Case study: Standard Chartered
Andrew Pring, head of audit – Europe and HR, Legal, GCS, CA & B&M
Standard Chartered is a British multinational banking and financial services company and employs more than 86,000 people around the world. They are listed on the London and Hong Kong Stock Exchanges as well as the Bombay and National Stock Exchanges in India.
On a macro level Brexit has had no material impact to date but the London-headquartered bank has prepared itself for a potential no deal outcome by reviewing its legal structure within the Euro zone, and is in the process of acquiring the necessary licenses.
It chose to set up a new European subsidiary in Frankfurt, where the bank already has an established presence from which it services a range of clients and conducts its euro clearing activities. Like many other financial institutions, by setting up a European subsidiary it enables the bank to continue trading with its existing counterparties that would be impacted by the loss of EU passporting rights. This way it is able to serve its clients and protect its revenue while remaining UK domiciled. It is currently awaiting approval from German and European banking regulators for the hub, which will allow it to continue operating across the EU after the UK leaves the EU in March 2019.
The uncertainties linked to the ongoing Brexit negotiations, coupled with larger geo-political events such as trade tensions between the United States and China, and ongoing concerns over emerging markets, have the potential to delay corporate investment decisions.
Germany
The European Central Bank (ECB) plays a key role in setting the conditions for banks’ new EU bases. To ensure they have a long-term plan for their post-Brexit hubs, the ECB has requested Standard Chartered to submit additional information to ensure its Frankfurt office is a genuine stand-alone business that is able to service its German and wider European clients. To comply with local regulatory rules and expectations, the bank is now required to have appropriately sized second and third line functions, including a German-based risk management function and internal audit function. To that end the bank has recruited a Head of Internal Audit who is familiar with German regulatory demands to oversee the bank’s provision of internal audit services to its new entity. In Germany, financial institutions are required by law to audit everything on a three-yearly audit cycle whereas in the UK a more risk-based approach is the norm. A German banking license means that the bank is now bound by national rules and is required to operate to standards that the local regulator expects.
Scenario planning
Standard Chartered considered and tested all exit scenarios but focussed more time and resources on a hard Brexit scenario as it will be the most disruptive to the organisation. Immediately following the Brexit referendum the bank started preparations for a hard Brexit in the event the UK government and the EU fail to reach an agreement before 29 March 2019. If both sides reach an agreement by that time, a transitional arrangement will be put in place to help smooth the UK exit from the EU.
The ongoing uncertainty and resultant large number of underlying assumptions that are required to be made meant that scenario planning is challenging and requires regular review as certain assumptions prove to be incorrect and new or revised assumptions
are required.
Brexit governance fora
An internal Brexit Steering Committee was set up after the referendum to assess and manage post-Brexit risks and the practical implications. Its primary focus has been on driving the direction of the Brexit preparations and making decisions on further progress and the appropriateness of the response the bank is taking. In addition, a Brexit working group was set up which consists of numerous work streams. A project office was established which provides direction, coordinates and assists with resources and budgetary issues that may impact the work streams and manages the overall progress of the project. Due to ongoing developments around Brexit, the working group meets on a weekly basis. There are various work streams, Client Communications and Client Migration for example, look at the impact of Brexit on the bank’s clients and, like all other work streams, submits its progress on delivering the necessary steps that ensure the bank is able to continue its activities
post Brexit.
The bank’s internal audit function attends all meetings of both groups to have oversight of key events and responses but to also raise questions and challenge assumptions and findings. Attending the meetings allows internal audit to continuously monitor the bank’s response to Brexit.
As part of the internal audit risk based planning process, key projects will be considered for audit coverage. Given its significance and potential impact, the Brexit project was one selected for audit coverage in 2018. The audit was completed in August 2018.
Advice
To influence an organisation’s response to Brexit, Standard Chartered’s internal audit function advises other audit functions to attend their individual Brexit steering committee. By observing the discussions and the decisions made on these committees, internal audit is able to raise any issues before decisions are implemented. Internal audit found that it was able to deliver more value to the organisation by attending the various meetings, rather than intervening on an ad hoc basis or after the fact. It timed the abovementioned audit to be when matters were sufficiently advanced and crystallised but with time to respond before it reached the critical months prior to the March leaving date. The audit function may consider undertaking further tangible work pre- and post-Brexit as it sees the need arising via its continuous monitoring. The function is very cognisant to minimise any internal audit impact on the project when it reaches critical milestones.
