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Responses are requested by Monday 27 November 2023.
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Responses can be sent by email to: CP20_23@bankofengland.co.uk.
Alternatively, please address any comments or enquiries to:
Banking Groups & Structural Reform Policy Team
Prudential Regulation Authority
1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed rule and policy updates in respect of the establishment and maintenance of third-countryfootnote  branches and subsidiaries within ring-fenced body (RFB) sub-consolidation groups.
1.2 HM Treasury (HMT) is currently consulting on legislative changes that, amongst other things, would allow RFBs to establish entities in third countries. This would allow RFBs to compete with international and domestic banking groups, advancing the PRA’s secondary objectives of competition, and competitiveness and growth. The proposals discussed in this CP ensure that this benefit can be realised in a manner that supports the PRA’s primary objective of promoting the safety and soundness of the firms it regulates.
1.3 The proposals in this CP would result in changes to the Ring-fenced Bodies Part of the PRA Rulebook (Appendix 1) and supervisory statement SS8/16 – Ring-fenced bodies (RFBs) (Appendix 2). Ring-fencing is the requirement set out in legislation for major UK banks over the deposit thresholdfootnote  to ring-fence their core activities, such as accepting core deposits, from riskier financial activities. This should be done by creating separate legal entities for different types of activities and controlling the interactions between the entities (see Background section for further detail).
1.4 The policy proposals included in this CP, when implemented, would:
- introduce a rule whereby RFBs must ensure that any third-country branch or third-country subsidiary within the RFB sub-consolidation group does not present a material risk to the provision of core services in the UK by the RFB; and
- set out a non-exhaustive set of supervisory expectations that the PRA will consider when determining if a third-country branch or third-country subsidiary of an RFB or ring-fenced affiliatefootnote  poses a material risk to the provision of core services in the UK by the RFB.
1.5 The PRA considers that there is potential for third-country branches and subsidiaries of RFBs and ring-fenced affiliates to create risks to the provision of core services in the UK provided by RFBs. The PRA is guided by its primary objectives of firm safety and soundness, and further objectives specific to ring-fencing of preventing adverse impacts to the continuity of the provision of core services in the United Kingdom.
1.6 This CP is relevant to PRA firms and their wider banking groups that are subject to the ring-fencing regime in the UK, and those firms and banking groups which are likely to come within scope of the ring-fencing regime. It is not relevant to other PRA-authorised firms, such as banking groups that are not ring-fenced, credit unions, or insurers.
1.7 The PRA has considered the costs and benefits of these proposals, which are discussed in Chapter 2 of this CP.
1.8 The PRA has a statutory duty to consult when introducing new rules under the Financial Services and Markets Act 2000 (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. The most significant ‘have regards’ in the PRA’s view were proportionality, efficient use of PRA resources, and competitiveness and economic growth.
1.10 In response to the financial crisis of 2008-2009, a number of domestic and international reforms to banking regulation have been introduced, which seek to improve the resilience and resolvability of banks. In the UK, the Independent Commission on Banking (ICB) chaired by Sir John Vickers made recommendations on how the UK banking system could be reformed. In September 2011 the ICB issued its final report and recommended, among other things, the ‘ring-fencing’ of certain core banking activities from risks elsewhere in the financial system that are unrelated to the provision of continuing retail banking services to a bank’s customers.
1.11 The government implemented many of the ICB’s recommendations through the Financial Services (Banking Reform) Act 2013. This Act defines ‘core activities’ as the regulated activity of accepting deposits and requires banking groups that undertake core activities to place these activities into RFBs. To supplement the definition of core activities, the Act also defined three ‘core services’:
- ‘facilities for the accepting of deposits or other payments into an account which is provided in the course of carrying on the core activity of accepting deposits’;
- ‘facilities for withdrawing money or making payments from such an account’; and
- ‘overdraft facilities in connection with such an account’.footnote 
1.12 The Act also prohibits RFBs from undertaking ‘excluded’ activities and specifies that this includes dealing in investments as principal. More detail on the definition of core activities and RFBs, and the activities which RFBs can and cannot undertake, is set out in two pieces of secondary legislation made by HMT in 2014. The Financial Services and Markets Act 2000 (The Ring-fenced Bodies and Core Activities Order) 2014 (CAO) specifies that institutions which have more than £25 billion of core deposits from individuals and small businesses will be subject to ring-fencing requirements.footnote  It also allows large organisations and high net worth individuals to place deposits outside RFBs if they so choose. The Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions Order) 2014 (EAPO) makes a number of activity prohibitions with which RFBs must comply. Among them, EAPO prohibits RFBs from establishing branches or subsidiaries carrying out financial services in a territory outside the European Economic Area (EEA).
