CP11/24 – International firms: Updates to SS5/21 and branch reporting

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Responses are requested by Wednesday 30 October 2024.

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Responses can be sent by email to: CP11_24@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Banking Groups and Structural Reform Team
Prudential Regulation Authority
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EC2R 6DA

1: Overview

1.1 Many overseas banks or banking groups operating in the UK are significant providers of financial services to the UK economy.^{footnote [1]} The Prudential Regulation Authority (PRA) is open to hosting highly integrated international banking operations, recognising the efficiency benefits that these can bring, and in line with its secondary objective to facilitate the international competitiveness and growth of the UK economy.

1.2 The PRA’s supervisory statement (SS)5/21 – International banks: The PRA’s approach to branch and subsidiary supervision sets out its approach to supervising international banks with activities in the UK, in line with its principle of responsible openness towards international business. This consultation paper (CP) proposes targeted updates to reflect developments since the publication of SS5/21 and to provide detail or clarification on certain aspects of the PRA’s approach. The proposals in this CP do not alter the overall framework in SS5/21.

1.3 This CP sets out the following proposed updates to the PRA’s approach to international banks:

• the introduction of some additional indicative criteria that the PRA would consider when determining whether it would be appropriate for an international bank to operate in the UK as a branch rather than a subsidiary (Chapter 2);
• clarifications to the expectations of firms’ booking arrangements and extending their formal application to a subset of UK banks (Chapter 3);
• amendments to the PRA branch return designed to improve the collection of whole-firm liquidity data (Chapter 4); and
• minor amendments to SS5/21 to clarify some of the PRA’s existing expectations and processes (Chapter 5).

1.4 The PRA and Financial Conduct Authority (FCA) are due to publish a consultation on their review of the Senior Managers and Certification Regime (SM&CR) during 2024, with relevance to the existing text in SS5/21 on the SMF7 Group Entity Senior Manager function.^{footnote [2]} The PRA would aim to implement any proposed amendments to SS5/21 following that consultation at the same time as changes proposed in this CP.

1.5 Firms may be aware of the statutory requirement for the PRA to review the deposit limit by January 2025. The PRA is currently reviewing the deposit protection limit and will consult later in the year. In the event of future limit changes these would affect what deposits in branches count towards the existing indicative thresholds in SS5/21 relating to Financial Services Compensation Scheme (FSCS)-covered deposits.

1.6 The proposals set out in this CP would result in changes to the PRA’s policy material (PRA Rulebook Parts and SSs), as set out in the table below.

Scope and accountability framework

1.7 This CP is relevant to existing or prospective PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK. In addition, (parts of) Chapter 3 of this CP relating to the PRA’s expectations regarding booking models are also relevant to banks and designated investment firms that are headquartered in the UK or are part of a group based in the UK, with investment banking and/or sales or trading activities in both the UK and overseas.

1.8 The PRA has a statutory duty to consult when introducing new rules and changing rules (FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.9 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals. None of the PRA statutory panels have been consulted about the proposals in this CP.

Implementation

1.10 The PRA proposes that the changes to SS5/21 resulting from this CP would be implemented during 2025 Q2 The changes to the material relating to branch reporting would be implemented on 31 December 2025.

Responses and next steps

1.11 This consultation closes on Wednesday 30 October 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP11_24@bankofengland.co.uk.

1.12 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.13 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.24 References related to the UK’s membership of the EU in the SS covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [3]}1

2: Branch risk appetite

Introduction

2.1 The PRA’s current expectation is that where an international bank is undertaking significant retail activity, this should take place through a subsidiary rather than a branch, to ensure that the PRA is able to meet its objectives and mitigate the risks to UK depositors and financial stability. SS5/21 sets out that the PRA will make a firm-by-firm determination of whether it is content for an international bank to undertake retail activities in the UK through a branch based on indicative criteria relating to the levels of retail and small company deposit taking.^{footnote [4]}

2.2 The PRA has been reviewing these expectations following lessons learned from the failure of Silicon Valley Bank (SVB) UK in March 2023.^{footnote [5]} SVB had been operating as a branch in the UK until July 2022. However, due to an assessment by the PRA in 2020, it was asked to transfer its UK operations to a UK subsidiary. The PRA's assessment indicated that SVB’s activities would surpass the indicative thresholds outlined in SS5/21. In particular, SVB was projected to hold more than £100 million of FSCS-covered transactional and instant access deposits from small companies.^{footnote [6]}

2.3 SVB UK’s status as a subsidiary at the point of its failure ensured that it was subject to standalone capital and liquidity requirements and provided the PRA with greater access to information about its financial position. It also meant that the Bank of England (‘the Bank’), as resolution authority, had a full set of resolution tools available including the stabilisation powers used on 13 March that enabled the Bank to sell SVB UK to HSBC UK Bank Plc (HSBC). This ensured that SVB UK’s customers could continue to access their bank accounts and other facilities without disruption. It also helped to preserve public confidence in the stability of the UK financial system.^{footnote [7]}

2.4 SVB UK’s failure and resolution therefore demonstrated the benefits of the approach set out in SS5/21 that had led to it becoming a subsidiary. However, the case also highlighted a potential gap since criteria guiding the PRA’s expectations on whether an international bank should operate in the UK as a branch rather than a subsidiary focus on deposits covered by the FSCS. The majority of deposits held by SVB UK prior to and following it becoming a subsidiary were not FSCS-covered. These were transactional and instant access accounts for customers who would have experienced disruption if they had not been able to continue to access their bank accounts. Prior to becoming a subsidiary, SVB reported its branch held over £4 billion of transactional and instant access deposits (referred to throughout this paper as ‘demand deposits’) from small companies, of which less than £100 million was covered by the FSCS. As such, the subset of deposits considered against the existing criteria remained below the PRA’s indicative threshold. As a branch, SVB also held over £5 billion of deposits from larger companies, which would also not have been considered under the existing criteria. However, during the resolution of SVB UK in March 2023, concerns were raised regarding the potential impact if these firms could not maintain continuity of access to their deposits. This relates both to the loss of access to transactional banking facilities, and the potential for deposits above the FSCS limit that represent working capital to be trapped in insolvency proceedings.

2.5 Having assessed the existing criteria in SS5/21 in light of this experience, the PRA considers they do not adequately identify other cases where a branch is holding material demand deposits over the FSCS limit, where the existing expectation should apply that these activities should take place in a subsidiary to promote the PRA’s statutory objectives and in turn mitigate the risks to UK financial stability. The PRA is therefore proposing targeted updates to its expectations in SS5/21. These are set out below. They reflect the PRA’s proposed approach to identifying and managing the risks noted above by setting expectations around:

• the total level of retail and small company demand deposits (ie both FSCS-covered and uncovered amounts) that can be held within a branch;
• how the PRA will take into account the level of demand deposits from relevant corporates above the small company threshold; and
• how the PRA will take into account the group resolution strategy of a branch in considering the factors above.

