EU investment banks to keep ‘branch status’ post-Brexit

The Bank of England (BoE) has thrown down the gauntlet to its EU counterparts, saying on Wednesday that it would keep the UK’s financial system open to foreign institutions after Brexit.

In a move to maintain London’s status as a global financial centre after Britain leaves the bloc, the BoE said on Wednesday that it would allow European-based investment banks that service the UK through their branches under an “EU passport” to apply for regulatory licences much like those enjoyed by their US or Japanese rivals.

The central bank set out the plans as part of a package of measures setting out how it will regulate foreign banks, insurers and clearing houses as the UK leaves the bloc.

“The UK’s financial system is both a national asset and global public good,” the BoE said in a statement. “Keeping the UK’s financial system open to foreign institutions is in the best interests of the UK, EU and global economies.”

The BoE’s Prudential Regulation Authority (PRA) said in a letter to chief executives of EU investment banks, also published on Wednesday, that they will be able to apply for “third-country branch status” from January.

However, the central bank cautioned that its position is dependent on close co-operation among banking supervisors in the UK and the EU, adding that it may have to revise its position depending on the outcome of Brexit talks. The decision is not expected to affect foreign investment banks from outside the EU.

Mark Carney, governor of the BoE, told MPs on the Commons Treasury select committee on Wednesday that if the central bank did not get assurances about co-operation from an investment bank’s home regulator, “there will be consequences for those institutions”.

Philip Hammond, the chancellor, said the move “will ensure that the UK’s exit from the EU is smooth and orderly, will underpin the UK’s status as a global financial services sector and will ensure that UK consumers are protected”, adding that he was confident of agreeing “a deep and special partnership” between the UK and EU.

The BoE also said on Wednesday that the UK government had given it new powers to “recognise” foreign clearing houses.

Recognition is currently granted via the EU, and there has been a question to what would happen to clearing houses’ regulatory status once the UK is no longer part of the bloc.

In a second letter published on Wednesday, the BoE said that it would expect foreign clearing houses to apply for recognition in the UK if they wanted to provide clearing services to UK trading venues.

Banking executives had feared that the BoE would force all EU investment banks to “subsidiarise” — a process that requires capital and liquidity to be held in the UK and scrutinised by the PRA.

Setting up subsidiaries is far more expensive than “branching”, where banks are overseen by their home regulator and can return capital and liquidity to their central treasuries.

“This is a decision for a global future for the City. It is also a vote of confidence in the UK financial regulators’ ability to control a global hub,” said Simon Gleeson, a regulatory lawyer at Clifford Chance in London.

“It also effectively torpedoes European hopes to create a rival to the City in the EU. The more easily and efficiently EU banks can operate in the City, the less incentive they have to move business elsewhere,” he added. “In terms of Brexit negotiations it is a masterstroke.”

Catherine McGuinness, policy chairman at the City of London Corporation, described it as “a welcome bit of news to end the year for the City”, pointing to the important contribution to UK tax revenues made by EU banks, which accounted for a big chunk of the £17.3 billion(€19.5 billion) in tax paid by foreign banks in the past fiscal year.

Simon Lewis, chief executive of the Association of Financial Markets in Europe, which represents many of the biggest investment banks in Europe, said the BoE decision “provides welcome clarity for firms, enabling them to proceed with their Brexit planning and avoiding additional fragmentation of capital within Europe”.

The UK’s move contrasts with Brussels’ proposals. EU negotiators want UK investment banks to stay close to EU rules, including the bonus cap, in order to be deemed “equivalent” to their EU counterparts.

The BoE’s plans do not apply to retail banks. The central bank has previously said that EU-based lenders with a material retail presence in the UK will probably have to subsidiarise. On Wednesday, it defined a material presence as over £100million (€112 million) of transactions each year.

Until now, the BoE’s Prudential Regulation Authority has not made clear its position about wholesale banks. But the banks have to start applying for new regulatory licences to operate in the UK now, to be ready for when the UK departs in March 2019.