There are many challenges that financial institutions face due to Brexit, from the setting up of new legal entities, target operating models and branches overseas, to various cultural and employee-related repercussions.
One Brexit challenge that is less discussed by institutions and the media is a management conundrum: satisfying senior management in the UK and US, ensuring compliance with local regulation and above all, continuing business as usual.
The German Banking Act Kreditwesengesetz (KWG) and the Minimum Requirements for Risk Management (MaRisk) has outlined several requirements that institutions and their respective senior managers must follow in order to operate in Germany. These include reporting any significant changes in their exposures, balance sheet, capital ratios, management or supervisory boards to regulators (BaFin, the Deutsche Bundesbank, or the European Central Bank).
They must additionally report their holdings or interests in other companies, as well as in some cases, client accounts and information they have stored in their systems. This therefore means that from a German perspective, managers must be ready to comply with any query coming from either BaFin or Deutsche Bundesbank.
To further complicate matters, the queries or requirements in Germany are not the same as in the UK or US. For instance, even though the goal of a KYC/AML Operations team is to ensure that clients are not laundering money or financing terrorists (regardless of location), the process followed by the teams will differ across locations. What is a must in Germany need not be a must in UK and US and vice-versa.
As an example, let’s assume that a certain client is onboarded on the UK entity. Post-Brexit, that client will be moved to the German entity to conduct business in the EEA area. However, due to different requirements, the UK onboarding team will have to document and store data that was not a must in the pre-Brexit world.
On the other hand, German senior management teams must ensure that the process followed by the UK teams is fully compliant with local regulation, since at the end of the day, even though it is legacy UK business, German management is responsible for migrated and new business.
But how much is needed to be compliant? Can institutions implement the minimum requirements in Germany and will the German regulator facilitate to some extend market entry of investment banks and new business models in Germany?
Managers must now decide what will be the trade-off; what can they adapt in their local processes to still be compliant in Germany, while simultaneously minimizing conflicts with their UK and US counterparts, as well as with the regulators.
Our advisory teams can help your business to ensure its post-Brexit models comply with local regulations, and that any issues associated with the transition to a new location are also minimized. Conflicts of interest are not rare but ubiquitous, and with Brexit we only expect them to increase. However, putting in place the right processes and models, as well as having clear strategies and communication with stakeholders, will ensure that your operations keep running, future European business flow is enabled while not being exposed to regulatory findings and more important put at risk.
While German banking regulations challenge organizations with high expectations and standards, they at the same time offer space to risk-adjust governance frameworks and operating models to facilitate European and global banking business.
For more information about how we can help UK and EU-based businesses in the run up to Brexit, please contact:
SEBASTIAN JUNGCK
Partner (Frankfurt)
Sebastian.jungck@capco.com