2.6 The PRA remains committed to the principle of responsible openness set out in SS5/21. The proposals would build the PRA’s capability to identify and manage potential future vulnerabilities. Based on available information about the activities of international banks currently operating as branches in the UK, the PRA does not expect that any of these firms would be expected to become subsidiaries as a result of its proposals.

Total retail and small company demand deposit threshold

2.7 As noted above, the current indicative thresholds for the level of deposits that a branch may hold before the PRA would consider asking it to become a subsidiary are set in relation to FSCS-covered deposits. The PRA is therefore proposing to update its expectations in SS5/21 to include an additional indicative threshold of £300 million of total retail and small company demand deposits (ie including non FSCS-covered deposits).

2.8 As with the PRA’s existing thresholds, the proposed £300 million total retail and small company demand deposits threshold would be indicative^{footnote [8]} and considered on a firm-by-firm basis. This new threshold is not expected to have a material impact on the existing branch population. However, it would help ensure significantly earlier identification and action if a branch were, in the future, to grow its FSCS uncovered demand deposit activity in the manner of SVB.

2.9 The PRA does not propose to change the calibration of the current indicative thresholds. These remain useful for capturing general retail activity and exposures of the wider sector via the FSCS. However, in conjunction with the proposal to set the new £300 million threshold for total retail and small company demand deposits, the PRA proposes to amend the wording of the existing £100 million threshold to clarify that this relates only to amounts under the FSCS coverage limit, and not to total balances in FSCS-eligible accounts.

Deposits from high-net-worth individuals

2.10 Private banking accounts serving high-net-worth individuals (HNWIs) are often instant access accounts and would therefore contribute towards calculations of retail demand deposits against the indicative thresholds. This is particularly relevant since HNWI accounts are more likely to hold high balances over the FSCS limit, which will count fully towards the new proposed £300 million threshold. However, such accounts are less likely to be used for day-to-day transactional banking and HNWI customers are more likely to have access to alternative transactional banking arrangements. A branch that breaches thresholds solely on the basis of activity of this nature is likely to pose less of a risk to UK financial stability.

2.11 The PRA therefore proposes to include a reference in SS5/21 to indicate that the PRA may consider it appropriate for an international bank to operate through a UK branch, even if its retail demand deposits are above the indicative thresholds, in cases where this is caused by deposits from HNWIs.

2.12 The PRA is not proposing to redefine its thresholds to reflect this, since this is likely to be relevant to only a small number of banks. Instead, affected branches would be expected to provide relevant evidence of their customer profiles (eg onboarding requirements, target market guidelines, ongoing due diligence criteria, account functionality or balances by account type). The PRA plans to assess an individual that had financial assets in the last financial year of over £250,000 as a HNWI. This threshold is drawn from the definition of an ‘eligible individual’ in the ring-fencing legislation.^{footnote [9]}

Corporate deposits above the small company definition threshold

2.13 SS5/21 sets out the PRA’s expectations for branches undertaking retail business, where this is defined as also including ‘small companies’ with up to £10.2 million of turnover, with anything larger being classified as ‘wholesale’ activity.

2.14 One of the lessons from the failure of SVB UK was that it was unusual in holding material demand deposits from corporate customers spanning both small companies and firms above the size definition, so therefore classed as wholesale depositors. However, some of these firms who were wholesale depositors were dependent on SVB UK as their sole provider of transactional banking, and a failure which resulted in discontinuity of access could have had an impact on UK financial stability. In certain cases, customer deposits which would be classed as wholesale in reports to the PRA, may therefore resemble deposits from small companies in the risk these pose to UK financial stability.

2.15 The PRA does not intend to change the expectations for effective supervision in relation to the vast majority of wholesale deposit activity. There are benefits to international banks and their customers being able to undertake wholesale deposit activity on a highly integrated global basis, including through branches. Risks from this can in most cases be adequately addressed through the existing expectations on wholesale business.

2.16 However, the PRA proposes that, in assessing whether it would be content for an international bank to operate as a branch, it would take account of significant demand deposits from corporate customers undertaking UK economic activity that are likely to be dependent on that branch as their sole provider of transactional banking.

2.17 The PRA is not proposing to set a quantitative threshold for such activity, recognising that the existing reporting definition of ‘large companies (non-financial corporations)’ spans a wide range of firms of varying degrees of size and sophistication, and that there may be some complexity in creating additional reporting definitions to break down this category in detail. The PRA therefore intends to use supervisory dialogue and assessment work to explore the scale and nature of relevant deposits on a case-by-case basis and would use high-level reporting data on total large company demand deposits to help guide such discussions (see paragraph 2.21 on proposals to amend reporting requirements to enable this).

2.18 When gauging the scale and nature of relevant demand deposits, the PRA will also take into account retail or corporate liabilities originated in the UK branch but booked remotely to another jurisdiction. As such, firms are expected to notify the PRA of material deposit activity originated by its UK branch but booked elsewhere.

Group resolution strategy

2.19 Some international banks are subject to rules and expectations set by their home resolution authority, which the Bank as the UK resolution authority, in consultation with the PRA, is able to rely on in delivering the resolvability outcomes set out in the statement of policy (SoP) – The Bank of England’s Approach to Assessing Resolvability on a broadly comparable basis. By meeting these rules and expectations, the risk of discontinuity of banking services in the event of the bank’s failure would be mitigated. This could permit the PRA to conclude that it would be acceptable for such a bank to provide demand deposit services to UK customers through a branch, even where these activities are of a scale that would normally be outside the PRA’s risk appetite.

2.20 The PRA therefore proposes that, when making a determination about branch risk appetite against the criteria relating to demand deposit activity, it would take account of the efficacy of group and its home resolution authority’s arrangements for resolution, in consultation with the Bank as the UK’s resolution authority. This would include consideration of whether, in cases where the branch in question is part of a globally systemically important bank or an overseas firm that is subject to expectations set by the home authority regarding its resolution capabilities, the resolvability outcomes it is able to achieve would be comparable to those set out in the Bank’s SoP.

Amendments to the Branch Return Form and Guidance

2.21 To enable implementation of the proposals outlined in this Chapter, the PRA is proposing to add two reporting elements to the existing PRA Branch Return Form.^{footnote [10]}

2.22 Under the proposals, third-country firms would be required to report spot data in pounds sterling semi-annually, based on 30 June and 31 December end of reporting periods covering:

• Total retail and small company deposits held in transactional accounts.
• Total retail and small company deposits held in transactional or instant access accounts.
• Instant access non-financial corporate deposits.
• The number of unique clients or customers covered by the descriptions above.

2.23 Retail and small company deposits held in transactional and instant access accounts: These lines are in the current branch return (rows 040 and 050 under Part 2 of the Branch Return). However, they are only ‘turned on’ for amounts covered by the FSCS. Total amounts are currently ‘turned off’ – that is to say firms are not required and not able to populate these fields. The PRA is therefore proposing to turn these fields on. This would allow the PRA to monitor firms against the proposed new threshold of £300 million of such deposits.

2.24 Instant access non-financial corporate deposits: The PRA proposes to introduce a new line to the Branch Return that would cover a sub-set of total non-financial corporate deposits (which is already reported via row 016 of Part 2 in the Branch Return). This would help the PRA monitor whether any branches are holding material corporate demand deposits that could warrant further investigation to understand the nature of these accounts and customers.

2.25 These proposed changes are illustrated in Part 2 of the revised Branch Return Form outlined in Appendix 2, with further details outlined in updated reporting guidance for the Branch Return in Appendix 3.

PRA objectives analysis

2.26 The proposals to update SS5/21 seek to improve the monitoring of branch activities specifically with regards to demand deposits not covered by the FSCS and to reduce the risk of discontinuity of banking services. As such, the PRA considers that proposals would advance its primary objective by seeking to ensure a firm’s business is carried on in a way that avoids adverse impacts on UK financial stability and by limiting the effect that the failure of a firm could have on UK financial stability.

2.27 The PRA has considered whether the additional factors it is proposing would restrict branches relative to domestic firms and foreign subsidiaries with regards to competition. While branches are restricted in relation to the level of retail activity that is permitted, the PRA considers that the proposal has been calibrated in a manner that minimises binding impacts to firms’ existing operations while directly advancing the PRA’s secondary objective to facilitate effective competition.

2.28 The PRA considers that the UK is comparatively open in its approach to allowing branch retail deposit taking below certain thresholds, given that some peer jurisdictions do not permit any retail activity by foreign branches. This would remain the case following the introduction of the proposed adjustments. The PRA therefore considers that its proposals maintain its longstanding approach to responsible openness while bolstering trust in the PRA and the UK prudential framework, thereby supporting the PRA’s secondary objective to facilitate international competitiveness and growth.

Cost benefit analysis (CBA)

2.29 The proposals in this chapter would extend the set of factors which the PRA would consider when assessing whether it will be content for an international bank to operate as a branch in the UK. The main additional factors would be a new indicative threshold for total retail, small company demand deposits and certain corporate demand deposits above the small company definition. As with existing factors, these would be indicative, and considered on a case-by-case basis, therefore their impact on the current and future population of international banks should not be viewed in isolation, or as hard thresholds.

Benefits

2.30 The main benefit from adding these factors would be to reinforce the PRA’s ability to ensure that international banks that are active in the UK are structured and supervised in a way that best supports the PRA’s safety and soundness objective and UK financial stability. Specifically, new reporting requirements will significantly improve the PRA’s ability to monitor and gauge the risk of discontinuity of banking services provided by international firms. That could, in cases where a bank undertakes material activities relevant to the new factors, result in the PRA asking the bank to operate as a subsidiary rather than a branch. The benefits of having a firm undertaking material relevant activities act as a subsidiary include: greater PRA access to information; separate capital and liquidity requirements for the UK operations; and application of the UK resolution regime in the event of failure, including stabilisation options to ensure continuity of operations. This would reduce the risk of disorderly failure impacting the supply of essential services, damaging confidence, or leading to financial instability. Customers of such banks would benefit from these additional protections if they reduce the likelihood of failure or the risk of loss or discontinuity in the event of failure. This would also help maintain trust in the PRA and the UK prudential framework.

Costs

2.31 The PRA expects new reporting requirements to be produced without significant additional burden since they relate closely to information branches already provide in the branch return. The proposals could involve additional direct costs for some existing branches that need to provide additional information to the PRA, such as data relating to a branch’s HNWI deposits, large wholesale demand deposits from corporates just above small company size or group resolution plans. However, the PRA considers that only a small number of branches would need to provide this information and it may involve firms providing the PRA with information that they already produce for their own purposes. As such, the costs of providing this information should not be material.

2.32 Banks may face additional costs when they structure themselves as a subsidiary rather than a branch, including operational costs and costs associated with holding capital and liquidity against the UK entity. Their customers may also be impacted from the loss of flexibility associated with being able to transact with a branch of a multi-national bank offering multiple services across different jurisdictions.

2.33 Recognising these costs, the proposals would only result in a bank being expected to structure itself as a subsidiary where the scale of its demand deposit-taking activities is sufficiently material. Branches of international banks will continue to be able to hold demand deposits for UK retail customers and small companies up to the £300 million indicative threshold.

2.34 As noted above, the PRA does not expect that any branches currently within risk appetite, as set out in SS5/21, would be expected to become subsidiaries as a result of the new proposals. PRA analysis indicates that, based on recent growth rates, no branches currently within risk appetite will cross the new threshold in the next 3 years.

2.35 Overall, the PRA expects the proposed changes to effectively mitigate potential discontinuity risks posed by branches that could arise in the future without imposing significant costs or binding impacts for today’s branch population.

‘Have regards’ analysis

2.36 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): The PRA considered the level at which it should set a policy expectation by way of an indicative threshold relating to retail and small company demand deposits. The proposal strikes a balance, including the considerations in relation to HNWIs and resolution, as the proposal would be likely to lead to no existing branch being asked to subsidiarise as a result of the proposal based on their current business, whilst enabling the PRA to mitigate future risks. The proposal in relation to ‘larger corporates’ with sensitive business profiles is also designed to be proportionate, as the PRA would consider a branch’s corporate deposit profile on a case-by-case basis taking into account the branch’s group resolution strategy. The PRA therefore considers that the proposals in this CP are the most proportionate options.
• The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principles): The proposed retail and small company demand deposit indicative threshold and larger corporate considerations set out in the CP would avoid any additional and unnecessary regulatory burden on UK branches, and allow the PRA to focus its resources on specific cases which pose a greater risk of causing instability in the financial system. The proposals would enable the PRA to more easily prevent, rectify or minimise such disruption by requiring branches to subsidiarise where they fall outside its expectations regarding the level of retail activity that can be undertaken in branches.
• The desirability of the PRA exercising its functions in a way that recognises differences in the nature of businesses carried on by different persons (FSMA regulatory principles): The proposed implementation of a new indicative threshold for retail and small company demand deposits and larger corporate considerations takes into account where continuity risk is the most acute based on firm type. Accordingly, the proposal would take into account both the level of HNWI business and whether the group has a credible resolution plan when considering the level of retail activity being carried on within a branch.
• The principles that regulators should ensure that they are transparent, accountable and consistent and that their approach to their regulatory activities is targeted only at cases in which action is needed (Legislative and Regulatory Reform Act 2006): The PRA is ensuring transparency in explaining its proposed approach to branches that are either established or that apply to be established in the UK. This approach would apply consistently to all branches. The proposed new thresholds and considerations, including the consideration of the deposits of HNWIs and the group resolution strategy, have also been designed to the mitigate risks that the PRA has identified. This should ensure that the PRA targets its consideration of the level of deposit-taking in branches on those branches that are potentially undertaking material retail activity that is outside the PRA’s expectations based on the criteria that would be set out in the revised SS5/21.
• Encouraging economic growth in the interests of consumers and businesses (HMT recommendation letter): The proposal achieves these objectives by both avoiding disruption in the financial system, which contributes to the stability necessary to achieve medium and long-term growth (a future SVB-like branch would fall under the scope of these measures), and still remaining less restrictive than other international competitors of the UK. (This is currently the case, and the proposal does not impose any additional restrictions on branches currently in the UK market, which would either fall below the threshold, or fall out of scope for other reasons set out.) The proposal would also still leave room for branches focused on wholesale activity, in order to maintain the status of the UK as an open and attractive jurisdiction for branching activity.

