Regulation of Banking in Ireland: Subsidiary or Branch

Monday, 10 April 2017

The two alternatives for setting up a banking operation in Ireland are either to obtain an authorisation from the ECB via the Central Bank as a credit institution or alternatively to establish a branch under the EU Capital Requirements Directive.

1. Key issues to consider when establishing a banking subsidiary in Ireland

Legal Forms

The permissible legal forms include private company including a Designated Activity Company or a PLC established under Part 17 of the Companies Act 2014.

The registered office and head office are required to be located in Ireland.

Minimum Substance Requirements

The mind and management of the firm must be located in Ireland and the minimum key functions that are required to be located in Ireland include: CEO, CFO, Financial Control, Risk, Credit, Treasury and Compliance.

The minimum initial capital is €5 million.

There are no prescriptive requirements or designating minimum domestic location requirements for Front, Middle or Back Office and subject to being able to demonstrate effective management and control from Ireland a firm could locate significant front office business in branches elsewhere in the EEA. However, it is likely that the effective management of Front, Middle and Back Office would have to be demonstrated to be carried on in Ireland.

Subject to effective management and supervision, it is likely that back office activities including IT and administration could be outsourced in accordance with the EBA Guidelines.

Outsourcing

Outsourcing rules are largely governed at EU level and they do not restrict offshoring to a branch or subsidiary outside of Ireland, subject to the following key principles:

• Management and control of the Firm’s affairs may not be delegated: Functions which involve responsibility for the organisation and the control of the affairs the firm may not be outsourced. In practice this includes the board and executive committee functions and other roles which involve exercise of discretion.


• Monitoring, management and control of outsourced activities: The firm must be able to monitor, manage (including risk management) and control the outsourced services, and must take reasonable care to supervise the discharge of the outsourced activities.


• Front Office activities generally cannot be delegated: Activities attracting EEA licensing requirements cannot be sub-contracted to an affiliate which does not have the necessary licenses.

The Single Supervisory Mechanism

The Single Supervisory Mechanism (SSM) applies automatically to any credit institution established in a Eurozone Member State, and EU Member States outside of the Eurozone may choose to participate in the SSM, provided that they have established a close co-operation with the ECB.

Significant credit institutions are regulated directly by the ECB and less significant credit institutions are regulated indirectly by the ECB through Joint Supervisory Teams in conjunction with National Competent Authorities.

The scope of a credit institution as either a significant or less significant will likely have a bearing on potential location, with Frankfurt being favoured for the location of significant credit institutions.

Minimum Capital Requirements

The rules are harmonised across the EU and there are limited areas where Member States can levy additional discretionary requirements.

Solvency, liquidity and capital requirements are required under the CRR and CRD IV. The CRR provides for common EU for Pillar 1 capital charges, the leverage ratio and the liquidity coverage ratio. The rules apply equally to banks and investment firms.

Material discretions can be applied in respect of:

• Pillar 2 capital charges resulting from the individual capital adequacy assessment; 
  


• The output of the individual liquidity adequacy assessment; 
  


• Leverage ratio (the CRR requires reporting on leverage and individual states may impose a hard leverage ratio, although Ireland has not done so): 
  


• Countercyclical buffer; and 
  


• G-SII buffers and D-SII buffers.
  

The Application Process

The firm should contact the Central Bank ("the Bank") once it has satisfied itself that the proposed entity will be capable of complying with all applicable requirements to arrange an exploratory meeting with the Bank and to provide the Bank with a Key Facts Document at that meeting. Based on the feedback at that meeting, the applicant should then submit a proposal for authorisation. The Bank will undertake a detailed review and will provide the applicant with a preliminary assessment within 2-3 months.

Following submission of a final application to the Central Bank, the application will be reviewed by both the Bank and the ECB and the Bank will issue comments requiring further information/clarifications.

Cross-Border Transfers

Pre Brexit, it would be possible to do an EU cross-border merger of a UK banking subsidiary into a new entity domiciled in Ireland and there is no ability to cherry-pick assets for transfer (all assets and liabilities transfer) and from a regulatory perspective, a new application for a licence would be required.

It would also be possible to convert a UK banking subsidiary into an SE (a form of European company) and re-domicile that entity in Ireland.

Employment Bonus Caps

Bonus cap restrictions apply on up to 100% of salary which may be increased to 200% of fixed salary with shareholder approval and such caps apply to senior managers, risk takers and staff in control functions.

2. Key Issues to consider when establishing a banking branch in Ireland

Passporting a Branch of an EEA Credit Institution

The process is set out in CRD IV and the EBA has prepared an Implementing Technical Standard which has been finalised in EC Delegated Regulation 1151/2014

The process requires the credit institution to provide its home state regulator with information concerning the proposed business operations of the proposed branch.

The Home State Regulator shall (unless it doubts the adequacy of the administrative structure or the financial situation of the credit institution) within 3 months communicate the proposed establishment to the Host State Regulator and shall also communicate the amount and composition of own funds and the sum of the own funds requirements under CRR.

Host State Regulator Competencies

Whist the Home State Regulator retains responsibility for prudential supervision of the credit institution, including the branch, there are certain competencies retained by the Host State Regulator and these include responsibility for:

• Oversight of liquidity of the branch 
  


• Conduct of business undertaken by the Branch;  and


• Compliance with domestic anti-money laundering requirements.

Oversight of Liquidity

The Bank has issued an Implementation Notice of National Discretions under CRR, which includes confirmation of the local position on management of liquidity risk in the following terms:

• The Bank’s requirements for management of liquidity risk issued in 2009 will remain in place until 1 January.
  
  
• The Bank will not impose an accelerated phase-in of the minimum liquidity requirements.
  
  
• The Bank will not introduce a net stable funding requirement ahead of a binding requirement at EU level.


• Until the full implementation of binding liquidity requirements at EU level, the Bank will continue to apply the existing liquidity reporting requirements.
  

Oversight of Conduct of Business

The principal areas of regulation by the Host State regulator relate to ensuring compliance with the various consumer protection codes in place by the Bank affecting the rights of consumers under the Bank’s Consumer Protection Code, the SME Lending Code and the Code of Conduct on Mortgage Arrears etc.

Compliance with AML Directives

The bank is the competent authority for ensuring compliance by firms including branches of credit institutions located in Ireland with the requirements of the 3rd and 4th AML Directives.

In view of the Host State Regulator’s competence, it will be necessary to establish policies and procedures on the client acceptance and suspicious transaction reporting in respect of proposed new business of the Irish branch.

Access to ECB Liquidity

A significant benefit of establishing a branch in Ireland is that the Branch will qualify as an Eligible Counterparty for liquidity transactions with the ECB and accordingly the Group can access ECB liquidity through the Irish branch. 

For further information, contact a member of our Financial Services team.