European Union: ECB-SSM's Supervisory Relocations On Principles (SPoRs) – How Do These Sharpened Supervisory Expectations Impact Firms BREXIT-Proofing?

Last Updated: 11 September 2018
Article by Michael Huertas and Katja Michel

The European Central Bank (ECB), acting in its role as the lead in the Single Supervisory Mechanism's (SSM) pillar of the Eurozone's Banking Union has been increasingly clear to the relevant national competent authorities (NCAs) as well as existing firms, notably Banking Union Supervised Institutions (BUSIs), or those looking to relocate, on what it thinks about BREXIT-proofing: Those relocating or looking to start the process of moving from Britain to the Eurozone have been reminded that they could and should do better and that time is tight. This is especially the case following the UK Government's release on August 23 of its "No Deal Guidance" for banking and financial services.1

Even if some are doing better than others, a number have yet to start. For those that have submitted plans some may have been told that these are lacking. For those that have submitted their plans and applications for legal entity structuring post-BREXIT and have not been invited to improve their plans, they might nonetheless be behind on implementing the Eurozone specific policies, processes, procedures and people. Work is needed to hang the meat onto the skeleton applications. This Client Alert assesses some of those requirements and the outlook ahead especially as the ECB-SSM announced further SPoRs, a number of which stem from bilateral supervisory dialogue, notably on booking models during August 20182 along with expectations on risk management and governance arrangements (the August 2018 Update), which build directly on the EBA's own SPoRs as well as its sister authorities, which are covered in this series of Client Alerts from our Eurozone Hub. The August 2018 Update notably introduces a distinction between ECB-SSM SPoRs, as they apply to "onshore" i.e. EU-27 and "offshore" entities and what is permitted where. It should come as no surprise that the expectation is for most functions and substance of business to be originated and managed onshore by EU-27 entities.

BREXIT has turned messy

The UK's move to introduce a "temporary permissions regime" thereby allowing incoming EU firms to continue to operate in the UK once they become third country entities (TCEs) has not been reciprocated across the EU let alone by the ECB-SSM in the Banking Union. The pressure is on for firms to step up preparations and to do so regardless of any outcome in the BREXIT negotiations including the existence and/or length of a transition period (if any). The ECB-SSM stated, at the first major SSM Press Conference in February 2018, that certain applicants may be eligible to be given more time to implement their relocation plans. However, this will only be available where applicants have already presented "high-quality and credible plans for their "steady state situation..." and are " control of their own risks."

Despite that warning and the prospect of an olive branch, the hard deadline for financial services firms to submit licence applications was set by the UK authorities as March 30, 2018 and by the ECB-SSM as June 30, 2018. Those dates have come and gone.

So what now?

The politics have worsened, and the EU's SPoRs have tightened. The ECB-SSM, like its European Supervisory Authorities (ESAs), notably the European Banking Authority (EBA), itself needing to relocate from the UK to Paris, and the European Securities and Markets Authority (ESMA) have been clear in drawing regulatory and supervisory red lines. The ECB-SSM's view, which builds upon the work of the EBA3: "The bottom line is that banks must remain in control of their own risks. We therefore expect incoming banks to be able to produce complete and accurate data on booking models, hedging strategies and intragroup exposures. But euro area banks [i.e. existing BUSIs] should also review and disclose any changes to their booking models during the ongoing supervisory process." Notably the ECB-SSM clarified in its August 2018 Update that it will apply its supervisory expectations in "a proportionate manner to the individual cases, taking into account the materiality and complexity of the bank's capital market activities."4 This however does not translate into a free pass for those firms operating other business and distribution models and the need for these to still prepare. The emphasis on originating and managing risk within the EU-27 as opposed to offshore and having the requisite human and technical resources within the EU-27 is made quite clearly. The same is true in existing and new BUSIs having "no heavy reliance on third country risk hubs...entities are expected to manage their market and counterparty risk independently and have independent trading capability (incl. market access on the basis of contractual arrangements in the name of the [BUSI in the EU-27]... and have effective decision-making powers regarding issues relating to the entity's booking model, as well as full control of its balance sheet and of transactions booked to the entity."

