With the New Year, the European Central Bank has published an updated frequently asked questions (FAQs) about the ECB’s role in supervising Eurozone banks. The updated FAQs are primarily aimed at UK based financial institutions re-locating in the context of Brexit but may also impact others. These updated FAQ ought to be read in conjunction with the ECB and other European Supervisory Authorities publications of “Supervisory Principles on Relocations” which we assessed most recently in this client alert. These ECB updates follow publications, just before Christmas, by the UK Government and regulators, in particular the PRA, of a number of policy announcements and the publication of consultations on how UK branches of EEA banks seeking authorisation might continue operating in London post-Brexit.
The ECB’s updated FAQs include the following changes:
“Internal governance and risk management”, where the ECB has added:
- A new FAQ: “Can I continue to provide services to customers in the EU from a branch in London post Brexit?”
- An updated answer to the existing FAQ: “Will the use of a back-to-back booking model be accepted? What arrangements do you expect to be in place when it comes to booking models generally?”
- A new FAQ: “How will booking models be assessed? What are the supervisory expectations vis-à-vis back-to-back booking?”
“Issues related to ongoing supervision”:
- A new FAQ: “The EBA has recently published an opinion on Brexit issues with a view to ensuring the consistent application of EU legislation to businesses seeking to establish or enhance their EU-27 presence. Will there be any changes as a consequence of that EBA opinion?”
It is surprising that the ECB has not updated these FAQs earlier as it published statements on supervisory principles on relocations in mid September 2018. In any event, there are a number of takeaways to note.
The requirements that the ECB have put in bold are quite interesting (e.g. “Banks in the euro area should be capable of managing all material risks“). They echo the tone that the ECB have been reminding the market again and again, that they are in charge of banking supervision and no longer, the national competent authorities (NCAs). Some of this is aimed at smaller NCAs, but more importantly, also Germany’s BaFin, which has suggested that it would be lenient on the supervision of certain compliance requirements for banks those relocating, for example, on model governance or grandfathering of model permissions. As background, the ECB and the European Supervisory Authorities have prohibited grandfathering of model permissions, but may tolerate temporary grandfathering.
The FAQs on back-to-back booking models have been reworded. It is clear that for the ECB these are a non-starter. There is a similar message around banks having “robust risk control mechanisms” in place. Similarly, there is a detailed emphasis on robustness of control functions in the Banking Union and to outsourcing. The FAQs state that “these mechanisms should ensure that the implementation of outsourcing agreements . . . is properly monitored by the entity’s management bodies and fully compliant with regulatory requirements.” Some of the driving force for this further clarification may derive from feedback received by the ECB evidencing differing degrees of understanding among some banks on this topic.
The ECB’s updated FAQ however do include some positive statements for those banks relocating to the Eurozone in the context of Brexit. The statement that the “ECB and national supervisors see value in having preparatory discussions with banks interested in establishing or increasing their presence…” and “Such discussions are encouraged on issues around your application as soon as you have defined the fundamental elements and narrowed down any options of your transformation or reorganisation plan” is very new and welcome. They show a readiness for dialogue.
Under “How long does the authorisation process take?”, the statement on timing deadlines places more emphasis on the fact that time is of the essence and that the speedy processing of applications depends on submitting “a complete file of high quality at the outset.” This wording can be seen as a criticism of some professional advisers over their involvement in applications to date. Similar sentiments apply as regards the statement that “The requirements for a well-functioning bank must be in place before an institution takes up any banking activities in the euro area” and that the phasing in of services “has to be based on a realistic and detailed business plan for the development of such capabilities, which has to be included in the authorisation application.”
Firms and their advisers would do well to note these FAQs and take on board the ECB’s standpoint when considering relocation to the Eurozone as well as consider the impact of the Supervisory Principles On Relocations and the ECB’s expectations for the coming supervisory cycle.