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07 March 2022 3 min read

Cross border licensing risk – it’s about more than just Brexit

Nicola Carter

Nicola Carter
Partner, Bookings Model and Controls Lead

Entity licensing documentation, centralisation, and oversight has often taken a backseat within investment banking change initiatives, given the scramble to MiFID II compliance, as well as navigating the complexities of business migration strategies and associated implementation following Brexit. Ensuring UK entities were not directly facing EEA counterparties, unless appropriately licensed to do so, fast became a significant undertaking for many banks post-Brexit. These programmes have thrown this topic into the spotlight and have emboldened the need and imperative for establishing a “cross border licensing” database with a global scope.

 

A licensing database may incorporate a myriad of entity licensing components, such as local banking and capital markets licenses, exchange, and trading venue memberships. However cross border licensing is an important aspect which can sometimes be overlooked by banks. A licensing database can provide a consolidated view of the legal basis for a "third country" firm to provide cross border ("offshore") investment services into a client jurisdiction. This may include a bank establishing an “onshore presence” through a branch or subsidiary or obtaining a third country firm license or other regulatory exemption.

A licensing database helps mitigate regulatory and compliance risks in the face of increasing regulatory scrutiny.

Developing a centralised cross border licensing database helps reduce or even mitigate several tangible risks in relation to the provision of cross border investment services. We are seeing increasing levels of regulatory scrutiny and action in the form of penalties, fines, or other enforcement actions, if firms are found in breach of cross border licensing requirements. This can lead to reputational damage as well as financial losses.

We see three key benefits for a centralised database

  1. Increased transparency and ability to track and meet ongoing obligations: a licensing database would help ensure that all legal entity management teams are aware of the jurisdictional licenses or exemptions that are held by their respective entities. This in turn would help manage and challenge business trading activity accordingly. In some cases, licenses are granted subject to satisfying ongoing obligations, such as regulatory reporting. Ensuring that these obligations are tracked and completed in a centralised fashion can be a challenge if no centralised database exists, thus increasing trading risk and liability.
  2. Tightening entity governance and oversight: providing a centralised view of licenses held by entities within a “group” structure can help organisations to understand whether the jurisdictional footprint is in line with the entity’s booking model strategy, or if this needs to be evaluated further. A database would provide a “single source” of truth in relation to entity cross border licensing, eliminating the reliance on “information silos” held by various parts of an organisation, which do not provide a comprehensive and standardised picture of the licensing landscape. This would reduce room for error and ultimately save time trying to source up to date information.
  3. Incorporating critical input into wider trading controls: a licensing database can also help further an organisation’s journey in developing a more robust Front Office controls framework. A “machine readable” view of entity licensing can be used as a key input into implementing trading controls. Trading activity in unauthorised jurisdictions can be blocked prior to trade execution, with any exceptions flagged on a post trade (T+1) basis.

How can we help get your control model to be more effective?

Implementing a booking model governance and controls framework which minimises complexity, reduces risk, meets clients’ needs, and ensures compliance with regulatory requirements, can be a significant undertaking with an impact spanning across an organisation. If implemented ineffectively, a banks’ control framework may still leave a firm exposed to regulatory, compliance and contractual risks. We have supported clients assess the efficiency of their existing booking model tooling and defining the target state framework, as well as scoping and establishing the licensing database - ensuring effective prioritisation, appropriate buy-in and review from key stakeholders, and integration of the database within the wider trading controls framework. This has directly contributed to the reduction of associated regulatory and compliance risks faced by our clients.

You can learn more in our previous Booking Model Control article, which looked at the five sustainable solutions for banks to get ahead with their booking model controls. If you would like to find out more about how we can help with your booking controls, please contact Nicola Carter, Mikhael Behzad and Laavanya Raju.

 

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