Corporate governance for UK branches – square peg, round hole
According to figures compiled by the PRA as at 1 March 2021, 167 banks operate in the UK by way of a branch rather than a separate legal entity.[1] Most of the key principles of corporate governance relied upon by UK financial services regulators derive from rules and guidance applicable to UK listed companies. Questions of corporate governance are generally considered through the lens of a board with non-executive directors, board sub-committees, fiduciary duties of directors and a CEO with delegated authority from the board. There are, however, significant challenges with applying such principles to UK branches.
Whilst the UK financial services regulators accept that international banks may operate in the UK on a highly integrated global basis, governance and management arrangements in the UK must still be sufficient to satisfy domestic regulatory expectations. This note considers regulatory expectations and three key issues in the context of UK branch governance: the role of the SMF19, the role of a branch executive committee, and information sharing.
Regulatory expectations for branch governance
Some guidance exists regarding the specific governance arrangements expected of UK branches.[2] The PRA expects branches to establish, implement and maintain: (i) decision-making procedures and an organisational structure which clearly specifies reporting lines and allocates functions and responsibilities; and (ii) procedures for the effective internal reporting and communication of information at all relevant levels of the branch. Substantially similar rules exist within the FCA’s Handbook.
UK regulators have stopped short of translating these principles into more specific, practical rules that UK branches must comply with – no doubt because regulatory expectations for branches in the UK vary considerably depending on the branch’s size, complexity and risk posed to the UK financial system. Branches must therefore make their own determination as to whether their decision-making procedures, internal reporting procedures and organisational structures are suitable for the nature, size and complexity of their business and also whether they demonstrate to UK regulators adequate oversight and control at UK branch level. In our experience, these decisions are complex and require careful stakeholder engagement and management.
The Head of an Overseas Branch function (SMF19)
The SMF19 occupies a curious position. From a regulatory perspective, the role is defined in broadly the same terms as that of the CEO for a UK incorporated entity. However, in practice, the SMF19 may not have the same kind of interaction with/influence over the Board, or the degree of oversight over global business lines, that a CEO of a UK headquartered bank would have. Regulatory scrutiny of branch governance arrangements will be particularly pointed where the SMF19 is not themselves part of a global business line or part of the management body at head office. The PRA expects the SMF19 to have the highest degree of decision-making power across the UK and be a senior figure within the firm who is credible and influential at the group executive level.
In the context of a highly integrated global business with a UK branch, ensuring that the SMF19 has sufficient: (i) oversight of UK business as a whole; (ii) autonomy and decision-making power at UK level; and (iii) influence at group executive level to escalate issues from the UK territory, requires the right individual as well as the right processes in place to support them.
Responsibilities of the UK branch executive committee
It is uncontroversial that UK branches should have an executive committee of the branch with oversight of the activities of the branch as a whole, instead of relying wholly on the legal entity Board and/or head office governance committees (e.g. global business line committees). Branch executive committees assist an SMF19 in discharging his/her responsibilities to oversee the activities of the branch as a whole, and some branch executive committees are established exclusively for this purpose. A branch executive committee may not be responsible for making decisions on business strategy in the same way that a UK board would, but will provide a structured forum in which UK-specific issues are escalated, debated and documented – enabling the firm (and the SMF19) to demonstrate compliance with UK regulatory requirements and exercise effective control in the UK.
That said, the responsibilities of a branch executive committee require careful consideration. For example, whether it is a decision making or advisory forum, whether it has a reporting line to the Board, the extent of responsibilities for oversight/implementation of UK policy and the extent of other responsibilities to ensure adequate UK oversight and control (e.g. compliance with UK regulatory obligations, UK risk and internal audit issues and shared services issues impacting business lines in the UK etc). A branch executive committee with clear oversight and control responsibilities helps demonstrate to regulators that UK-specific issues are appropriately considered in the context of the wider globally integrated business.
Information sharing
As a branch forms part of a legal entity incorporated outside the UK, its obligation to be open and cooperative with UK regulators must be considered not only in the context of the activities of the UK branch, but the authorised entity as a whole. In this context, matters such as regulatory investigations, significant civil litigation, prosecutions, changes to operations, capital or liquidity,[3] instances of fraud or changes to the firm's financial position and/or any other matters likely to affect a firm’s reputation as a whole, should be considered for disclosure to the UK regulators and satisfaction of the UK branch's regulatory obligations. UK regulators consider transparency as critical in ensuring they are able to achieve their statutory objectives and are known to take enforcement action where firms fall short of expectations.[4] To manage these risks, it is important for information sharing protocols to be put in place that enable issues impacting the group as a whole, including issues with significant reputational consequences, to be cascaded to UK management for early reporting to UK regulatory authorities. Whilst inevitable challenges arise when it comes to the sharing of highly sensitive information within a group, failure to have such protocols in place gives rise to enforcement risks and could result in more intensive scrutiny being applied by UK regulators in relation to the information shared by UK branches.
How we can help
We work closely with various UK branches of international firms on how best to structure their governance arrangements. Our clients benefit not only from our experience assisting UK branches with UK SMCR requirements, but also from our contentious regulatory experience, which brings to life potential weaknesses with branch governance arrangements. We can benchmark and evaluate your approach, advise on the fundamentals of branch governance, whilst working with you to tailor a governance structure that will best suit the needs of your business.
[1] https://www.bankofengland.co.uk/prudential-regulation/authorisations/which-firms-does-the-pra-regulate
[2] The most extensive guidance setting out expectations with respect to branch governance is detailed in PRA’s SS 4/16 “Internal governance of third country branches” (updated December 2020).
[3] The PRA has separately set out its specific requirements with respect to the provision of information by third country branches as to the financial performance of the entity as a whole. See the PRA’s recent consultation CP2/21 “International banks: The PRA’s approach to branch and subsidiary supervision” (at Box 1).
[4] In February 2017, the PRA fined Bank of Tokyo Mitsubishi UFJ Limited and MUFG Securities EMEA plc £17.85m and £8.925m for failing to disclose US enforcement proceedings.
