Banks, insurers and clearing houses from the European Economic Area will be able to apply to operate in the U.K. as branches after Brexit, as long as they are not carrying out significant retail business, the Bank of England said.
But this is based on the assumption that Brexit negotiations lead to a co-operative relationship between the U.K. and the EU. If they do not, the Bank of England may have to reconsider how it supervises firms from third countries, deputy governor Sam Woods said in a Dec. 20 letter to bank CEOs.
If the Prudential Regulatory Authority does not have clear cooperation with the regulators in EEA countries, then it may have to impose extra regulatory requirements on branches. If this turns out to be ineffective, the PRA would only allow firms in question to operate as subsidiaries, the letter said.
Branches of foreign firms in the U.K. are ultimately the responsibility of the regulator in their country of origin, whereas subsidiaries are separate legal entities that are regulated in the country where their activities take place, for example, Santander UK Plc.
There are 160 branches of international banks in the U.K., of which 77 are from the EEA. Their combined assets total £4 trillion, which is "substantially" larger than the U.K.'s GDP, according to the Bank of England.
There are 110 branches of international insurers in the U.K., of which 10 are from the EEA. European banks would have to re-apply to operate in the U.K. as branches after Brexit.
The Bank of England would also take a similar approach to central counterparties, or CCPs, according to the statement.
'A global public good'
The question of whether U.K. banks will be able to maintain passporting rights, which would allow them to continue to operate freely in EU states following Brexit, and vice versa, has been a sticking point in ongoing negotiations about the U.K.'s exit from the bloc.
The U.K.'s financial system is "both a national asset and a global public good," and keeping it open to foreign financial institutions is "in the best interests" of the U.K., EU and global economies, a statement from the bank said.
Firms will be able to submit applications for authorizations from January 2018 onward.
Banks with assets in the U.K. of more than £15 billion are deemed to be systemically important and will have to become subsidiaries instead of becoming branches. Retail banks face a considerably lower threshold, and have to become subsidiaries if they have over £100 million of retail clients.
This is in keeping with comments that Woods made in an October speech on "geofinance," in which he said that wholesale banking is, by its very nature, international, whereas retail banking should be treated as a more local activity.
The EEA includes the 28 members of the EU plus Iceland, Norway and Lichtenstein.