Banking and finance regulatory news, 14 December 2020

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Banking and finance regulatory news, 14 December 2020

FIG Bulletin

14 December 2020

Recent regulatory developments focussing on banking and finance. See developments of broader scope in the Related Materials links.

The Prudential Regulation Authority (PRA) has published a policy statement, PS26/20, on the implementation of the Capital Requirements Directive V (CRD V). The UK is committed to implementing CRD V measures that must be implemented before the end of the Brexit transition period. The PRA has also published additional rulebook instruments and supervisory statements where it considers that certain policies would need to be amended under the European Union (Withdrawal) Act 2018 (EUWA) to make the legislation operable following the end of the Brexit transition period.

In PS26/20, which has 37 appendices accessible from the PRA's webpage, the PRA sets out near-final rules instruments (appendices 1 to 13), Statements of Policy (appendices 16, 26 and 27), Supervisory Statements (appendices 17 to 25 and 28 to 33), and templates (appendices 13 and 14). Appendices 34 to 37 to PS26/20 contain near-final revised versions of documents relating to model requirements for capital buffers and Pillar 2A and for the Additional Leverage Ratio Buffer. The FCA also gives feedback to responses to its two consultation papers on CRD V: CP12/20, published in July 2020, and CP17/20, published in October 2020.

The PRA will publish the final rulebook instruments and supervisory material on 28 December 2020. The PRA has not yet made the final versions of its rules and other materials as its power to make rules imposing consolidated or sub-consolidated requirements on holding companies cannot be exercised before 28 December 2020. However, the PRA states that it does not intend to change policy or make significant alterations to the text of the instruments before the publication of the final policy material.

CRR II: PRA CP22/20 on designation of firms within certain consolidation groups

The PRA has published a consultation paper, CP22/20, on its proposed approach to designating entities within certain banking UK consolidation groups as responsible for ensuring that consolidated prudential requirements are met during a transitional period. CP22/20 is relevant to banks and PRA-designated investment firms that are part of a UK consolidation group controlled by a UK parent financial holding company or mixed financial holding company.

The PRA explains that, from 28 December 2020, CRR II requires a UK consolidation group's approved parent holding company – where it has one – to become responsible for ensuring that consolidated prudential requirements are met. CRR II does not, however, specify the entity or entities responsible for ensuring compliance with consolidated prudential requirements for the period from Monday 28 December 2020 until the date on which the UK parent financial holding company's application for approval or exemption is finally determined. The proposals in CP22/20 set out how responsibility for meeting these consolidated requirements would be allocated during this period.

The PRA is implementing its proposals through two rule instruments:

the draft PRA Rulebook: CRR Firms: Designation (Consolidation) Instrument 2020 creates a new Designation Part of the PRA Rulebook; and
the draft PRA Rulebook: Designation (Consolidation) (EU Exit) Instrument 2020 amends the new designation rule so that it operates effectively in the UK following the end of the Brexit transition period. The instrument comes into force on 31 December 2020.

The consultation closes on 16 December 2020 to meet the transposition date for CRD V and apply the CRR II requirement on 28 December 2020.

Systemic risk buffer rates: PRA update

The PRA has announced that, in response to the ongoing economic shock caused by COVID-19, it will maintain firms' systemic risk buffer (SRB) rates at the rate set in December 2019 for a further year, until December 2022, with no rate changes taking effect until January 2024. The SRB applies to ring-fenced banks (RFBs) and certain large building societies.

The PRA also explains in its statement that, as part of the implementation of CRD V, the SRB will be replaced by the other systemically important institutions (O-SII) buffer on 29 December 2020. The O-SII buffer will be set at the same rate as firms' current SRB buffer. The PRA will next reassess firms' O-SII rates in December 2022, based on balance sheet positions at the end of 2021. This aims to provide lenders with greater certainty about capital requirements.

The PRA expects to set an O-SII rate consistent with its statement of policy and the Financial Policy Committee framework in December 2022. The PRA will take into consideration the impact of COVID-19 and any decision will take effect from January 2024.

The PRA reiterates its expectation that all elements of banks' capital and liquidity buffers can be drawn down.

BRRD: PRA PS25/20 on simplified obligations for recovery planning

Following its consultation in CP10/20, the PRA has published a policy statement, PS25/20, on simplified obligations for recovery planning in the light of the discretion it has under Article 4(1) of the Bank Recovery and Resolution Directive (BRRD) as to whether to apply simplified obligations. PS25/20 is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, to which the Recovery Plans Part of the PRA Rulebook applies. The policy is likely to be of interest to smaller and non-systemic firms that do not perform critical functions.

The PRA gives its response to the feedback it received in response to CP10/20. The PRA has made minor changes to its policy following feedback but is otherwise introducing simplified obligations.

The appendix to PS25/20 contains an updated version of SS9/17, which takes effect from 7 December 2020.

BRRD II: FCA statement on transposition

The FCA has updated its webpage on the Handbook rules relating to the BRRD to set out its approach to the transposition of BRRD II which the UK is required to transpose by 28 December 2020.

