When a bank, financial institution or Fintech intends to pursue its banking activities in another EU Member State than originally licensed, they need to notify their National Competent Authority (NCA) of this intention and  - if requirements are met  - will be granted approval. In Germany the relevant NCA is Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin). In order to comply with the general regulatory requirements, it is all about providing the NCA with enough information and documentation about the institutions' envisaged activities to be carried out in the member state. Once the NCA has reviewed and constituted the information to be sufficient, it transmits them to the host competent authority of the potential future member state of the institution. The host competent authority reviews the information once again, confirms their compliance with local requirements and subsequently communicates with the institution itself.

Background

The EBA has published Regulatory Technical Standards (RTS) in 2014 that set out, which information are required to be handed in by the credit institutions as well as the overall notification process on the authority's side. In November 2019, these Technical Standards have been revised based on the findings of an assessment conducted by European Banking Authority (EBA), the “Peer Review Report”, and thus oppose all parties with new and adjusted specifications that need to be considered. The published Consultation Paper on Passport Notifications covers all necessary amendments.

Drivers for the RTS amendments

The EBA Report on the Peer Review of the RTS on Passport Notifications has been published in 2018, which contains an assessment of all notifications being handed in within one year. The authorities were surveyed regarding potential fields of improvement they see within the RTS. In general, the EBA found the notification process to be sufficient and has recognized a huge improvement through standardization since its implementation back in 2014. Nevertheless, certain areas were identified to be holding even more potential for improvement. These include:

• Information exchange: Timing and granularity of exchanged information between home and host authority.
• Proportionality principle: Appropriate application and integration of the proportionality principle among operational arrangements of the notification process.
• Quality of information: Information provided by institutions must include more detail to ease the review process for the NCA.
• Based on the enlisted findings, the EBA adjusted the existing RTS and published them in the Consultation Paper on Passport Notifications in November 2019.

Overview of the amendments

By acting upon the output of the “Peer Review Report”, EBA aimed at providing authorities with a more complete and in-depth picture of the institutions planning and assumptions, for the purpose of facilitating the accuracy, comprehensiveness and consistency of supervisory assessment of both passport notifications. Moreover, the drafting amendments aim at improving the efficiency of communication between home and host authorities.

The proposed changes can be categorised into material changes (content of information authorities require) and minor changes (marginal content, communication and other editing changes). Material changes are as follows: 

• The inclusion of the intended start date for each activity planned to be performed by a branch, not only for core activities (applicable to branch and service notification).
• The expressly request to provide additional information in form of more granular data on the underlying assumptions behind an institutions financial planning, i.e. the B/S and P&L forecast (branch notification only).

Minor changes include:

• The differentiation between new notifications and changes to existing notifications (branch notification only).
• In cases of branch closures, inclusion of a statement by an external auditor stating that the credit institution no longer holds deposits or other repayable funds through the branch (branch notification only).
• Communication of own funds requirements and composition by home to host authority at institution and consolidated level.
• Other editing changes: including more information on legal entities, update specific legal references and formatting issues.

Implication for institutions

The changes made to the Regulatory Technical Standards mean higher reporting requirements for institutions since they mostly imply more detailed information or even the assessment of an external auditor to be submitted to the NCA. In order to being able to provide more detailed information, the management of the institution should consider long-term planning. Especially together with the now to be included start date of the envisioned beginning of branch activities in the member state, a more strategic and holistic approach (e.g. in form of a strategic roadmap) to the notification process is recommended. Further seeing NCA's taking a closer look at and providing more resources for the analysis of the institutions' information, quality standards must be exceptionally high in order to reduce time- and resource-expensive loops for the institution. At the same time, higher reporting requirements mean additional costs for institutions given the extended preparatory time period. On the other side, competent authorities also face additional cost due to the resources and time the review and assessment of these additional information requires.

Therefore, the institutions should prepare for the notification process in terms of ensuring the possession of appropriate technological infrastructure, implement appropriate processes and structures and employ competent human resources to enable these high documentation standards. Given the fact that the EBA consistently pursues to harmonize standards for licence applications across the EU member states, adjusting internal processes and structures according to the average level of its requirements serves the institutions not only in the particular case of a branch notification process, but also in any other case of EBA or ECB approval required procedures and practices.

The Consultation paper is published for a 3 months consultation period, starting on 13th of November 2019. Until the 13th of February 2020, comments to the consultation paper can be submitted via the EBA homepage. A public hearing on the amendments took place on 21st of January 2020, from 10:30 to 12:30 CET at EBA premises. Once all relevant changes have been adapted to the paper, it will be submitted to the European Commission for endorsement. Eventually, the enlisted amendments will be published in the Official Journal of the European Union, meaning that from this point on institutions have to consider and adapt them accordingly.