To ask Her Majesty's Government what changes they propose to regulations governing banks to ensure that branches whose headquarters are outside the United Kingdom but who trade in the United Kingdom are monitored to the same degree as those whose headquarters are in the United Kingdom. [HL5937]

The regulations governing the supervision of branches of European economic area (EEA) banks are set out in European legislation. These regulations apply equally to banks headquartered in the UK and outside the UK, but within the EEA. Under the single market legislation, a bank authorised in one member state has a right to establish a branch in another member state. Day-to-day supervision of branches of EEA banks trading in the UK is a matter for the Financial Services Authority (FSA).

The FSA's responsibilities over EEA branches are set by EU law and include shared responsibility for liquidity but exclude all other areas of prudential monitoring. Recent changes to the EU's capital requirements directive permit the supervisor of a significant branch to be a member of a supervisory college. This should provide supervisors of branches with a better picture of the health of the financial group and alert them to emerging problems the group may be facing.

The Government believe that the rules and safeguards for cross-border branching within the EEA should be strengthened to reduce the likelihood, and cost, of the failure of a foreign branch. The European Economic and Financial Affairs Council agreed, in October 2009, to invite the European Commission to further review the home-host arrangements for branches under the EU single passport. The Government will play an active role in proposing appropriate changes to the framework.

Financial institutions outside the EEA wishing to establish an authorised presence in the UK can open either a branch or a subsidiary. The FSA will authorise institutions as a branch once the home regulator has been assessed for equivalence to UK and EEA supervisory standards, and once the whole firm has been assessed as meeting the FSA's threshold conditions for authorisation.