2.37 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

Impact on mutuals

2.38 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

2.39 The PRA considers that the proposals do not give rise to equality and diversity implications.

3: The PRA’s expectations of firms’ booking arrangements

Introduction

3.1 The PRA proposes a number of clarifications to the expectations of firms’ booking arrangements. The PRA has developed these clarifications through its supervisory discussions with the larger firms in the last few years and is consulting on them now so that others can have the benefit of understanding and commenting on the PRA’s thinking, and to ensure that there is a level playing field in this area. There are three broad reasons for these clarifications:

• The PRA’s development of more granular principles regarding desk structures. The PRA has developed these principles which focus on the risk management and control of firms’ derivatives activity, in response to the changes observed in firms’ booking structures. These principles originated as part of the PRA’s close engagement with the European Central Bank (ECB) during the ECB’s desk-mapping review (DMR) but are of wider application. They are designed to provide clarity on the PRA’s expectations of prudent risk management on a range of questions that have consistently been raised by recently proposed desk structures and which required a greater level of detail than contained in the existing SS5/21. The revised expectations provide transparency on the PRA’s expectations where banks plan to make material booking changes and where banks consider making a change to their booking model which will result in greater fragmentation of risk management across entities or locations.
• Industry developments. The PRA has observed more firms operating split desks, (where the bank trades the same instrument from more than one location and/or entity or branch, and the management of the product is also split between locations), than when it previously published its booking expectations in 2021. These arrangements carry with them higher operational risks and firms should be aware of the PRA’s expectations of their management. The revised expectations clarify both where the PRA is open to firms moving to split desks and what the PRA considers to be good practice in the management of such structures.
• Firm requests for further clarity regarding the PRA’s booking expectations. Firm responses to SS5/21 requested greater clarity on aspects of the expectations on booking arrangements, notably on some of the terminology, so that they could gain a better understanding of how to meet them. In addition, the PRA now has experience over several years of reviewing booking arrangements against these expectations and has used its booking principles in reviewing banks’ booking practices against them. The proposals aim to provide further clarity to firms both on those issues and include a reminder to firms on engaging with the PRA at an early stage in the process of planning material changes to booking models.

3.2. As part of this consultation, the PRA also proposes formally extending the scope of application of the booking section of SS5/21 to those banks and designated investment firms that are headquartered in the UK or are part of a group based in the UK, with investment banking and/or sales or trading activities in both the UK and overseas. This is to ensure that those banks undertaking the same activity in the UK are treated in the same way. These are termed ‘UK trading banks’ in the draft SS (see paragraph 3.12 below).

Proposed clarifications to the PRA’s expectations

Effective prudent risk management and control

3.3 Firms have different booking and risk management structures. As noted in the existing SS5/21 (SS paragraph 4.24, retained in new paragraph 4.25A), the PRA is open to firms operating a diverse range of booking arrangements provided there are effective systems and controls in place.

3.4 Most large international trading banks operate with some form of centralised risk management, where the market risk of a given product is managed from a single location, and run their business on a global basis. The UK is typically one of their global risk management hubs for market risk. The PRA is open to the use of global risk hubs, and centralised risk management can have particular advantages in the management of complex and non-linear risks and for the efficiency of both hedging and the quality of firms’ risk management and controls. And, in stressed events, experience shows that firms often need to centralise their risk management and hedging globally, showing one face to the external market.

3.5 Such a centralised structure may be appropriate for all risk types but, in particular, has benefits for complex non-linear risks that can be most effectively managed on a portfolio basis, as it: allows two-way directional flows from different client types to be balanced across a single entity; allows a fine-grained offsetting of risk parameters/risk sensitivities; and leads to natural internal portfolio-wide hedging of net risk characteristics that might otherwise be difficult or impossible to hedge externally with the market. In addition, centralised risk management provides other benefits including: streamlined operational processes; the use of common infrastructure; and the development of a critical mass of dedicated resource pools with deep expertise.

3.6 Where banks plan changes to such a centralised risk management structure, there is a risk that this could impair the effectiveness of their risk management. In such cases, the PRA will need to understand the rationale for the changes and where risk management is being fragmented, the mitigants that a firm is putting in place. This is the main driver of a proposed expectation in the revised SS that a firm should notify the PRA when they plan to make material changes (see paragraph 3.11 below).

3.7 The PRA also proposes setting out a number of considerations for all international and UK trading UK banks when they plan material changes to their existing booking arrangements (SS paragraph 4.25A-E). This is new for SS5/21, as the PRA has previously focused on criteria that a firm’s arrangements should satisfy in ‘steady state’, rather than in change management. The key principle is that those arrangements should not undermine the effectiveness of existing risk management controls. In any proposed material change to their booking arrangements, the PRA proposes that a firm will need to consider a number of factors, including:

• If a firm proposes greater fragmentation of risk management, a firm should ensure that this does not undermine its effectiveness, especially for large-scale business and business characterised by complex and non-linear risks, which are most effectively managed on a portfolio basis. If a firm were to plan to fragment the management of the most complex non-linear risks, such a proposal is unlikely to be acceptable to the PRA.
• In proposing to split desks between locations, a firm should ensure that: it is justified by volume of activity in the ‘new’ jurisdiction; there is still a single business head accountable for consolidated management of split desks across entities; and that the split between the number and seniority of traders is aligned with the proportion of activity managed across the locations.
• In any move towards greater remote booking a firm should ensure that the proposed risk management structure does not leave behind a liquidity, market or counterparty risk profile that is hard to manage, such as those risks best managed on a portfolio basis. A remote booking structure with all traders remote from the risk hub is unlikely to be acceptable to the PRA.
• A firm should also ensure that it has a sound economic rationale for a proposed change. These include, inter alia, the geographical location of market liquidity, or the relative distribution of client activity. Conversely, the PRA does not consider that the underlying currency of denomination of an instrument is sufficient rationale, of itself, to warrant the fragmentation of prudential risk management of a desk that is either large-scale and/or where the risk is complex (SS paragraph 4.25D). Globally and centrally risk managed desks need access to (and booking of) a range of currency denominations to achieve prudent and effective risk management.
• If a firm has a ‘pre-existing control weakness’ in the relevant area, these should have been remediated before it proposes further booking changes in that area.

Split desks

3.8 The PRA proposes additional guidance on its expectations where firms choose to operate split desks, and where there is extensive remote booking, both of which are associated with higher operational risks. As the number of locations or splits increases and there is a greater need to coordinate across desks, the fragmentation may make controls harder to operate effectively (see SS paragraph 4.25M). To mitigate these risks, a firm should set out clear desk ownership and the consequent management escalation for any operational or risk management incidents.

