On August 8, the UK Financial Conduct Authority (FCA) published a “Dear CEO” letter concerning cross-border booking arrangements.
In the letter, the FCA explains that the UK’s impending withdrawal from the EU has resulted in firms needing to put in place contingency plans that, when executed, will impact current business models, legal entity strategies and booking arrangements. The FCA states that it appreciates the information firms have already provided to it on their plans, and reminds firms of the importance of continuing to provide all necessary information. The FCA further states that firms should not make decisions without first speaking to the FCA.
The FCA expects that firms expanding their presence elsewhere in the EU should ensure that the structures they put in place enable the FCA to supervise the conduct of their UK business effectively. Firms also must ensure continued compliance with the FCA’s Threshold Conditions and assess whether the proposed changes are in their clients’ best interests.
In contrast with some EU supervisors, which have set out specific business model requirements, the FCA states that it is open to a broad range of legal entity structures and booking models. This includes those making use of back-to-back and remote booking models, as long as the associated conduct risks are effectively controlled and managed. The FCA’s stated focus is not on business models, but on understanding the principles and practices involved, and how the conduct risks arising from them are managed. The FCA sets out six principles that booking models should comply with, as follows:
- Firms should set out a clear rationale for their booking arrangements, document them and have them approved by their boards.
- Risk management should be appropriate for the firm’s booking activities including hedging arrangements.
- There should be 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 are explicit in statements of responsibilities.
- Booking arrangements should not be an impediment to the firm’s recovery and resolution.
The FCA expects UK boards and senior managers to ensure that effective governance is in place to identify and mitigate the potential harm that could arise from modified booking arrangements. Firms also should be able to demonstrate to the FCA (whenever requested) how the principles have been observed and implemented.
The FCA’s letter is available here.