The ECB-SSM's supervisory scrutiny does not just stop at booking models, delegation and avoiding "empty shells" through testing sufficient presence and substance. The ECB-SSM, in addition to exercising its own rulemaking and supervisory powers, applies and tailors the Single Rulebook to the Banking Union and supervised institutions. It does this through actual rulemaking, often hardwiring draft concepts and principles of the EBA and other ESAs to its operations as well as the use of soft law methods, allowing flexibility advanced through means which range from "non-binding Guidance that forms part of the supervisory dialogue" along with its own supervisory expectations and SPoRs issued to the wider market along with more tailored but quite public statements directed to firms. Some of the requirements and how the ECB-SSM approaches in its supervisory culture to make the Single Rulebook more single may be culturally foreign to a number of jurisdictions and firms – including those in the UK.

Couple this with the emerging supervisory tone that the ECB-SSM will not fully distinguish between whether a firm's EU-27 entity's presence is a branch, thus not within the full perimeter of the ECB-SSM, or a standalone subsidiary (the ECB-SSM's preference) and thus within the Banking Union supervisory perimeter. The terminology used instead is "onshore" versus "offshore" and looks at branches, subsidiaries business activity and viability as well as capabilities (as a going concern as well as on a business continuity basis) under one roof. This assessment also looks at the "adequacy of sales/business origination capabilities within the [BUSI] entity located onshore to ensure asset growth and revenue plans are achievable and supported by trading capabilities that are appropriate for executing trades and hedging risks". This also includes an expectation that the new or expanded onshore entity is "expected to develop effective independent price verification (IPV) and fund transfer pricing (FTP) capabilities and processes to price and evaluate intragroup arrangements and is expected not to be systematically loss-making.

That amended supervisory perimeter is also expected to extend through actions being mooted by the EU Commission and endorsed by the ECB-SSM to directly supervise those "broker-dealer" arms of BUSIs that are currently not subject to Banking Union supervision but national authority supervision but which undertake "bank-like" activity – currently a conveniently undefined term.5 This marks a potential sharpening of tone and breadth of coverage. It also means specific compliance considerations especially as the ECB-SSM has some clear expectations on build-up periods on management information systems' capabilities and BCBS 239 compliance.

The August 2018 Update also closes the door on some structuring expectations and assumptions by stating that (emphasis added in bold): "dual hatting and secondments of members of the management body, key functions holders and staff employed by the [BUSI] are expected to be used only in exceptional circumstances [undefined term] and in duly justified cases." This will affect existing and new BUSIs, a number of whom may want to reassess how they map and manage compliance with the ECB's own Guide qua rules on fitness and propriety assessments (see our dedicated Eurozone Hub coverage on this) and the rules of national competent authorities.

Getting serious on compliance with SPoRs will need specialist advice on the rules, the supervisory approaches and supervisory culture as well as how it fits into the wider set of global, EU and Eurozone-specific developments that have varying degrees of impact on the "change the business," "run the business" and "change the compliance" workstreams affecting financial services firms. The ECB-SSM's views on SPoR compliance are also flanked by its work across its 2018 as well as multi-annual supervisory priorities notably:

  • The review of the SSM Regulation, where there is some scope for further administrative adjustments and streamlining of certain processes. This builds upon reforms that are being put in place following the 2016 Report of the European Court of Auditors;6
  • Work on the ECB-SSM's NPL Guide Addendum as well as the EU's wider NPL Action Plan,7 which despite the political pushback it received still went ahead with the ECB-SSM regime now forming part of tailor-made supervisory dialogue with BUSIs;
  • Results of the 2017 supervisory Interest Rate Risk in the Banking Book (IRRBB) sensitivity analysis run by the ECB-SSM, which remarked that most BUSIs were managing interest rate risk well. The update provided to ECON was timely given the start of the 2018 EU-wide supervisory stress tests, the start of the ECB-SSM's 2018 Supervisory Review and Engagement Process (SREP) review cycle, the ECB's forward guidance as a central bank on the normalization of interest rates as a monetary policy tool along with the ending of its asset purchase programmes are just around the corner.

So where have BUSIs and other firms fallen short and how could supervisory perimeters expand?

A number of structuring options have been advanced by market participants, often still putting UK-centric interests first in a manner that either misses the whole existence of or specific contents of the SPoRs. The ECB-SSM has repeatedly concluded:

"In assessing the relocation plans available so far, the ECB has identified some deficiencies, especially regarding the tendency to set up 'empty shell' banks in the banking union, overly relying on services provided group entities in the United Kingdom...."


"Additionally, we see a tendency to relocate bank-like activities to investment firms or third country branches which are out of the SSM's scope, thus leading to a fragmentation of supervision and possibilities for regulatory arbitrage. Here we rely on you as European legislators to introduce the necessary changes to the prevailing regulatory framework."

