Banking and finance regulatory news, October 2020 # 4

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Recent regulatory developments focussing on banking and finance. Includes updates relating to the UK PRA's implementation of CRD V, the FCA on bank account portal provisions, and an EBA opinion on prudential treatment of legacy instruments.

Contents

  • Implementation of CRD V: PRA CP17/20
  • Money Laundering Regulations: FCA update on bank account portal provisions
  • CRR: EBA Opinion on prudential treatment of legacy instruments

Implementation of CRD V: PRA CP17/20

The UK Prudential Regulation Authority (PRA) has published a consultation paper, CP17/20, setting out proposed changes to its rules, supervisory statements (SS) and statements of policy (SoP) implementing elements of the Capital Requirements Directive V (CRD V). It also proposes to update aspects of the UK regulatory framework as a result of amendments to the Capital Requirements Regulation (CRR, as amended in CRR II), which apply during the UK-EU transition period.

CP17/20 should be read in conjunction with CP12/20, which sets out the PRA's proposed approach to implementing other elements of CRD V, and HM Treasury's approach to implementing aspects of CRD V and CRR II that require legislative changes in order to implement them in the UK.

The CRD V measures in CP17/20 include:

  • a new requirement for the approval and supervision of certain holding companies;
  • measures to enhance supervisory requirements to measure, monitor, and control interest rate risk in the banking book;
  • measures revising the framework for applying capital buffers;
  • amendments to the definition of the maximum distributable amount that constrains a firm's distributions when it uses its capital buffers; and
  • clarifying the quality of capital required to meet Pillar 2 requirements.

The CRR measures comprise adjustments to:

  • the process through which variable capital requirements may be applied to firms' real estate exposures (and the public authority responsible for applying them); and
  • the methods that may be used for the purposes of prudential consolidation.

The Appendices to CP17/20 have been published separately. Appendix 1 contains draft rules instruments, Appendix 2 contains draft rules EU exit instruments, Appendix 3 contains draft SoP and draft SS, Appendix 4 contains draft amendments to the Voluntary Requirement (VREQ) - Capital Buffers and Pillar 2A Model Requirements, and Appendix 5 contains an indicative information template for holding companies approval.

The consultation closes on 17 November 2020. The PRA also asks for views on whether additional and material costs not identified in chapter 11 of CP17/20 may arise as a result of the proposals.

Money Laundering Regulations: FCA update on bank account portal provisions

The FCA has updated its Money Laundering Regulations webpage. The update relates to the bank account portal (BAP) provisions in Part 5A of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (Money Laundering Regulations or MLRs 2017). Part 5A imposes duties on credit institutions and the providers of safe custody services to respond to requests for information from law enforcement authorities or the Gambling Commission submitted via a central automated mechanism (the BAP). The information requested will relate to accounts and safe-deposit boxes including, but not limited to, the name of account holders or people with beneficial interests, their dates of birth and addresses.

Technically, these requirements came into force on 10 September 2020. However, the FCA explains that the BAP is still under development. As a result, firms are not yet expected to comply with the BAP requirements in the MLRs 2017.

The FCA expects an update from HM Treasury in early 2021. It advises that HM Treasury intends to give firms notice and opportunities for engagement ahead of a revised date for them to comply with the BAP requirements.

The BAP provisions were introduced into the MLRs 2017 in January 2020 as part of HM Treasury's work to implement the Fifth Money Laundering Directive.

CRR: EBA Opinion on prudential treatment of legacy instruments

The European Banking Authority (EBA) has published an Opinion to clarify the prudential treatment of so-called "legacy instruments".

The EBA explains that when the CRR entered into force, grandfathering provisions were introduced to ensure institutions had sufficient time to meet the required levels and definition of "own funds". Certain capital instruments that, at that time, did not comply with the new definition of own funds (referred to as legacy instruments) were grandfathered for a transition period, the objective being that they would be gradually phased out from own funds. The grandfathering provisions come to an end on 31 December 2021. Therefore, the EBA proposes policy options to address the so-called "infection risk" (that is, the risk that other layers of own funds or eligible liabilities instruments are disqualified) when created by such instruments.

To address infection risk and preserve the quality of regulatory capital, the EBA envisages two main options. Institutions can either call, redeem, repurchase or buy-back the relevant instrument or, alternatively, amend their terms and conditions. In a limited number of cases, where institutions could demonstrate to their competent authorities that neither of these two options can be pursued, the EBA considers a third option. This option would allow institutions to keep the legacy instrument in their balance sheet while it would be excluded from regulatory own funds and total loss-absorbing capacity or minimum requirement for own funds and eligible liabilities eligible instruments.

The EBA intends to monitor legacy instruments until the end of the grandfathering period, placing particular focus on the use of the proposed options across jurisdictions, with a view to ensuring a consistent application. It will also consider how the transposition of specific provisions of the Bank Recovery and Resolution Directive might alleviate concerns about the existence of infection risk linked to subordination aspects.

[View source.]

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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