1.13 The ring-fencing regime came into force on 1 January 2019. The PRA has general powers to make rules under FSMA.footnote  Ring-fencing legislation provides that the regulator must make rules requiring a ‘ring-fenced body to make arrangements to ensure the effective provision to the ring-fenced body of services and facilities that it requires in relation to the carrying on of a core activity’.footnote  These rules are now predominantly contained in the Ring-Fenced Bodies Part of the PRA Rulebook.
1.14 In addition to the legislative requirements imposed on firms, Parliament mandated that a review of the legislation relating to ring-fencing be undertaken by an independent panel.footnote  The panel was given a mandate to examine how the ring-fencing regime meets its intended purpose of supporting financial stability and minimising risks to public finances through the effective separation of core banking services (continuous provision of which is vital to the economy and to customers), from other banking activities. The panel’s mandate also required it to take into account the wider context of changes to banking regulation in recent years, including the introduction of the banking resolution regime.
1.15 The Final Report of the Independent Review of Ring-fencing and Proprietary Trading (‘the Review’) concluded that ring-fencing has contributed to a more resilient retail banking system. The Review also made a number of recommendations for authorities to consider, which aim to improve the functioning of the regime while maintaining financial stability. One such recommendation was to remove from legislation the geographical restriction that prevents RFBs from establishing financial services operations outside of the EEA. HMT is consulting on a change to secondary legislation to implement this recommendation. In tandem, this CP invites views on the proposed new rule and proposed new supervisory guidance in respect of the safeguards that would accompany this legislative change.
1.16 In addition, the PRA has a statutory duty to carry out a review of its existing ring-fencing rules (see 1.13 above), including rules applying to parent undertakings of ring-fenced bodies, by 31 December 2023.footnote  A report of that review will be presented to HMT by the end of 2023 and HMT will lay the report before Parliament. That review will not impact the outcome of the proposals set out in this CP, or vice versa.
1.17 The PRA proposes that the implementation date for the changes resulting from this CP would coincide, as closely as practicable, with the removal of the legislative prohibition on non-EEA branches and subsidiaries. This is expected to be in the first half of 2024.
Responses and next steps
1.18 This consultation closes on Monday 27 November 2023. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP20_23@bankofengland.co.uk. Please 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.
1.19 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.
2.1 Concurrent with HMT’s proposed legislative changes that would allow RFBs to establish third-country subsidiaries and branches, the PRA proposes to introduce a new rule aimed at mitigating the risks to an RFB’s provision of core services in the UK that could emerge from resultant international operations. This proposed rule would require an RFB or ring-fenced affiliate to ensure that risks arising from its overseas branch or subsidiary are not material to the safety and soundness of the RFB, including its resolvability, and its ability to continue to provide core services in the UK. The proposed rule is set out in Appendix 1.
2.2 In conjunction, the PRA proposes to amend SS8/16, with further expectations of RFBs that establish a financial services branch or subsidiary in a third-country (or where a ring-fenced affiliate establishes a branch or subsidiary in a third-country). This is to explain the issues that the PRA would consider when assessing firms’ compliance with the proposed rule and determining whether such a third-country entity might pose a material risk to the provision of core services in the UK. The proposed text is set out in full in Appendix 2.
2.3 The PRA proposes a non-exhaustive set of considerations to which it will have regard when determining whether a material risk is posed to the RFB. In particular, the PRA proposes expectations around: disclosure in firms’ Individual Capital Adequacy Assessment Process (ICAAP) for non-UK entities over a certain size, establishment of non-UK entities in countries whose supervision would pose risks to the RFB, and the impact of non-UK entities on resolvability.