These are damning statements and aimed at those that have tried to be cute rather than compliant. The two prime deficiencies are something that were central to most supervisory statements issued by the ECB prior to the ESA's and the NCAs released their own SPoRs. Whilst there may be a fair amount of finger-pointing, what is more pertinent is for a fair degree of firms to take specialist advice and remedial action especially as goodwill amongst supervisors may begin to deteriorate where firms are not prepared. Moreover the ECB-SSM is a strong supporter of the EU's proposals on introducing "K-Factors" for MiFID Investment Firms undertaking "bank-like activity" as well as supervising branches set-up by third-country firms in the EU which may not be subject to full Banking Union supervision8 or for BUSIs' operating third country branches in the EU – suggesting that either side of the Channel and the Irish Sea may be subject to more invasive thematic reviews and firm specific supervisory inspections. Its new rules on on-site inspections9 is just one step in cementing how the ECB-SSM applies the Single Rulebook.

Besides the Banking Union supervisors at the ECB-SSM and NCA level working to push the supervisory perimeter through legislative and soft-law measures, supervisory convergence is a cornerstone of institutional improvements being carried out. This means closing loopholes, working better together and more efficiently, joining ranks and allocating support to areas of expertise. In short, it would be exceptionally shortsighted for firms and certain professional advisors to build BREXIT-plans on assumptions that EU supervisors can overturn by changing their supervisory scope and scrutiny faster than a supervised institution may be able to rejig its structure.

The ECB-SSM isn't the only voice

Another issue that remains worth considering is that certain NCAs, in particular those that have a strong track record in their own supervisory engagement processes in the banking as well as other financial services sectors, are themselves quite active in publishing their own clarifications on how they will administer the SPoRs along with their supervisory priorities. Some NCAs are walking a fine line between communicating the strict nature of the SPoRs whilst also trying to entice firms to come to their jurisdiction. Some NCAs have been better than others at making "their" jurisdiction appear more appealing to relocating firms. The ECB-SSM however may take steps to clampdown on some of these arbitrage practices, especially as it is, in addition to having harmonized rules in the standards that licence applications10 must follow, is the final body that decides on whether to grant or refuse regulatory permissions.

In any event, while the Banking Union aims to make the Single Rulebook more single, the narrative from respective NCAs add local market context and own standards, notably in those areas where the NCA is the lead competent authority rather than the ECB-SSM. This is especially the case in relation to conduct of business measures where the ECB-SSM has yet to develop an interest for how it might affect those prudential workstreams for where it is the lead authority and how to craft a common supervisory culture in that area to streamline the Single Rulebook for financial services. Despite the on-going Europeanization of financial services rulemaking and supervision moving from NCAs to ESA and/or the ECB-SSM, one area where consensus could not be clearer is that firms need to comply with the SPoRs and start the relocation process sooner rather than later.

Outlook and next steps

As a result, in light of the ECB-SSM's continued statements and verdict on SPoR compliance levels, affected firms will need to:

  • Review existing and pending BREXIT-proofing and relocation plans, some of which might need to be revisited to make sure assumptions made on the structuring side of things do not fall foul of the SPoRs and other supervisory expectations and take remedial action if necessary;
  • Critically assess certain structuring decisions and assumptions, notably in relation to outsourcing or booking models, even if structured in a SPoR compliant manner, require a greater degree of documented justification as to why a particular decision was taken and the circumstances influencing that decision and the evaluation of adequacy of control functions; and
  • Allocate sufficient time and resources in order to take account of potentially more protracted and more invasive supervisory touchpoints along each of the levels of supervisory engagement. In addition to reviewing structuring assumptions, in-house steering teams may want to consider appropriate support in relation to preparing SPoR friendly policies, procedures, processes and people in relevant strategic and risk-taking roles as well as the requisite control functions.


1 The UK's No-Deal Guidance Note "Banking, insurance and other financial services if there's no Brexit deal" mirrors some of those conclusions – please see our Eurozone Hub's coverage on the text of the Guidance Note which is available

2 See our Client Alert from our Eurozone Hub on this development.

3 See our Client Alert from our Eurozone Hub on this development.

4 Capital market activities are not to be distinguished between those in the Trading Book and those in support of the Banking Book.

5 See our Eurozone Hub's coverage on this development.

6 See:

7 See our Eurozone Hub's dedicated coverage on the EU's NPL Action Plan and the ECB-SSM's own work in this area.

8 Please see our dedicated coverage from our Eurozone Hub on these developments.

9 See:

10 See our coverage on ECB-SSM final rules on licence applications: and on fit and proper assessments:

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions