United Kingdom: Banking & Finance

The Financial Conduct Authority (FCA) is the conduct regulator for firms providing financial products and services in both retail and wholesale markets, and also the prudential regulator for many firms. It is also responsible for enforcing the market abuse and listing regimes.

The Prudential Regulation Authority (PRA) is responsible for the prudential regulation of systemically important financial institutions, including banks, building societies, insurers and major investment firms.

The Bank Recovery and Resolution Directive (BRRD) establishes a common approach within the European Union (EU) to the recovery and resolution of banks and investment firms. The Bank of England is the resolution authority in the United Kingdom for the purposes of BRRD.

In addition, the UK’s own special resolution regime provides the Bank of England, the Prudential Regulation Authority, the Financial Conduct Authority and the Treasury with tools to protect financial stability by managing the failure of financial sector firms.

Deposit taking by way of business is the regulated activity that requires an institution to be a regulated credit institution.

Lending is only a regulated activity in relation to mortgages and consumer lending. In these circumstances, and assuming none of the available exemptions apply, a lender will need to be authorized by the UK Financial Conduct Authority to conduct such business.

Mortgage and consumer loans are subject to a range of regulatory requirements that do not apply to unregulated loans. For example, for regulated mortgage contracts, there are particular restrictions around how:

• the loans are marketed, originated and sold;
• lenders administer the loans on an ongoing basis; and
• borrowers who fall behind with their payments are dealt with.

Regulated credit agreements on the other hand have specific requirements around how the agreement is drafted and formatted and what information must be included.

There are no additional restrictions that apply to foreign lenders making loans to UK borrowers.

The regulatory regime in England and Wales provides for a range of regulated activities to be conducted only by authorized persons. These extend beyond pure ‘banking’ services. A financial activity requires regulatory authorization when it is identified as a specified activity in relation to a specified investment, it is carried on by way of business in the UK and it does not fall within any of the available exemptions.

• Specified activities include activities such as accepting deposits, dealing in, managing, arranging and advising on investments, and establishing collective investment schemes.
• Specified investments include deposits, shares, debt instruments, options, futures, units in a collective investment scheme and government and public securities.

The scope of the authorized activities that a bank has vary and a bank will need to have the correct permissions as part of its authorization.

Yes. The UK FCA has established a regulatory sandbox for innovative propositions that are either regulated business or support regulated business in the UK financial services market, open to authorised firms, unauthorised firms that require authorisation and technology businesses. The sandbox provides the ability to test products and services in a controlled environment, reducing time to market, providing support to identify appropriate consumer protection safeguards and better access to finance. This has been launched on a cohort basis with five cohorts closed to date.

Cryptocurrencies and other crypto assets may fall within the existing UK regulatory perimeter and in particular tokens may be specified investments under the Regulated Activities Order, may be financial instruments under the Markets in Financial Instruments Directive II, may be e-money under the e-money regulations or may be captured under the Payment Services Regulations. On 23 January 2019, the UK FCA launched a consultation on guidance for cryptoassets which is open for comment until 5 April 2019.

An institution wishing to become authorized as a bank in England and Wales will need to be authorized to do so by the PRA and become regulated by both the PRA and the FCA. While the PRA make the final decision on an application, the PRA can only authorise a new bank with the FCA’s consent.

The process involves a pre-application phase which the regulators recommend to commence discussions before submitting an application for authorisation. The PRA will initially focus on the following areas:

• Business plan
• Senior management, the board and governance
• Financial resources
• IT strategy
• Outsourcing

The PRA recommend a series of at least four pre-application meetings with papers for each submitted at least 10 days in advance.

This is then followed by submitting a formal application for the PRA to consider and use to decide whether to authorise the new bank. At this stage, detailed forms are submitted and an application fee of £25,000 is payable. The PRA will commence its review and assessment and aims to revert with its initial response within eight weeks which will include reverting on required capital and liquidity levels.

