On July 30, 2024, the Prudential Regulation Authority (PRA) published a consultation paper (CP11/24) (CP) on proposed updates to its supervisory statement on international banks and its approach to branch and subsidiary supervision (SS5/21). The PRA’s proposals are intended to reflect developments since SS5/21 was originally published and to provide further detail and clarification on specific aspects of its existing approach, including its approach to risk management and remote booking.

The consultation is relevant to:

• PRA-authorized banks and designated investment firms that are headquartered, or part of a group based, outside the UK (International Banks); and
• in relation to booking arrangements, International Banks, as well as PRA-authorized banks and designated investment firms that are headquartered, or part of a group based, in the UK with investment banking and/or sales or trading activities in both the UK and overseas (UK Trading Banks).

The PRA is consulting on the following areas:

• updates to the PRA’s expectations regarding the thresholds and/or circumstances in which it would expect International Banks to operate through a UK subsidiary, not a branch;
• providing further detail and clarifications in relation to its expectations of firms’ booking arrangements, as well as introducing a formal notification requirement for material changes to booking models;
• amendments to reporting requirements for third country branches; and
• various other minor amendments to SS5/21, including clarifications in relation to deposit aggregators.

The PRA’s branch risk appetite

The PRA’s current expectation is that significant retail activity undertaken by an International Bank should take place through a subsidiary rather than a branch. The PRA considers that its existing thresholds do not adequately identify certain instances where a branch is holding material transactional and instant access deposits (demand deposits) over the UK Financial Services Compensation Scheme (FSCS) limit. The PRA proposes to:

• Introduce an additional indicative threshold of £300m ($386m) of total retail and small company demand deposits (including non FSCS-covered deposits).

This threshold would sit alongside the current indicative threshold of £100m ($129m) of FSCS-protected amounts. At the same time, the PRA intends to clarify that it may consider it appropriate for an International Bank to operate through a UK branch in cases where the holding of retail demand deposits in excess of the indicative thresholds is caused by deposits from high-net-worth individuals (HNWI deposits). The PRA plans to treat all individuals with financial assets of over £250k ($322k) in the last financial year as HNWIs for these purposes.

• Take into consideration significant demand deposits from corporate customers undertaking wholesale activity that are likely to be dependent on the branch as their sole provider of transactional banking.

In the PRA’s view, such wholesale deposits resemble deposits from small companies in the risk they pose to the UK’s financial stability. The PRA does not intend to set quantitative thresholds for such activity and proposes to rely on supervisory dialogue and assessment work to review the scale and nature of such deposits on a case-by-case-basis. The PRA will also take into account retail or corporate liabilities originated in a UK branch but booked remotely to another jurisdiction and expects firms to notify it when this occurs.

• Take into consideration the efficacy of the home resolution authority’s arrangements for resolution when making a determination about branch risk appetite against criteria relating to demand deposit activity.

If the PRA can rely on an International Bank’s home resolution authority to deliver comparable resolvability outcomes to the Bank of England, it may allow International Banks to provide demand deposit services to customers, even where these activities would usually fall outside of its risk appetite.

• Add new reporting elements to the existing PRA Branch Return Form, to implement the proposals outlined above.

This would involve activating existing fields to enable International Banks to report: (i) total retail and small company deposits held in transactional and instant access accounts; and (ii) instant access non-financial corporate deposits.

Based on the information available to it, the PRA does not anticipate that any International Banks currently operating as branches in the UK will be required to become subsidiaries as a result of the proposals described above.

Expectations of firms’ booking arrangements

The PRA’s booking expectations in SS5/21 currently apply to International Banks only and do not fully express the PRA’s views as articulated in one-on-one supervisory discussions. The PRA proposes clarifications to its stated expectations on booking arrangements and to explicitly extend their application to UK Trading Banks.

The proposed clarifications provide a valuable insight into the PRA’s approach and thinking around the structure of different booking models (centralised booking, split booking, remote booking and shared desk models) and the PRA’s risk management expectations, based on its experience of reviewing such arrangements over a period of several years. In summary, the PRA’s proposals include:

• Setting out considerations for all International Banks and UK Trading Banks when they plan material changes to their existing booking arrangements and introducing a formal notification requirement.

The PRA emphasises that changes to centralized risk management structures (e.g. towards greater fragmentation of risk through split desk or remote booking arrangements) should not undermine the effectiveness of existing risk management controls. The PRA expects firms to have identified a sound economic rationale for any proposed change and emphasises the importance of early engagement with the PRA. The PRA is also taking the opportunity to introduce a formal notification requirement, listing certain qualitative factors which may suggest that a notification is required.

• Additional guidance for firms operating split desks or extensive remote booking arrangements.

The PRA expects firms to mitigate the heightened operational risks by ensuring clear desk ownership and implementing arrangements for consequent management escalation.

• Requiring firms to develop their own taxonomy of terms such as ‘remote booking’ and ‘split desks’ in their policies and procedures.

Although the PRA will not define these terms itself, it has proposed certain characteristics that firms should consider when defining these terms in their own policies and procedures.

• Expanding PRA guidance on front office controls in several areas.

The PRA proposes various changes to bring greater clarity and transparency around its expectations in relation to the use of certain terminology (e.g. the distinction between traders, sales persons and sales traders), the location of trading risk, the importance of management information and scope of coverage, and pre- and post-trade controls.

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

In summary, the PRA proposes changes to collection of whole-firm liquidity data from third country firms, with the addition of a new part to the existing PRA Branch Return Form. Under the proposals, third-country firms would be required to report spot data semi-annually, on various metrics relating to liquidity coverage ratios and net stable funding ratios.

Minor amendments to SS5/21

The CP also sets out various minor amendments to SS5/21 to clarify specific expectations and processes, and to update references to relevant material. These include clarifying:

• the role of deposit aggregators, with the PRA noting that use of third parties to source deposits will be taken into consideration in making its determination as to whether to allow International Banks to operate through a branch;
• the PRA’s process for assessing the equivalence of International Banks’ home jurisdictions;
• expectations regarding innovations in digital money and money-like instruments; and
• removing guidance on its approach to firms operating under the Temporary Permissions Regime which has become obsolete.

Actions for firms and next steps

While the PRA is not intending to materially change its supervisory approach, International Banks and UK Trading Banks should review the new guidance and other proposals carefully. Existing International Banks and overseas firms that are considering entering the UK market should consider what impact the new thresholds for subsidiarisation may have on their UK structure (e.g. whether they may permit more growth without subsidiarising than previously anticipated).

In relation to booking arrangements, the PRA’s proposed amendments should provide both International Banks and UK Trading Banks with some welcome clarifications. Firms should review their existing models and policies against the updated text and prepare to build the formal notification process into change management. We would be happy to discuss the potential impact on your booking arrangements and would recommend a review of the relevant policy documents.

The PRA invites comments by October 30, 2024 and intends to implement the final changes on December 31, 2025.