Banks’ post-Brexit’desk-mapping’ review will end up being a damp squib, City predicts, as finish line nears

A major review into how UK banks structure their operations in the EU after Brexit could end in an anticlimax, those with an eye on proceedings predict, as the finish line on the European Central Bank’s investigation nears.

A staffer at a major global bank that has substantial EU and UK operations said that while the so-called’desk-mapping’ exercise had reviewed them last year, it has now died down, leaving a feeling that it has been largely superficial.

“I’ve checked at a couple of banks and nobody has really heard much,” one compliance consultant said. “Seems like a bit of a damp squib.”

Rob Moulton, global co-chair of both law firm Latham & Watkins’ financial regulatory practice, told Financial News that without a firmer steer on transgressions, the review could end in disappointment.

“The industry awaits the outcome of the ECB’s mapping exercise, but the regulators are likely to need to take enforcement action to end any industry practices that they do not like.”

As top officials near the end of their probe into UK lenders in the bloc, the City remains largely in the dark as it awaits a wide-reaching review into bank structures in the EU post-Brexit.

With just weeks to go before banks receive the results of an ECB review into how they split staff and resources between jurisdictions, and whether this is compliant with new rules in the wake of Brexit, market watchers have received few hints from authorities on how they will proceed with their bid to enforce the new regulatory landscape.

The ECB, European Banking Authority, European Securities and Markets Authority, Bank of England, and the Financial Conduct Authority all declined to provide FN with an update on how the review is progressing.

An official update is expected in the next few weeks, after a source close to the situation confirmed a Q1 timetable last year. But regulatory experts say they have also heard little from the authorities involved since, leaving many unsure of what to expect.

With feedback imminent, banks themselves are also keeping their cards close to their chest.

International lenders with units in the bloc that were covered by the review included the likes of Goldman Sachs, Citi, JPMorgan, Bank of America and Morgan Stanley, Bloomberg reported in May.

Citi, Bank of America, and Morgan Stanley declined to comment to FN. Goldman Sachs and JPMorgan did not respond to requests to comment by the time of publication.

However, one source familiar with the ECB’s exercise at their bank said they did not expect the review’s impact to be particularly significant. more people than they needed to.

Banking trade body UK Finance also declined to comment.

In a note last month, lawyers at Magic Circle firm Allen & Overy said UK banks should continue to review their booking models and risk strategies, “even where no new exposures are sintered”.

“Booking arrangements and intra-group exposures will likely not soon disappear from the ECB agenda and banks should engage in constructive dialogue to discuss their booking models and compliance with ECB expectations,” Allen & Overy said.

EU silent on compliance monitoring

Ahead of passporting ending on 31 December 2020 — removing UK firms’ automatic regulatory permission to trade in the EU — the ECB warned that “banks that have failed to hire staff with sufficient seniority and skills, neglected to make necessary transfers of material assets, or unduly split trading desks across multiple legal entities, will not be considered as complying with the ECB’s requirements “.

Not addressing this would lead to “empty shells” in the bloc — something that the ECB will not accept.

The ECB was crystal clear: “All activities related to European products or European customers should, as a general principle, be managed and controlled from entities located in the EU.”

If moving resources to Europe, banks should “reach their end-state target operating models” in good time, it added.

The EBA also asked banks to “finalise the full execution of their contingency plans” before permissions lapsed.

The ECB last year began a probe into whether banks had lived up to that promise.

It has been tight-lipped on exactly what data it is collecting, and does not appear to have acknowledged the existence of the review in any formal announcement, let alone its scope.

The probe’s importance has only increased since the first rumblings of the review surfaced, given the EU has continued to prove unsuccessful in its bid to grab swathes of business from London.

EY’s latest Brexit tracker, published on 29 March, shows the speed of post-Brexit departures continues to slow, while on the same day the Schroders Global City Index reveals that London held onto the top spot on for the second year in a row.

“While the FCA set out its stall to accommodate EU firms and make the post-Brexit transition relatively smooth with the temporary permissions regime, the EU sees an opportunity finally to make inroads into London’s dominance and is rightly taking it. a brass plaque on a door and an empty desk in an office somewhere in the EU is unlikely to be enough, ”said FE fundinfo regulatory manager Mikkel Bates.“ Without any equivalence in financial services, I find it hard to see any solutions to the impasses, except through greater divergence of the rules. ”

READ Why EU’s Brexit threat to’steal our business’ no longer panics London funds

An ECB spokesperson declined to comment on the status of the review. The EBA said it could not comment on supervisory activities outcomes, asking FN to direct questions to the ECB.

Meanwhile, UK policymakers have also given few hints of what is to come, saying only that it has been “manageable” so far.

At a meeting of MPs on the European Affairs Committee on 22 March, the Bank of England’s executive director Nathanaël Benjamin — who oversees several areas including authorisations and international supervision — reiterated the ECB’s desire to avoid empty shells, but gave little further information on the review’s potential outcomes.

“They have said they would want both of us to consider proposals together before any decisions are made, which is also helpful from a process perspective,” he said. move large numbers of staff across to the continent, but the review is ongoing so it would be premature to draw any conclusions at this stage.

“We will be watching very carefully not just the immediate outcome, but the long-term direction of travel.”

Sam Woods, the chief executive of the Prudential Regulation Authority — the BoE’s regulatory arm which is due to receive the results of the review from the ECB — added that “the jury is still out a bit”.

“This has not been a non-event, and nor are we at the end of it but, so far it has been manageable,” he said.

A Bank spokesperson declined to provide an update, pointing to its latest on-record comments, made by Woods in November last year, that the UK was not seeking a “tit-for-tat game” over staffing by cutting off the EU’s access to the City.

READ London hedge funds ditch Brexit loophole amid watchdog whack-a-mole

An FCA spokesperson declined to comment, saying the review was a matter for the PRA.

“There will remain a degree of fluidity for some years to come, and staff and operational moves across European financial markets will continue” due to a host of factors, including the desk-mapping review, EY Emeia financial services leader Omar Ali noted in the firm’s 29 March Brexit tracker.

EY also declined to comment further on the review.

Meanwhile, Esma, which co-ordinates the activities of local regulators across the bloc and has also warned over issues such as reverse solicitation of business from the region, said it is still unable to say for sure how many firms are skirting access rules post- Brexit, deferring to national watchdogs, which have enforcement powers to take any further action against them.

“We can’t give an exact number. However, we have observed, over the course of these recent years, cases of UK investment firms engaging in the practices mentioned,” an Esma spokesperson said. “The provision of investment services in the EU It is up to national competent authorities without proper authorisation is a violation that may qualify as an administrative or criminal offence depending on national law in different member states. [local regulators] and national courts to take initiatives in response to violations of national law. ”

Claude Brown, a financial services partner at law firm Reed Smith, said: “I think many in the sector will have seen [the review] coming. It is perfectly sensible for the ECB, and Esma separately, to either initiate their own checks or ask national supervisors to do so. The position has been clear for some time that’letterbox’ companies are not acceptable, so we’re really You could say the regulatory chickens are coming home to roost.

“The main issue will be that the staffing levels, especially at supervisory and risk management levels required in the EU, will not reduce those required in the UK. If anything they will be higher in both because the ECB and the PRA and FCA will want additional cover for the business that is being carried out in the other regulators’ jurisdictions that they cannot see. ”

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