Note that the first assessment the PRA will make is whether the application is complete or not. This affects the statutory deadline by which the PRA must make a decision on the application which is a six month statutory deadline to assess an application that has been deemed complete and a 12 month statutory deadline to assess an application which has been deemed incomplete.

Authorisation is then further followed by mobilisation – an optional stage where the new bank, once authorised, completes its set up before starting to trade fully.

Yes. If an entity is already authorised as a bank elsewhere in the European Economic Area (EEA) then it can ‘passport’ into the UK directly, without applying to the UK regulators.

This is different from the position for international banks headquartered outside the EEA which may operate in the UK through a branch, a subsidiary or both but they need to go through the new bank authorisation process for either approach.

Most banks take the form of limited companies, with larger banks typically being public limited companies and smaller ones being both public companies and private companies. There are some institutions formed by Royal Charter or special act of parliament for historical reasons.

Corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management, including how they:

• set the bank’s strategy and objectives;
• select and oversee personnel;
• operate the bank’s business on a day-to-day basis;
• protect the interests of depositors, meet shareholder obligations, and take into account the interests of other recognised stakeholders;
• align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations; and
• establish control functions.

Yes. The PRA has issued a supervisory statement setting out the expectations for firms in relation to the following:

• proportionality;
• material risk takers (MRTs);
• application of clawback to variable remuneration;
• governing body/remuneration committees;
• risk management and control functions;
• remuneration and capital;
• risk adjustment (including long-term incentive plans);
• personal investment strategies;
• remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards);
• deferral; and
• breaches of the remuneration rules.

The majority of the Basel III framework has been implemented and is in force but there are certain aspects, including in relation to changes to the definition of exposure and minimum capital requirements for market risk, that will come into force only in 2022.

Yes, the UK through the PRA Rules now has a requirement that a regulated firm must hold sufficient tier 1 capital to maintain, at all times, a minimum leverage ratio of 3.25%.

The rules apply to every firm that is a UK bank or a building society that, on the firm’s last accounting reference date, had retail deposits equal to or greater than £50 billion either on: (1) an individual basis; (2) if the firm is a parent institution in a Member State, on the basis of its consolidated situation; or (3) if the firm is controlled by a parent financial holding company in a Member State or by a parent mixed financial holding company in a Member State and the PRA is responsible for supervision of that holding company on a consolidated basis under Article 111 of the CRD, on the basis of the consolidated situation of that holding company.

The UK has implemented the LCR regime and is aligned with the CRR requirement that banks should have enough high quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period and accordingly with effect from 1 January 2018, the ratio requirement that banks have to meet is 100%.

The NSFR regime is not yet in force in the UK as final EU legislation is awaited. It is expected that when implemented, the NSFR regime will require banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. Expressed as a percentage and set at a minimum level of 100%, it indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. As allowed under EU rules, preferential treatment will be possible in certain exceptional cases.

Yes – generally English banks are subject to the same corporate law disclosure requirements as other English company. The need for interim reporting will apply to public companies that are subject to the disclosure rules of a stock exchange and typically on the London market will require semi-annual reporting if there is no US market aspect.

Yes. Consolidated supervision in the UK is derived from the requirements set by the Basel Committee on Banking Supervision. It enables prudential supervision of a bank to look to the strength of the bank’s group and not just the entity itself. Following the CRR regime, calculations are required of group capital requirements and resources and reporting is made at both group and entity level.

The UK regime relating to changes in control is ultimately derived from CRD IV. A change of control of a UK bank is subject to a notification and clearance regime.

Under section 178 of the Financial Services and Markets Act (FSMA), to acquire or increase control over a UK-authorised bank, a person must notify the PRA writing before making the acquisition and must await either positive consent from the PRA (or the expiry of the 60 day statutory assessment period) before making the acquisition. Control for these purposes looks at both shareholding and voting power. It is a criminal offence under section 191F of the Financial Services and Markets Act (FSMA) to acquire or increase control without notifying the PRA and receiving approval first.