2.4 First, the PRA proposes to amend SS8/16 to include an expectation that is targeted at addressing the risks that could arise where a third-country branch or subsidiary grows to a size where it is a material operating entity within the subgroup.
2.5 Accordingly, the PRA proposes to set a clear expectation that RFBs with non-UK subsidiaries or branches that individually or in aggregate contribute over 5% of the RFB subgroup’s risk-weighted assets (RWAs) disclose this fact in their ICAAP. Where such a disclosure is made, firms should also explain the steps taken to assess the materiality of risks posed to the RFB’s operations, including the continuity of the provision of core services, and how they are mitigated.
2.6 The proposed guidance would ensure the PRA has sight of the size and nature of risks associated with potentially material subsidiaries or branches in third countries. In particular, a large third-country subsidiary or branch could substantially alter the nature of the RFB subgroup and expose the RFB to contagion risk, arising from their activities in more risky or less familiar products and markets, or expose the RFB to reputational risk if concerns around a material subsidiary or branch arose.
2.7 Second, the PRA proposes to include an expectation in SS8/16 that firms should ensure that the establishment or operations of third-country subsidiaries do not create material risks through the nature of supervision in the third country. Such material risks may emerge if: (i) the third-country supervisor has no effective coordination with the PRA, or (ii) the third country’s prudential regime is not sufficiently equivalent to the UK regime. The PRA will consider both factors in the context of the new rule discussed above. The proposals outline that firms should consider publicly available information on the prudential regime and whether it is broadly equivalent with the UK’s, and notify and gain views from the PRA where cases appear marginal.
2.8 These proposed expectations respond to the risks that could arise if subsidiaries were established in third countries without sufficiently equivalent prudential regimes, or where a lack of engagement between supervisory authorities could lead to concerns in respect of supervisory oversight. The proposal only applies to subsidiaries: as the PRA is the prudential supervisor for branches of RFBs, it would retain indirect oversight of all branches through its day-to-day supervision of the RFB and its role as consolidated prudential supervisor. Nevertheless, the PRA may expect information from the home state supervisor on the nature, cause, and extent of any idiosyncratic stress, and details on the subsidiary such as size, specific risks, and any supervisory issues. The frequency and scope of the information shared in key areas would be determined on a case-by-case basis. Third-country branches of other regulated subsidiaries within the RFB subgroup would also be subject to oversight by the PRA.
2.9 Third, the PRA also proposes to set an expectation that firms will identify, assess, and mitigate any risks to the resolvability of the firm that may arise from the subsidiary or branch. The PRA will, in consultation with the Bank of England (the Bank) as the UK’s resolution authority, have regard to the firm’s own assessment and the requirements in Rule 8 of the Fundamental Rules Part of the PRA Rulebook,footnote  to determine whether or not there is a material risk to the continuity of core services in the UK.
2.10 The set of proposed expectations discussed above is non-exhaustive and the PRA may, on a case-by-case basis, have regard to additional considerations. Such considerations may concern the identification, assessment, and mitigation of, for example, financial, operational, or reputational risk. Existing requirements relevant to this would remain, including the PRA rule requiring firms to notify the PRA of any business expansion (including new branches) which could have a significant impact on the firm’s risk profile or resources,footnote  and Fundamental Rule 7footnote  concerning open collaboration with regulators.
Further amendments to SS8/16
2.11 This CP also proposes to amend paragraph 2.8 of SS8/16 to delete text concerning what the owner of an RFB may do with regard to non-EEA undertakings; this is no longer relevant given that RFBs themselves would no longer be prohibited from establishing operations outside the EEA under HMT’s proposals. The proposals would also make a minor amendment to the remaining text in this paragraph, to clarify that if the ultimate owner of an RFB is not a ring-fenced affiliate, it may have an ownership interest or hold capital interests in an excluded activity entity.