The FCA explains that, under the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (SI 2020/1350), certain revisions to the BRRD made by BRRD II will come into force on 28 December 2020 and then cease to have effect at the end of the Brexit transition period at 11pm 31 December 2020 (the four-day period).

The FCA states that, in contrast to the PRA which consulted on some short-lived rule changes, the FCA has not identified any conflicts between its current requirements and those in the Regulations. It states that firms should be aware that the FCA will not be addressing those new requirements in BRRD II that do not apply to FCA solo-regulated firms. Firms should consult the websites of HM Treasury and the PRA for further information on these changes.

The FCA highlights certain BRRD II reforms that will apply to IFPRU 730K firms (that is, FCA solo-regulated firms within the scope of the BRRD):

article 48(7) on the priority of debts in insolvency: firms should be aware that there are certain changes to the priority of debts in insolvency in the case of insolvency proceedings commenced during the four-day period;
article 55 on the contractual recognition of bail-in: BRRD II supplements existing FCA requirements in IFPRU 11.6 on the contractual recognition of bail-in by adding a mechanism for firms to notify the resolution authority in situations where it is "legally or otherwise impracticable" to include the required terms in contractual provisions. The FCA states that these additional requirements do not conflict with its existing rules. Any notifications submitted that have not already been acted upon will automatically lapse on 1 January 2021; and
article 44a which addresses the sale of subordinated eligible liabilities to retail clients and will be introduced via Handbook rules. The FCA notes that it is consulting on the introduction of the requirements in this area in its Quarterly Consultation Paper No. 30.

COVID-19: FCA guidance consultation on BBLS and collecting debts

The FCA has published a guidance consultation on the Bounce Bank Loan Scheme (BBLS) and pay as your grow (PAYG) options. The consultation sets out guidance for firms collecting payments under a Bounce Back Loan where the collection of that debt is a regulated activity. It sets out how firms can:

use and offer PAYG options in a manner compliant with CONC 7;
recognise vulnerability and respond to the needs of vulnerable customers; and
assist borrowers who need debt advice.

Where CONC 7 does not apply to debt collection under BBLS, firms are expected to use chapter 5 of the proposed guidance regarding the Lending Standards Board's standards of lending practice for business customers.

Bank mergers and acquisitions: SRB guidance

The Single Resolution Board (SRB) has published a paper outlining its expectations for how banks engaging in mergers, acquisitions and other corporate transactions can ensure resolvability.

The SRB notes that such transactions, in addition to prudential and competition law implications, are highly likely to have consequences for banks’ resolvability. However, bank consolidation, if well designed and well executed, can enhance banks' resilience and profitability, leading to strengthened resolvability.

Post-Brexit transition period: ESAs confirm status of STS transactions

The European Supervisory Authorities (ESAs) have published a communication highlighting the change in status of simple, transparent and standardised (STS) securitisations after the end of the Brexit transition period. The ESAs remind investors that, for a transaction to qualify as a European STS securitisation, the Securitisation Regulation requires that the originator, sponsor and the special purpose vehicle be established in the EU. This means that transactions currently labelled as EU STS securitisations will lose the STS status where one or more of the parties is established in the UK after the end of the transition period.

The ESAs therefore advise investors to assess the impact of the change of status on their balance sheet and investments ahead of 31 December 2020, as the loss of the STS status means that the preferential capital treatment available for investments in STS securitisations will come to an end.

Basel III: EBA capital monitoring report

The European Banking Authority (EBA) has published a report containing the results of the exercise it has carried out to monitor the impact of implementing the final Basel III reforms on EU banks' capital. The results are based on data as of 31 December 2019. The EBA has also published an interactive tool for the first time that shows the main results. It has made this available for analytical purposes.

The EBA also announces that it will be publishing a more detailed ad hoc report on 15 December 2020 in response to the European Commission's call for advice on Basel III. While this will be based on the same reference date, it notes that the cumulative results of the two reports are not directly comparable, as they are based on slightly different samples (composition and size) and two key methodological differences.

Basel III: BCBS monitoring exercise report

The Basel Committee on Banking Supervision (BCBS) has published a report summarising the aggregate results of its latest Basel III monitoring exercise, based on data as of 31 December 2019. The report assesses the impact of the Basel III framework on banks and captures the effects of the BCBS' finalisation of the Basel III reforms in December 2017. It also includes a special feature on counterparty credit risk and credit valuation adjustment risk.

Given the December 2019 reporting date, the results do not reflect the economic impact of COVID-19 on participating banks. However, the BCBS believes that the information contained in the report will provide relevant stakeholders with a useful benchmark for analysis.

The BCBS summarises the results of the monitoring exercise in a press release that it has published alongside the report. It also announces that, for the first time, the report is accompanied by a dashboard that presents the results of the liquidity section of the Basel III monitoring report using an interactive tool to visualise the data. It notes that it may add similar dashboards related to other sections of the report at a later stage.