3.9 The proposed characteristics of an acceptable split desk model include the following:

• a single business head being accountable for consolidated management of split desks across entities;
• market risk limits which are appropriately monitored and sub-allocated down to legal entity;
• the split between the number and relative seniority of traders being aligned with the proportion of activity managed across the locations;
• a single consolidated independent risk management oversight across the entities with the ability to reduce offsetting inventory positions by way of periodic inter-affiliate transactions; and
• the ability to pool collateral between entities for centralised financing and short-covering purposes (SS paragraph 4.25N(d)).

3.10 For remote booking, the PRA proposes that any UK legal entity or branch that receives remote bookings should ensure that there is some local UK oversight of these remote books as a risk mitigant, particularly in cases where there is no UK based trader covering the book (often called ‘orphan books’). ‘Shared’ books or desks, where there is a mix of local and remote traders, should be clearly defined in the firm’s booking taxonomy (see paragraph 3.13 below), and the remote booked portion of the risk is expected to be identified and subject to remote booking controls (SS paragraph 4.25O-4.25P).

Notification

3.11 The proposed changes to the text of SS5/21 include adding an expectation that a firm should notify the PRA when it plans to make material booking model changes (SS paragraphs 4.25A-4.25E). This is the type of information that firms should share with the PRA under Fundamental Rules 7 or Rule 2.3(1) of the Notifications Part of the PRA Rulebook. Most firms who have material trading activity already notify the PRA when they plan to make such changes to their booking arrangements. And these notifications could be included in regular/periodic supervisory meetings (SS paragraph 4.25C). It is not feasible to give a numerical threshold to guide when notifications should be made. However, the PRA has suggested a number of qualitative criteria, notably when trading is material to the firm’s business and when there are significant changes to the risk management structure.

Scope of application

3.12 SS5/21 as a whole currently applies to international banks, that is all PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK. The booking expectations in the statement are currently not applied formally to UK-headquartered banks, but the PRA supervisors of the relevant UK firms have used them as the basis for reviewing their booking arrangements. The PRA proposes extending the scope of application for these booking expectations to include those PRA-authorised banks and designated investment firms that are headquartered in the UK, or are part of a group based in the UK, with investment banking or sales and trading activities in both the UK and overseas (see SS paragraphs 1.1 and 4.24A). The SS proposes the term ‘UK trading banks’ to cover such firms. The relevant booking expectations relate to a bank’s controls and those are set out in the SS paragraphs 4.1(d), 4.20, 4.23-4.425E, 4.30A-4.46A, 5.14-5.16 and the Annex on Context and Definitions.

Taxonomy

3.13 As noted above, firms have requested further clarity on the PRA’s expectations, including on the definitions of terms.

3.14 The PRA proposes, in revising SS5/21, that a firm should define its own taxonomy as part of their policy document. There are currently many different uses of terms such as ‘remote booking’ or ‘split desks’. The proposed Annex to the section on booking sets out the characteristics firms should consider when defining its own processes and controls, for example on ‘remote booking’ and ‘back to back’. Firms and regulators do not have common terminology. The PRA therefore proposes setting out the types of activities it believes are relevant to cover, but leaving it to a firm to define terms in its own policy documents (SS paragraph 4.35A). A firm’s taxonomy should clearly define the use of terms such as remote booking (legal entity and geographic sense), split desks, and shared desks.

Front office controls

3.15 The PRA proposes expanding the guidance on management and controls to provide greater transparency around the PRA’s expectations. These suggested clarifications also reflect firm queries that the PRA has received since 2021 and issues that have arisen during PRA reviews of firms’ booking controls.

3.16 The PRA proposes giving more clarity in several areas:

3.17 On terminology, the PRA proposes:

• Adding a descriptive Annex as an illustration of the types of booking practices: back-to-back, centralised hubs, split desks, remote booking. This is not an exhaustive list and there is no agreed use of such terminology across firms or regulators, so the PRA is not proposing specific definitions. However, the proposals indicate the key characteristics relating to these terms and indicate firms should use their own precise definitions.
• Providing further explanation of what it means by booking controls applying to the ‘lifecycle of trades’. In particular, the PRA considers booking to occur when a trade is first entered into the bank’s systems and so propose expectations on the control of booking rights. In the proposed Annex to the SS, ‘booking model’, ‘booking arrangements’, and ‘booking framework’ are clarified as synonyms that mean the entire sequence of trade lifecycle activities that ensure that a booked trade is directed to the correct legal entity or branch in a controlled manner. This includes, for example, trade capture, risk transfer and other operational events including settlement and the associated controls involved.
• Clarifying the initiation point for ‘booking’. In SS paragraph 4.25J, the PRA proposes that a firm should define and record who is permitted to book and what constitutes a booking, including whether the trader is solely responsible. This should articulate the distinction, if any, between traders, sales persons and sales traders. The firm should also ensure that trade capture and trade modification are preferably the responsibility of one individual, and this would normally be the trader. The PRA expects the delegation of booking activities to non-trading staff to be tightly controlled and does not expect the actual booking responsibility to be delegated to them. 

3.18 Secondly, on transparency (SS paragraphs 4.25F-4.25G), the PRA proposes:

• Noting that the overall objective for a firm with international booking arrangements is that the location of trading risks should be transparent to each legal entity. This requires an ability for the reporting of such risks to be readily disaggregated by entity.
• Elevating the status of the section on management information on booking to make it clear that the PRA considers it an important element of ‘controls’ and has added more detail on its expectations. Management information should cover booking type, booking location, the number of remote books and remote traders, and the volume and value of remotely booked trades (SS paragraphs 4.25R-4.25S).

3.19 Finally, the PRA also proposes more clarity on pre- and post-trade controls. Where possible, a material trading business should seek to avail itself of a mix of detective and preventative (SS paragraph 4.25L). Firms should determine the appropriate mix and what is practicable for various applications. The objective should be to embed pre-trade (soft and hard block) trading controls into their trading systems to ensure that a particular product, client and entity combination is a permitted booking from the outset (SS paragraph 4.36A).

Timing of application

3.20 The amendments to the booking expectations in the SS largely consolidate the PRA's existing approach to international banks and UK trading banks, but provide more detail in a number of areas. The PRA expects authorised firms within the scope of this section to meet the expectations set out within a reasonable timeframe, taking into account the firm’s current position and the scale of any change that might be required. These firms should provide their supervisors with a planned timeframe for doing so.

Co-ordination with the FCA

3.21 The PRA has consulted the FCA in developing these amendments to its expectations for dual-regulated firms. The PRA and the FCA will continue to work closely in this area and to share information and views on relevant firm proposals where needed.  

PRA objectives analysis

3.22 The PRA’s expectations are designed to advance its primary objective of safety and soundness in this area of firms’ activity by providing additional detail on the PRA’s expectations of prudent risk management. The PRA is proposing to update these expectations to reflect developments in firms’ booking structures and practices, notably the potentially greater fragmentation of firms’ risk management structures.