When considering whether or not to grant approval, the PRA considers the suitability of the person, having regard to their likely influence over the bank. This will involve considering the following statutory items:

• the reputation of the section 178 notice-giver;
• the reputation and experience of any person who will direct the business of the UK authorised person as a result of the proposed acquisition;
• the financial soundness of the section 178 notice-giver, in particular in relation to the type of business that the UK authorised person pursues or envisages pursuing;
• whether the UK authorised person will be able to comply with its prudential requirements (including the threshold conditions in relation to all of the regulated activities for which it has or will have permission);
• if the UK authorised person is to become part of a group as a result of the acquisition, whether that group has a structure which makes it possible to—
  (i) exercise effective supervision;
  (ii) exchange information among regulators; and
  (iii) determine the allocation of responsibility among regulators; and
• whether there are reasonable grounds to suspect that in connection with the proposed acquisition money laundering or terrorist financing is being or has been committed or attempted; or the risk of such activity could increase.

No, but other rules on protecting the national interest could apply to banks.

Certain parts of UK regulation (for example in relation to TLAC) deal specifically with globally systemically important banks (with the UK being home to 5 of them)

This will depend on the nature of the breach but sanctions range from reprimands to fines to suspension of loss of a banking licence. There are also criminal sanctions for certain violations (e.g. in relation to change of control).

The current resolution regime is set out in the UK’s Banking Act 2009 which provides for resolution and recovery measures and has been amended to reflect the requirements of BRRD. The PRA rules require banks to maintain recovery plans and resolution packs to enable institutions and the PRA better to plan effectively for recovery or resolution in the future. The Banking Act 2009 introduced a special resolution regime with new insolvency procedures of bank insolvency, bank administration and also empowers the institutions to transfer the bank to a third party or to take it into temporary public ownership. As part of the new powers granted to the Bank of England under the Banking Act 2009, the Bank of England has bail-in powers to write down and covert capital into full equity.

The UK offers protection of deposits up to £85,000 per person per firm, administered by the Financial Services Compensation Scheme (FSCS). This body is responsible for ensuring that compensation is paid to insured depositors and other eligible claimants to cover amounts due from failed banks and in other appropriate cases. The FSCS is independent from, but accountable to, both the FCA and the PRA.

The FCA also has extensive rules on client asset protection which apply to firms holding client assets. These rules require client assets to be segregated and reconciled within set time periods.

Yes. Bail-in involves shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability. The shares can then be transferred to affected creditors, as appropriate, to provide compensation. Alternatively, where a suitable purchaser is identified, the shares may be transferred to them, with the creditors instead receiving, where appropriate, compensation in some other form.

Certain arrangements are subject to safeguard provisions to protect netting and set-off.

There are a range of excluded liabilities including:

• liabilities representing protected deposits
• any liability, so far as it is secured
• liabilities that the bank has by virtue of holding client assets
• liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm
• liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems
• liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 (EMIR) of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade depositaries
• liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration
• liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits
• liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of its operations

A “protected deposit” is defined in section 48C as one which is covered by the FSCS, or equivalent deposit guarantee scheme, up to the coverage limit of that scheme.

The UK is currently subject to the EU’s TLAC rules in the CRR II Regulation which have applied from 1 January 2019 in relation to globally systemically important banks.

There has over recent years been an increase in EU-driven bank regulation as the European response to the financial crisis has been implemented, often by directly effective EU regulation. It remains to be seen what the post-Brexit position will be.

The ongoing uncertainties posed by the Brexit process and possible loss of passporting and potential loss of equivalence are seen as the greatest challenges for the sector to navigate as it simultaneously looks for new opportunities as a result. Whether this transpires will depend in large part on the nature of the exit and whether there is a transitional implementation period. The current draft withdrawal agreement would provide for an implementation period from 29 March 2019 until the end of December 2020 but at the time of writing this has still not received approval from the UK parliament.