28 June 2021 is the deadline for UK Financial Holding Companies ("FHC") and Mixed Financial Holding Companies ("MFHC") to submit their application for approval or exemption under the UK's implementation of the Capital Requirements Directive V ("CRD V")1. Member States were required to have implemented CRD V into national law by 28 December 2020. As this deadline expired before the end of the UK's 12-month Brexit transition period, the UK has implemented CRD V via the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020 (SI 2020/1406) (the "FHC Regulations"). The Prudential Regulation Authority ("PRA") is expected to open its application process for approvals or exemptions in April 2021.
Conditions for Approval or Exemption
Under CRD V and the new Capital Requirements Regulation ("CRR")2, FHCs and MFHCs will become subject to licensing obligations and ongoing supervision by the relevant national prudential and enforcement authorities. In the UK, this means that UK FHCs and MFHCs of PRA-regulated subsidiaries that are required to comply with the CRR on a sub-consolidated basis must, pursuant to the FHC Regulations, apply to the PRA for approval (unless exempt) under Part 12B of the Financial Services and Markets Act 2000 ("FSMA").
The approval regime for FHCs and MFHCs does not replace the current change-in-control regime, which will continue to operate in parallel. The new regime for FHCs and MFHCs will bring them under direct scrutiny by the PRA and grants the PRA more extensive powers to intervene where it assesses there is a risk to compliance with consolidated or sub-consolidated prudential obligations or its ability to supervise compliance effectively – including authority to suspend voting rights, restrict distributions or require divestiture or transfer of holdings.
The conditions for approval as a FHC or MFHC are set out in the FHC Regulations and cover the following:
1. the adequacy of the internal organisation of the group to ensure compliance with the prudential requirements of CRD V and CRR2 on a consolidated or sub-consolidated basis;
2. the effect of the structure of the consolidated or sub-consolidated group on the PRA's ability to supervise it effectively; and
3. CRD V requirements regarding qualifying holdings and the fitness and propriety of members of the management body of the FHC or MFHC.3
A company is exempt from the requirement for approval if:4
(a) it is a parent FHC and its principal activity is to acquire holdings in subsidiary undertakings; or
(b) it is a parent MFHC and its principal activity with respect to institutions and financial institutions is to acquire holdings in subsidiary undertakings; and
(c) the following conditions are satisfied:
(i) the Bank of England has not identified the company as a resolution entity5 in a group resolution plan;6
(ii) a credit institution or a designated investment firm which is a subsidiary undertaking in the same group as the company:
(A) has been designated by the PRA as responsible to ensure the group's compliance with prudential requirements on a consolidated or sub-consolidated basis; and
(B) has the power required to discharge those obligations effectively, whether under contractual arrangements with other companies in the group or otherwise;
(iii) the company does not take any management, operational or financial decisions affecting:
(A) the group as a whole; or
(B) any of its subsidiary undertakings which are institutions or financial institutions; and
(iv) the PRA is satisfied that there is no impediment to the effective supervision of the group on a consolidated or sub-consolidated basis.
The intent of this exemption and the conditions is to exclude from scope those FHCs and MFHCs that do not have effective control over the group or its bank, investment firm or financial institution subsidiaries, where the PRA is satisfied that another bank or investment firm in the group is responsible for the group's prudential compliance.
Consequences of being approved
If the PRA determines that an approved FHC or MFHC ceases to meet the conditions for approval, it must take appropriate measures to ensure the continuity and integrity of its consolidated / sub-consolidated supervision and compliance by the relevant group with consolidation requirements. The PRA has authority (under section 192T of FSMA) to take a number of measures to ensure this, including suspending voting rights, ordering divestiture or a transfer of holdings, restricting distributions or interest payments, re-designation of responsibility for prudential compliance and/or calling for a remedial plan.
Timeframe
The deadline for submission of an application for approval or exemption is 28 June 2021.7 However, given the wide scope of the approval or exemption requirement, and number of applications the PRA expects to receive, the PRA expects that FHCs and MFHCs should submit their applications between 3 May and 31 May 2021.8
The application forms have yet to be published, but the PRA has indicated that it expects to publish them on its website in early-April 2021.