3.23 The PRA is maintaining its established approach of responsible openness in the revised supervisory statement. The PRA remains open to highly-integrated firms operating as branches or subsidiaries, provided they meet the expectations set out in SS5/21. This approach also underpins the PRA’s expectations of booking arrangements. The PRA is open to a range of booking models provided they meet the appropriate standard for prudent risk management.

3.24 Overall, the expectations promote safety and soundness by ensuring robust risk management and greater transparency around booking arrangements, both within the firm and across the firms’ global regulators. The expectations provide greater clarity to UK and international banks on how they can ensure prudent risk management in the face of greater fragmentation of booking arrangements. The original responses to SS5/21 sought more clarity in a number of areas, and the PRA believes that the greater detail it is providing will assist with these requests.

3.25 The PRA has considered how the proposed clarifications of its expectations would impact its secondary objectives on competition and on international competitiveness and growth.

3.26 The proposed clarifications to the PRA’s expectations benefit competition by facilitating more efficient prudential practices through the use of centralised risk management and group risk management resources. A more localised approach would favour larger firms with the resources to set up operations in multiple jurisdictions.

3.27 Adopting a responsibly open approach attracts foreign capital to the UK and enhances the UK’s stature as a global financial centre, and is an important part of the PRA’s approach to the secondary competitiveness and growth objective. The proposals support the UK’s international competitiveness and growth by allowing firms to rely more on their global affiliates and resources giving firms more flexibility in how they structure their operations.

3.28 It is also important for the PRA to ensure that the scope of application is unambiguous. The material provides further detail on the PRA’s expectations, and UK and international banks undertaking the same business are expected to meet the same standards. While the PRA as home supervisor for UK-headquartered groups usually has better visibility of their global booking arrangements than it does for international banks, these activities can still pose the same types of risk to the PRA’s objectives in terms of potential weaknesses in risk management and controls.

Cost benefit analysis

Benefits

3.29 The proposals address industry responses to the original SS5/21 which asked for more clarity on expectations of firms’ booking model arrangements. The clarifications will help enable firms to rely on group resources (in contrast to localised approaches to risk management). As such, the proposals protect more efficient prudential practices (via centralised risk management and the ability to rely on group resources), which help support competition (compared with a more ‘localised’ approach to risk management which favours larger firms with the resources to set up desks in multiple jurisdictions).

Costs

3.30 A key expectation is the reminder that firms should tell the PRA when they are making substantial changes to their risk management structures. The PRA would expect to discuss this with them and is open to different arrangements and would offer firms additional flexibility to adapt to these expectations. Most firms already discuss any such proposed changes with us. Accordingly, there do not appear to be any material upfront costs (as the PRA is only asking firms to flag in advance that they are planning to make changes, including explaining why they are making them).

3.31 In addition, given that the PRA’s proportionate approach in setting its expectations takes account of the materiality of the firm’s trading activity, the PRA does not expect small firms or those with small trading books to find it relatively more costly to comply with new proposals. Finally, the expectations apply consistently across domestic and international firms, and across branches and subsidiaries.

3.32 The PRA continues continue to work closely with all relevant regulatory bodies to oversee PRA-regulated international banks. Where differences of approach arise, the PRA will work with other regulatory bodies to agree an appropriate solution. By providing greater transparency, the PRA believes this will assist in finding mutually agreeable outcomes. Acceptable solutions were agreed between the ECB and the other regulators during the DMR.^{footnote [11]}

3.33 The proposals support the PRA’s approach to responsible openness by allowing international firms to rely more on their global affiliates/resources, but maintaining safety and soundness. The PRA’s expectations remain less prescriptive than the expectations of some peer regulators and broadly in line with others’.

‘Have regards’ analysis

3.34 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

3.35 The need to use the PRA’s resources in the most efficient and economical way (FSMA regulatory principles): The PRA is proposing to provide more clarity and detail on its booking expectations which will assist firms in meeting the PRA’s expectations.

3.36 The principle that the regulators should exercise their functions as transparently as possible (FSMA regulatory principles): By making clear the additional expectations the PRA had developed, the PRA’s proposals would take account of the principle that it should exercise its functions as transparently as possible. The alternative of keeping these expectations unpublished would contravene this ‘have regard’.

3.37 The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): There would be a limited burden imposed on firms by these proposed more detailed expectations. These expectations are relevant to all internationally active PRA authorised banks which accounts for most of the international banks authorised in the UK and a significant proportion of UK headquartered firms. The PRA has tried to make clear that the application of these expectations is also proportionate depending on the degree of trading activity undertaken. The PRA’s proposals do not impose any regular data reporting requirements on the relevant banks.

3.38 The PRA has made clear that for UK groups it is only the material subsidiaries in their groups that it is primarily interested in seeing plans for material booking changes for material subsidiaries (see SS paragraph 4.25C). These notifications should also be made within normal/existing supervisory exchanges.

3.39 The PRA is providing guidance to firms on how they may comply with the Fundamental Rules and General Organisational Requirements (GOR), but the PRA is not imposing new requirements or rules. Firms may find different ways to comply and can explain to the PRA how they deviate from the proposed expectations the PRA has set out. This would ensure there is very limited additional burden, while there would be considerable benefits to firms from providing more clarity.

3.40 The responsibilities of the senior management of persons subject to requirements imposed by or under this Act, including those affecting consumers, in relation to compliance with those requirements (FSMA regulatory principles): The PRA already has an expectation that firms appoint a senior manager with responsibility for the firm’s booking arrangements. The additions in these proposals relate more to the responsibilities for the booking function being clarified and ensuring that where desks are split there is clear overall responsibility.

3.41 The principles and Regulators Compliance Code under the Legislative and Regulatory Reform Act (LRRA): Each of the five principles in the LRRA (transparent, accountable, proportionate, consistent, targeted only at cases in which action is needed) for regulatory activities is relevant to the proposal. The PRA considers the proposal meets these principles and the spirit of the Regulator’s Code for the following reasons:

• Transparent and Accountable: The proposals seek to add greater clarity to existing expectations. The PRA is consulting on the proposals. The PRA will explain how feedback has been considered in the SS.
• Proportionate: The PRA would continue to apply its expectations in this area proportionately and there is no reason for firms to expect a change in the degree of engagement they already have with the PRA on booking. The application of expectations is proportionate depending on the level of trading activity undertaken and seeks to facilitate efficient use of resources by firms.
• Consistent: The proposals would place the same expectations on all banks who operate internationally and undertake trading activity.
• Targeted: The proposals are targeted at all banks who operate internationally and undertake trading activity and are designed and meant to be implemented in a proportionate manner.

3.42 The desirability of the PRA exercising its functions in a way that recognises differences in the nature of businesses carried on by different persons (FSMA regulatory principles): The PRA accepts a range of booking model structures, recognising the diversity of firms’ business and booking models. The PRA’s assessment needs to be flexible to encompass this diversity, but still achieve consistent standards. The proposed expectations are in the form of guidance and no rules are proposed.