2.12 This CP proposes a minor update to paragraph of 9.14 of SS8/16, which sets expectations around RFBs’ use of Financial Market Infrastructure (FMIs). This is to align the SS to Rule 16 of the Ring-fenced Bodies Part of the Rulebook. Rule 16 was amended after the UK’s withdrawal from the EU: where previously there was a distinction in how the rule applied to central counterparties (CCPs) in or outside the EEA, this distinction was changed to those in or outside the UK. Paragraph 9.14 of SS8/16, which clarifies expectations in relation to this rule, was not updated and still refers to the EEA. This CP proposes changing references in paragraph 9.14 from ‘EEA’ to the ‘UK’.
2.13 In addition, where appropriate this CP amends references to EU legislation to ensure that citations now reference the correct provisions in UK legislation.
PRA objectives analysis
2.14 The PRA considers that these proposals would advance its primary objective to promote the safety and soundness of PRA-authorised firms. The ring-fencing regime protects core retail banking services from risks associated with activities outside the ring-fence, including risks arising from international financial activity. HMT’s proposed legislative changes to allow the establishment of third-country branches and subsidiaries within the RFB subgroup would enhance the international competitiveness of RFBs. However, with no safeguards at all, RFBs could establish operations in a wide range of jurisdictions and markets, potentially creating risks that ring-fencing is designed to mitigate, such as contagion from the complexity of financial activity, and the scope for international financial innovation to pose risks to core banking services in the UK. Therefore, the PRA’s proposals intend to mitigate these risks in a proportionate way, without creating undue burdens on firms.
2.15 The PRA has considered whether the rule would impact its secondary competition objective, and secondary competitiveness and growth objective. As the proposed rule works in tandem with HMT’s proposed legislative changes to remove blanket restrictions, the PRA considers that the rule is compatible with its secondary objectives. The proposals as a whole allow benefits to competition, international competitiveness, and long-term growth to the UK economy to be realised in a safe manner.
Cost benefit analysis (CBA)
2.16 The PRA has considered the costs and benefits associated with these proposals, which would occur in tandem with HMT’s proposed legislative changes to allow RFBs to establish overseas branches and subsidiaries. Taken with the HMT proposals, there would be a net increase in the freedom of RFBs to operate internationally. The safeguards discussed in this CP ensure that this freedom can be realised in a safe manner.
2.17 The benefits that occur as a result of the overall package include those to the competitiveness of UK RFBs by better enabling them to serve customers internationally. The proposals in this CP offer financial stability benefits, in that they would give the PRA scope to ensure that the core activities of RFBs are safeguarded from potential threats arising from the nature, size, or location of any overseas entities inside the RFB sub-consolidation group. This can ensure that core activities and arrangements for resolution are protected in line with the original intents of the ring-fencing regime, and that the safety and soundness of RFBs is not undermined.
2.18 The safeguards proposed in this CP do provide some limited restriction, but only in a very narrow set of circumstances. The potential costs only arise if a ring-fenced banking group seeks to establish an overseas entity from within their RFB sub-consolidation group. In this case, the costs are limited to taking action to ensure that no overseas entity creates a material risk to the provision of core services, including resolvability, and an expectation to report entities over a certain size in the ICAAP. These proposals do not impact the ability of groups to establish overseas entities from their non-ring-fenced bank (NRFB). As it is common practice to hold overseas entities in the NRFB currently, including in the EEA where firms are already permitted to place them in the RFB as well, the PRA considers that the costs arising from these proposals are further limited. For these reasons we believe the costs of these proposals would be limited and it is not reasonably practical to estimate them.
2.19 Therefore, the PRA is of the view that the benefits are proportionate to the costs.
‘Have regards’ analysis
2.20 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, 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 proposals.
- 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 and Legislative and Regulatory Reform Act 2006): In light of this principle, when developing these proposals the PRA has sought to ensure that any proposed new safeguards are proportionate and targeted without compromising safety and soundness, and do not undermine the benefits to growth that HMT’s proposed legislative change may offer. Therefore, these proposals do not create new detailed rules for firms to follow, or new ongoing reporting requirements.
- Efficient use of PRA resources (FSMA regulatory principles): The PRA has accounted for the impact on its resourcing, and considers that the proposals achieve its objectives in an efficient manner. The proposals set out clear but limited expectations against which firms can self-assess their activities. While the PRA has flexibility to further scrutinise firm actions, the ongoing burden would be minimal.