Required Information for an Application for Approval or Exemption
The information FHCs and MFHCs are required to provide in their application is set out in the FHC Regulation's enactment of section 192Q(3) of FSMA. The information relates to the structure and organisation of the FHC and MFHC as well as information about the directors and managers of the entity.9 Among other information, applicants will be required to provide the PRA with information about the FHC's or MFHC's group's structure, the identity, skills, qualifications, and duties of the directors, and the distribution of tasks within the group.10
The PRA, in its Consultation Paper, published an Annex with indicative information for applications with cross-references to the relevant CRD V provisions.
Subsidiary Compliance
As applications are not yet open and will take some time to be processed, the FHC Regulations require that PRA subsidiaries of a UK parent FHC or MFHC "would be (or in most cases, would remain) responsible for ensuring compliance with the consolidated prudential requirements under CRR, until the date on which the PRA reaches a determination on the relevant UK parent financial (or mixed financial) holding company's application for approval or exemption."11 This is to ensure the continuity of consolidated supervision, and to enable the PRA to continue to supervise, monitor, exercise discretions, impose additional requirements, and enforce against breaches of obligations which apply on a consolidated basis.
Grace Period
For FHCs and MFHCs that were already established in the UK on 29 December 2020, the FHC Regulations provide for a grace period in which those firms can continue to operate into 2021. This grace period ends on 28 June 2021 for any FHC or MFHC that has not submitted an application by 28 June 2021.12 For FHCs and MFHCs which have submitted their applications for approval or exemption by 28 June 2021, the grace period ends when their application is finally determined or, in any event, no later than 31 December 2021.13
Consequences of Non-compliance
Section 192K(2) of FSMA gives the PRA the power to issue a fine, "of such amount as it considers appropriate" for failure to comply with this new requirement. Importantly, this fine can be levied against the non-compliant FHC or MFHC or any "person who was knowingly concerned in the contravention".14 The PRA can also, in lieu of a fine levied against a person, issue a statement of censure against that person.15 In addition, where a person is "knowingly" concerned in the non-compliance, the PRA is empowered to impose restrictions upon members of management of the non-compliant FHC or MFHC, which can include a temporary ban on undertaking PRA-regulated activities, "for such period as it considers appropriate."16
Given the possible financial consequences and reputational damage non-compliance could entail, for FHCs, MFHCs and their management, it is vital that firms proactively comply with the new approval and exemption requirement.
Conclusion
The UK's CRD V application process will soon be underway. FHCs and MFHCs should ensure they submit timely applications in order to continue operating, and their subsidiaries should ensure they monitor their group's compliance with CRD V/CRR2 requirements until their parent FHC or MFHC is authorised or exempted.
1 Directive 2019/878/EU.
2 Regulation (EU) No 575/2013 as amended by Regulation (EU) 2019/876.
3 section 192R of FSMA as enacted by Regulation 2 of the FHC Regulations. See also paragraph 2.7 of PRA Consultation Paper (CP 17/20).
4 Paragraph 2.9 of PRA Consultation Paper (CP 17/20) citing section 192P of FSMA as enacted.
5 Within the meaning of section 3 of the Banking Act 2009.
6 Under Part 5 of the Bank Recovery and Resolution (No. 2) Order 2014.
7 Regulation 5(3) of FHC Regulations and paragraph 2.13 of PRA Consultation Paper 17/20.
8 PRA Consultation Paper (CP 17/20 paragraph 2.14.
9 section 192Q(3) of FSMA as enacted by Regulation 2 of the FHC Regulations. See also paragraph 2.7 of PRA Consultation Paper (CP 17/20).
10 Ibid.
11 PRA Policy Statement (PS 29/20) paragraph 1.6.
12 Regulation 5 of the FHC Regulations.
13 Ibid.
14 FSMA s. 192K(2).
15 FSMA s. 192K(3).
16 FSMA s. 192K(3A)-(3B).
Matthew De Bari (White & Case, Trainee Solicitor, London) contributed to the development of this publication.
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