Brexit: How the authorisation process in the euro area works in practice
Licensing procedures for credit institutions established in the euro area are carried out jointly by the ECB and the National Competent Authority (NCA) of the country where the applicant is located. Technically, this “common procedure” starts with an institution approaching its NCA, which is the entry point for any authorisation procedure, and ends with the ECB taking the decision. However, the ECB and the NCA work closely together from the beginning to ensure a consistent, efficient and thorough approach. The first step in the process is to review the documentation for completeness. Once all the required documentation has been provided, the official legal timeline of the procedure starts. In the case of licensing a new credit institution, this is between six and twelve months in accordance with the legislation applicable throughout the EU. The involvement of both the ECB and the NCAs in this process is fully coordinated and does not affect legally defined timelines.
The assessment for authorisation focuses on a number of key areas, including the planned programme of operations, governance, capital, liquidity and solvency as well as the internal organisation of the entity. Supervisors carefully assess the soundness and thoroughness of the institution’s business plan and the underlying assumptions. They also assess whether the proposed members of the management bodies are fit and proper for their envisaged role, and whether the shareholders are suitable and financially sound. Supervisors also consider the set-up of the risk management, compliance, and audit functions. Again, the ECB and the NCAs cooperate closely during the assessment stage of the application process and ensure that the work conducted is synchronised rather than sequential. The supervisors and the applicant or its parent company usually keep in contact throughout this process to clarify any open issues.
The decision-making process is based on a draft prepared by the NCA, which feeds into the ECB’s own assessment. Subsequently the draft decision is submitted to the ECB’s Supervisory Board for its decision and adopted by the Governing Council following a non-objection procedure.
In the context of Brexit, where the general requirements and the well-established common procedures process remain unaltered, the ECB and the NCAs have jointly identified areas to focus on to ensure, for example, that banking groups do not set up shell companies that lack adequate local capabilities. Supervisors will pay particular attention to these aspects when assessing banks’ internal governance and risk management arrangements, business plan and planned outsourcing arrangements. Of course, special attention will also be paid to how banks plan to transfer their activities to the euro area and how they ensure that the progress in building up local capabilities keeps pace with the speed of the transfer process.
Some banks already have a licensed entity within the euro area and may, therefore, opt to transfer substantial activities to this entity instead of applying for a new licence. The requirements for these banks will be similar to those applied during the authorisation procedure for new banks, the aim being to ensure consistency of supervision and a level playing field among banks.
What all procedures have in common is that the thorough assessment of applications takes time. In addition, the time needed to shift activities to the new entity after the authorisation has been granted also has to be factored in. To avoid a potential disruption of client relationships when the UK leaves the EU, banks should therefore submit their licensing applications as early as possible. But early submission alone will not guarantee early approval – the quality of the application is also key. High-quality applications reduce the need for clarifications and discussions during the authorisation process. In the interest of promoting efficiency and quality, the NCAs and the ECB are open to engaging in discussions with banks even before they officially submit an application and to providing preliminary views where possible.