The “Dear CEO” letter underlines the FCA’s open and pragmatic approach in the context of Brexit.

By Nicola Higgs and Charlotte Collins

The FCA has published a “Dear CEO” letter to firms, advising them of its position in relation to the use of cross-border booking models in the context of Brexit. Firms commonly use remote and back-to-back booking models, but these arrangements have come under closer scrutiny recently as firms prepare their businesses for Brexit.

European supervisors have cautioned against the use of such models, and warned against firms potentially seeking to set up “empty shell” companies in the EU. For example, the European Central Bank (ECB) (which carries out a supervisory role in relation to Eurozone banks) has set out fairly detailed expectations for banks wishing to relocate to the Eurozone. In particular, the ECB expects that EU products and transactions with EU clients are booked in the EU, and that risk management capabilities related to such products are located in the EU.

The FCA, in contrast, is not seeking to restrict market access, and simply is concerned that firms with a UK presence structure themselves so as to enable the FCA to supervise their UK business effectively, and to continue to meet the FCA’s high-level threshold conditions. Additionally, the FCA wants to see that, when formulating their plans, firms consider not only their business needs, but also the best interests of their clients.

The FCA states that it is open to a broad range of legal structures and booking models, provided that underlying conduct risks are managed appropriately, and effective governance arrangements are in place. According to the FCA’s letter, this means firms need to be able to demonstrate how they have observed and implemented the following principles in relation to their booking models:

  • Firms should set out a clear rationale for their booking arrangements, document them, and have them approved by the Board
  • Risk management should be appropriate for the firm’s booking activities, including hedging arrangements
  • Firms should ensure a broad alignment of risk and returns at the entity level
  • Firms should have adequate systems and controls in place to ensure that booking arrangements are followed
  • Firms should consider whether responsibility for oversight of booking arrangements should be explicit in Senior Managers’ Statements of Responsibilities
  • Booking arrangements should not be an impediment to the firm’s recovery and resolution

As witnessed over recent months, there is an air of pragmatism from the UK regulator and a sense that it wants to help facilitate business continuity as much as possible, provided that firms act sensibly and put in place appropriate risk mitigation arrangements. Nevertheless, firms will be conscious that there are two sides to the coin. As with other issues relating to Brexit, no matter how helpful the FCA is willing to be, groups operating across the EU will also need to remain mindful of the views of relevant EU regulators.

Another key message from the letter is that the FCA wants an ongoing dialogue with firms. The FCA stresses that firms should not take decisions without first speaking to the regulator, and indicates that the FCA is always ready to discuss restructuring and relocation issues with firms. The FCA also emphasises that the approach outlined in the letter aligns with the PRA’s approach, and so dual-regulated firms should assume that this guidance is equally applicable to them.