Impact on mutuals

3.43 The impact is not expected to be material. Building societies are precluded by section 9A of the 1986 Financial Services Act from acting as a market maker or trading (subject to some de minimis exemptions) and will not be undertaking the relevant trading activities.

Equality and diversity

3.44 The PRA considers that the proposals do not give rise to equality and diversity implications.

4: Amendment to the PRA Branch Return to collect whole-firm liquidity data

Introduction

4.1 In this chapter, the PRA proposes changes to reporting requirements for third-country branches in PRA rules and SSs to improve the collection of whole-firm liquidity data.

4.2 The chapter is relevant to PRA-regulated UK branches of third-country banks and designated investment firms (herein ‘third-country firms’). It is not relevant to credit unions or insurers.

Proposal for a new Branch Reporting rule and amendments to the Branch Return Form and Guidance

4.3 In line with the PRA’s programme of work to strengthen and transform its data-related capabilities, the PRA is proposing to change the way it collects whole-firm liquidity data from third-country firms. The PRA is proposing to add a new part to the PRA Branch Return Form to collect whole-firm liquidity data from third-country firms. This would involve the amendment of Rule 22.3 and the deletion of Rule 22.4(1) in the Regulatory Reporting Part of the PRA Rulebook, and amendments to the Branch Return Form and to the Reporting Guidance for the Branch Return. The deletion of Rule 22.4(1) reflects the introduction of liquidity reporting into the Branch Return and does not indicate that liquidity reporting for banks is being removed.

4.4 The PRA proposes to collect summary information on whole-firm Liquidity Coverage Ratios (LCR) and Net Stable Funding Ratios (NSFR) as reported to the home state supervisor through the PRA Branch Return Form.

4.5 Under the proposals, third-country firms would be required to report whole-firm spot data in pounds sterling on a total currency basis semi-annually, based on 30 June and 31 December end of reporting periods covering:

• High Quality Liquid Assets
• LCR inflows over 30 days
• LCR outflows over 30 days
• LCR net outflows over 30 days
• Liquidity Coverage Ratio
• Available Stable Funding
• Required Stable Funding
• Net Stable Funding Ratio
• Exchange rate at reporting date (from reporting currency to pounds sterling)
• Reporting currency
• Reporting date

4.6 The objective of this proposal is to reduce the amount of whole-firm liquidity data the PRA collects from all third-country firms and to systematise the collection of summary metrics. Collecting summary metrics through the Branch Return Form would reduce the manual nature of the current data collection set out in SS1/17 and lead to a simpler submission process for third-country firms. This change would also make it easier and more efficient for supervisors of third-country firms to review the data submitted and make it consistent with wider PRA regulatory reporting.

Proposals for the revocation of SS1/17, amendments to SS34/15 and a consequential change to SS5/21

4.7 The PRA proposes to revoke SS1/17, which sets out the PRA’s expectations of branch liquidity reporting, and replace it with an update to the existing SS34/15 – Guidelines for completing regulatory reports.

4.8 The PRA proposes the policy intent of SS1/17 is retained in the revised expectations in SS34/15 as follows:

• firms should submit summary whole-firm liquidity information through the PRA Branch Return Form every six months;
• the PRA expects some third-country firms to submit additional and/or more frequent whole-firm liquidity information via email to their usual supervisory contact, including daily in a stress. All third-country firms should maintain the ability to submit the full LCR and NSFR returns as reported to the home state supervisor. In determining whether to request more and/or more frequent whole-firm liquidity information, the PRA may have regard, among other factors, to;
  • whether the metrics submitted through the PRA Branch Return Form suggest a material change in the firm’s funding or liquidity position;
  • whether the firm is experiencing a liquidity stress;
  • whether the firm has been authorised within the last twelve months;
  • the nature, scale, and complexity of the firm’s activities, including the potential impact on UK financial stability; and
  • the information available pursuant to the requirements of the home state supervisor;
• the PRA expects most third-country firms would be able to comply with the PRA’s approach outlined above. Where a third-country firm can demonstrate that this is not the case, for example, because its home jurisdiction does not currently have a LCR or NSFR regime, firms should indicate this in the Branch Return and the PRA would work with the firm to determine suitable, alternative reporting arrangements on a case-by-case basis. Suitable arrangements may include firms providing information based on the home state supervisor’s own liquidity regime or whole-firm internal liquidity management information.

4.9 The proposals in this CP would result in a consequential change to SS5/21. The PRA proposes to replace the reference to SS1/17 in paragraph 6.6 of SS5/21 with a reference to the revised Branch Return Form whole-firm liquidity reporting requirement and the updated expectations in SS34/15.

4.10 The proposal to revoke SS1/17 is intended as a simplification measure to reduce the number of SSs relevant to third-country firms. The proposal to retain the existing policy intent of SS1/17 within SS34/15 is intended to preserve the PRA’s expectation that third-country firms remain prepared for the PRA to request further information on the whole-firm liquidity position than is provided by the summary metrics. The proposal also provides for instances where, in a limited number of cases, a third-country firm may be unable to meet the PRA’s reporting requirements in the Branch Return Form.

PRA objectives analysis

4.11 This proposal is intended to improve the collection of whole-firm liquidity data, which third-country firms already submit to the PRA by email. Collecting the data using the existing Branch Return Form would improve efficiency, reduce the risk of manual errors, and make it easier for the PRA to assess the whole-firm’s liquidity position, therefore advancing the PRA’s objective of promoting the safety and soundness of firms.

4.12 The PRA has considered whether the proposals in this CP would advance the PRA’s secondary objectives to facilitate effective competition and to facilitate the international competitiveness of the UK economy and its growth in the medium to long-term. Third-country firms are currently already subject to similar whole-firm liquidity data collection expectations by the PRA, so the PRA does not expect the proposals to have a material impact on the secondary objectives. The expectations regarding PRA requests for more whole-firm liquidity data beyond the summary information provided in the Branch Return Form are designed to be proportionate to the scale and complexity of the third-country firm.

Cost benefit analysis

Benefits

4.13 The PRA considers it is preferable to require a more limited set of whole-firm liquidity metrics across all third-country firms and to tailor further whole-firm liquidity information requests to a third-country firm’s specific situation.

4.14 The PRA also considers that the changes to the data collection would remove existing manual processes and therefore reduce the risk of human error in firms’ submissions and PRA review.

4.15 Finally, collection of whole-firm liquidity data through the Branch Return Form would make it easier for firms to meet the PRA’s existing supervisory expectations.

4.16 These three effects would support more efficient and effective supervision of international bank branches, which reduces risks of disorderly firm failure, thereby helping maintain confidence in PRA firms, the supply of essential services and supporting financial stability.

Costs

4.17 The PRA anticipates firms would spend a small amount of time familiarising themselves with the proposals. The PRA also anticipates one-off implementation costs to firms relating to the systems changes required to adapt to the new reporting content in the Branch Return Form. The PRA expects such one-off costs to be minimal as the information the PRA is proposing to collect through the Branch Return Form would be readily available to submitting firms as most already submit this information to the PRA in other formats. Additionally, the PRA anticipates ongoing costs to firms would be minimal once the implementation of the changes is complete.

