserted by section 33 of the Financial Services (Banking Reform) Act 2013. ↩

3. The EEA (European Economic Area) is the EU plus Iceland, Liechtenstein and Norway. ↩