- Growth (HMT recommendations letter) and sustainable growth (FSMA regulatory principles): The PRA has considered the potential impact on growth. The proposals work in tandem with HMT’s proposed legislative changes that can promote growth by allowing RFBs to establish new operations abroad. As the proposed safeguards are minimalist in nature, the PRA considers that they would enable the realisation of these benefits in a safe manner.
- Competitiveness (HMT recommendations letter): The PRA has considered the potential impact on competitiveness. The proposals work in tandem with legislative changes that can promote competitiveness by enabling UK RFBs to establish foreign operations. As the proposed safeguards are minimalist in nature, the PRA considers that they would enable the realisation of these benefits in a safe manner.
- Impact on consumers (HMT recommendations letter): The PRA has considered the impact on consumers. Some international consumers may face complications from not having banking services provided by a ring-fenced banking group in their jurisdiction, either because they do not meet the criteria to be banked by an NRFB, or because of frictions from being serviced on both sides of the ring-fence. Under the proposals, the overall relaxation relative to current restrictions would allow for an improved experience for these customers. While the PRA proposals may place some limits on the RFB’s ability to serve these customers, their modest nature should ensure that benefits for consumers are realised.
- Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The publication of the proposed new rule and the proposed amendments to SS8/16 provides RFBs with sight on the key areas that the PRA will consider where RFB branches are established outside the UK.
- Recognising the differences in the nature and objectives of businesses (FSMA regulatory principles): The proposals only apply to banking groups that are ring-fenced. The PRA has considered the implications on these firms, firms that are close to the threshold, and other competitors. We have not identified any areas of concern relating to different kinds of business subject to requirements imposed by or under FSMA.
- Ensuring the UK is attractive to internationally active financial services firms and activity (HMT recommendations letter): The proposed legislative changes which would remove the prohibition on the establishment of non-EEA branches and subsidiaries would allow RFBs to operate in additional jurisdictions, improving their ability to service international customers and businesses. By adding certain safeguards which ensure that this is done in a safe manner, the PRA considers that these proposals are compatible with this recommendation.
- Innovation and new developments in financial markets and active embracing of new technology in financial services (HMT recommendations letter): The proposals are not directly targeted at this. However, the removal of the prohibition on the establishment of non-EEA branches and subsidiaries as a result of the legislative change, with modest PRA safeguards, may give RFBs greater flexibility and therefore access to innovative technologies than they currently have.
2.21 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’ to not be a significant factor for this proposal. The statutory panels were not consulted for the proposals described above.
Impact on mutuals
2.22 Part 9B of FSMA specifies that the ring-fencing regime only applies to UK deposit taking institutions authorised under Part 4A FSMA.footnote  Building societies and credit unions are established under separate legislation. Accordingly, the proposals in this CP would not apply to them.
Equality and diversity
2.23 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not.
2.24 The PRA has considered the equality and diversity issues that may arise from the proposals in this consultation. The PRA does not consider that the proposals in this CP raise any concerns with regards to equality and diversity.
The PRA Rulebook defines third country as a territory or country other than the UK.
Ring-fencing requirements apply to banks with more than £25 billion in UK retail and SME deposits. HMT is currently consulting on increasing this threshold to £35 billion.
The PRA Rulebook defines a ring-fenced affiliate as ‘(1) in relation to a RFB, any member of the sub-consolidation group of which the RFB is a member, other than the RFB itself; and (2) in relation to a relevant person, any member of the sub-consolidation group of which the relevant person is a member, other than the relevant person itself.’
s142C Financial Services and Markets Act 2000, as amended by the Financial Services (Banking Reform) Act 2013.
HM Treasury is currently consulting on increasing this threshold to £35 billion.
s137G Financial Services and Markets Act 2000.
s142H Financial Services and Markets Act 2000.
Section 8 Financial Services (Banking Reform) Act 2013.
s142J Financial Services and Markets Act 2000.
Fundamental Rules, Rule 2.8 of the PRA Rulebook: ‘a firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services’.
Notifications Part, Rule 2.3 of the PRA Rulebook.
Fundamental Rules, Rule 2.7 of the PRA Rulebook.
Part 9B FSMA.