4.18 Overall, the PRA considers that the cost to firms from these proposals would be minimal and materially outweighed by the long-term benefits to firms and the PRA.

‘Have regards’ analysis

4.19 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were most significant in the PRA’s analysis of the proposal:

• Proportionality (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The proportionality principle is embedded within the proposed data collection and expectations as they are sized not to be overly burdensome on small third-country firms, and proposed supervisory expectations, on requesting more and/or more frequent data, would factor in the size and complexity of the firm in making further requests.
• The need to use the resources of each regulator in the most efficient and economical way (FSMA regulatory principles): The proposed policy and data collection should result in a more efficient use of PRA resources as it would automate much of the whole-firm liquidity data collection process and reduce the time spent on manual tasks.
• Transparent exercise of PRA’s functions (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The proposals include revised supervisory expectations and reporting guidance to ensure clarity for firms on the PRA’s expectations for how they should report whole-firm liquidity data and under what circumstances they should be prepared to submit further information.

4.20 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ not to be a significant factor for this proposal.

Impact on mutuals

4.21 The proposed rules do not apply to mutuals or Building Societies.

Equality and diversity

4.22 The PRA considers that the nature of the proposals does not give rise to equality and diversity implications.

5: Minor amendments to SS5/21

5.1 In this chapter, the PRA proposes minor amendments to SS5/21 that seek to provide greater clarity on the underlying intent of specific expectations and update references to relevant material.

Proposal 1: Clarifying Role of Deposit Aggregators

5.2 The PRA proposes a minor amendment to Chapter 6 of SS5/21 to clarify expectations regarding the interaction between indicative thresholds on bank branching and the use of deposit aggregators.

5.3 This proposal is relevant to PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK.

5.4 Chapter 6 of SS5/21 outlines indicative thresholds that inform the PRA’s expectations as to whether an international bank is best suited to operate in the UK as a subsidiary or a branch. These thresholds pertain to levels of deposit-taking activity and the number of retail and small company customers serviced by a bank branch.

5.5 As outlined in Dear CFO Letter: Working with Deposit Aggregators, firms should manage their arrangements with deposit aggregators in a manner that is consistent with outsourcing and third-party risk management expectations.

5.6 For greater certainty, the PRA is proposing an amendment to clarify that use of third parties to source deposits will be taken into consideration when assessing the deposit-taking activity by a bank branch relative to the indicative thresholds outlined in SS5/21. Specifically, the PRA will look-through to underlying beneficiary customer counts and retail activity when benchmarking firms against indicative thresholds.

Proposal 2: Clarifying the PRA’s Process on Equivalence Assessments

5.7 The PRA proposes minor amendments to Chapter 3 of SS5/21 to clarify its process for assessing equivalence of home jurisdictions of international banks.

5.8 This proposal is relevant to PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK.

5.9 One of the general expectations the PRA considers for effective supervision is whether the home jurisdiction’s prudential regulatory and supervision regime is sufficiently equivalent to the UK regime. When assessing equivalence, SS5/21 outlines how the PRA will base its analysis on reputable third-party sources, such as the International Monetary Fund’s Financial Sector Assessment Programme reviews.

5.10 For some jurisdictions, analysis from third-party sources may not be available. Additionally, some firms may be subject to a regulatory framework in their home jurisdiction that differs from the default regulatory regime assessed by third-party sources.

5.11 Proposed amendments in SS5/21 clarify that the PRA would base its equivalence assessments on reputable third-party sources where appropriate and available, but will utilise other sources as necessary.

Proposal 3: Clarifying expectations for international banks on innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins

5.12 The PRA proposes a minor amendment to Chapter 3 of SS5/21 to include a reference to existing expectations regarding innovations in the forms of digital money and money-like instruments that are applicable to some international banks.

5.13 This proposal is relevant to PRA-authorised banks and designated investment firms that are headquartered outside of the UK or are part of a group based outside of the UK.

5.14 In November 2023, the PRA published Innovations in the use by deposit-takers of deposits, e-money and regulated stablecoins to clarify expectations for deposit takers to approach different types of innovative digital money and money-like instruments. This includes, inter alia, the expectation that deposit-taking entities only provide innovations in digital money in the form of deposits in a way that meets eligibility rules for deposit protection under the FSCS. The PRA intends to include a reference to this publication in SS5/21 to improve regulatory coherence for international banks.

Proposal 4: Conclusion of the Temporary Permissions Regime

5.15 The PRA proposes minor amendments to the introductory chapter of SS5/21 to remove guidance on the PRA’s approach to firms operating under the Temporary Permissions Regime (TPR), as the time period to process authorisation applications from EEA banks under the TPR concluded at the end of 2023 and no firms remain within the regime.

PRA objectives analysis

5.16 The PRA considers that the proposals in this Chapter would improve the clarity, coherence and relevance of expectations within SS5/21 in a manner that advances the PRA’s primary objectives of firm’s safety and soundness and policyholder protection.

5.17 The PRA considers that, given their nature as clarifying amendments to SS5/21, these proposals provide firms with added legal certainty. Proposals have also been designed with proportionality in mind and enable the PRA to maintain its open approach to banking relative to other jurisdictions. As such, the PRA believes the proposals advance the secondary objectives of facilitating effective competition and the international competitiveness of the UK economy and its growth in the medium to long-term.

Cost benefit analysis

Benefits

5.18 Proposals 1 to 3 seek to make explicit clarifications and/or references to other areas of the PRA’s regulatory framework as they apply to international banks. The PRA believes this would improve legal certainty and coherence across the PRA’s regulatory framework. Proposal 4 removes language in the supervisory statement that is no longer relevant.

5.19 The PRA believes the clarity provided by proposals 1 to 3 would help advance its primary objective. Clarity on the PRA’s expectations regarding the use of deposit aggregators by foreign branches would help ensure such third parties are risk managed adequately. Additionally, updates to the PRA’s process for administering supervisory equivalence assessments would ensure that assessments remain accurate. These effects will support more efficient and effective supervision of international bank branches.

Costs

5.20 Proposals 1 to 3 clarify existing PRA expectations in the context of international banking. Meanwhile, proposal 4 provides firms with an updated description of PRA authorisation processes with no bearing on firm operations. As such, these proposals are not expected to have cost impacts for firms.

‘Have regards’ analysis

5.21 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The aim of all proposals is to ensure expectations within SS5/21 are clear and up to date.
• Proportionality (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The PRA’s approach to assessing supervisory equivalence of home jurisdictions include considerations around proportionality. These considerations have been maintained under newly proposed amendments.

5.22 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this set of proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for the proposals in this chapter.

Impact on mutuals

5.23 The proposed rules do not apply to mutuals or Building Societies.

Equality and diversity

5.24 The PRA considers that the nature of the proposals does not give rise to equality and diversity implications.