Recent regulatory developments focussing on banking and finance. Includes updates relating to Brexit, CRR, HM Treasury call for evidence on access to cash and PRA Dear CEO letter on zero or negative BoE Bank Rate.
- CRD V: Draft Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020
- BRRD II: Draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020
- Access to cash: HM Treasury launches call for evidence
- Brexit: FCA views on closures of EU-resident customers' UK bank accounts
- Zero or negative BoE Bank Rate: PRA Dear CEO letter on banks' operational readiness
- CRR: PRA PS22/20 on treatment of model limitations in banks' internal models for counterparty credit risk
- CRR: PRA CP16/20 on approach to overseas IRB models for credit risk
- CRR: PRA slides on IRB models for residential mortgage exposures
- CRR: Corrigendum to Regulation amending CRR on statutory prudential backstop for NPLs
- CRR: EBA final draft RTS on prudential treatment of software assets
- Climate-related financial risk initiatives: BCBS speech
CRD V: Draft Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020
HM Treasury has published a draft version of the Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, together with an explanatory memorandum.
The draft Regulations implement, in part, the CRD V Directive in the UK and address deficiencies in retained EU law arising from the withdrawal of the UK from the EU. They are made under paragraph 1(1) of Schedule 7 to, the European Union (Withdrawal) Act 2018 (EUWA). The UK is required to transpose the CRD V Directive by 28 December 2020.
The Regulations will mostly come into force on 29 December 2020.
Separately, HM Treasury has published its response to its consultation on updating the UK's prudential regime before the end of the Brexit transition period.
BRRD II: Draft Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020
HM Treasury has published a draft version of the Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020, together with a draft explanatory memorandum. The Regulations transpose the Bank Recovery and Resolution Directive (BRRD) II. They also correct deficiencies arising in retained EU law to ensure the UK maintains a fully functioning regulatory and legal framework following the end of the transition period. The Regulations are made under section 8(1) of, and paragraph 21 of Schedule 7 to, the European Union (Withdrawal) Act 2018 (EUWA).
Parts 1 to 3 and Chapter 3 of Part 4 come into force on 28 December 2020. Part 4 (apart from Chapter 3) comes into force on IP completion day. Part 5 comes into force on 28 December 2020, but ceases to have effect on IP completion day.
HM Treasury has also published the response to its June 2020 consultation on the transposition of the Bank Recovery and Resolution Directive (BRRD) II. It explains the government's approach, including that in the draft statutory instrument.
The government intends to transpose the new Article 44a of BRRD II, using FCA rules, and the new Article 71a, by including the new pre-resolution moratorium power within the definition of "crisis management measure" in the Banking Act 2009, which means no changes of substance are required to the UK Prudential Regulation Authority's (PRA) stay rules.
The government does not intend to implement the BRRD II requirements that do not need to be complied with by firms until after the end of the transition period, in particular Article 1(17) which revises the framework for minimum requirement for own funds and eligible liabilities (MREL).
The government intends to include sunset clauses in its secondary legislation transposing BRRD II for the following provisions, which will cease to have effect in the UK from 1 January 2021:
- article 1(6), which concerns the maximum distributable amount relating to the MREL (M-MDA);
- article 1(12), which inserts a new Article 33a in the BRRD to introduce a pre-resolution moratorium power;
- article 1(20), which introduces Article 48(7) of BRRD, making changes to priority of debts in insolvency;
- article 1(21), which updates Article 55 of BRRD on the contractual recognition of bail-in (CROB). The existing PRA CROB rules will be revoked from 28 December 2020 for the remainder of the transition period and new PRA CROB rules will have effect from 1 January 2021. The PRA will conduct a public consultation on changes to its CROB rules; and
- article 1(30), which amends the existing in-resolution moratorium power under Article 69 of BRRD.
The government also intends to revoke any regulatory and implementing technical standards relating to provisions not implemented or not suitable for the UK that are developed and adopted at EU level by the end of the transition period.
Access to cash: HM Treasury launches call for evidence
HM Treasury has published a call for evidence on access to cash. The call for evidence sets out the government's legislative aims for protecting access to cash and seeks views on key considerations for the future of the UK's cash system. It seeks views on:
- how the government can ensure the UK maintains an appropriate network of cash withdrawal and deposit-taking facilities over time through legislation, including the potential role of cashback;
- the factors affecting cash acceptance; and
- whether the government should give a single regulator overall statutory responsibility for maintaining access to cash.
The Call for Evidence closes on 25 November 2020.
Brexit: FCA views on closures of EU-resident customers' UK bank accounts
The House of Commons Treasury Committee has published a letter from Nikhil Rathi, FCA Chief Executive, to Mel Stride, Committee Chair, in response to an earlier letter from the Committee asking the FCA about EEA customer notifications from banks that their accounts will be closed after the end of the Brexit transition period.
Mr Rathi makes the following points:
- in the absence of any pan-European equivalents to the UK's temporary permissions regime (TPR) and financial services contracts regime (FSCR) schemes, the extent to which UK banks can service EEA-based customers is a matter of local law and regulation as well as the decisions firms take in the light of their specific business models and structures;
- where banks inform customers that their current accounts will be closed, contractual provisions between the firm and the customer govern the notice periods they need to give. These vary by firm and by banking product. For example, under the UK Payment Services Regulations 2017, banks must provide a minimum notice period of two months when closing in-credit current accounts. The FCA's rules and guidance set out other requirements for banks to provide clear and timely information to customers when closing other types of account (see BCOBS 4.1.1). As a minimum, the FCA expects firms' actions to be consistent with customers' contractual rights;
- in line with their obligation to treat customers fairly, firms must be able to show they have considered how their plans for the end of the transition period may affect their customers, bearing in mind that different categories of customer might be affected in different ways. This includes identifying whether closing accounts would cause any individual customers or classes of customer undue financial hardship, taking account of the availability of alternative products. Firms should consider this when deciding how much notice to give and how much support they provide to customers to ensure they can smoothly transition to new arrangements; and
- the FCA is engaging closely with the large banking groups about their plans for servicing EEA-based customers after the transition period.
Zero or negative BoE Bank Rate: PRA Dear CEO letter on banks' operational readiness
The PRA has published a Dear CEO letter sent to specific banks asking about their operational readiness and challenges with potential implementation, particularly in terms of technology capabilities, for a zero or negative Bank of England (BoE) Bank Rate.
The PRA asks firms to complete a questionnaire. While completing it is voluntary, the PRA notes that firms' responses will help to ensure that the BoE and the PRA have an accurate and comprehensive understanding of any potential issues and risks associated with the operational implementation of a zero or negative Bank Rate.
CRR: PRA PS22/20 on treatment of model limitations in banks' internal models for counterparty credit risk
Following a previous consultation, the PRA has published a policy statement, PS22/20, on the treatment of model limitations in banks' internal models for counterparty credit risk.
In PS22/20, the PRA sets out the final version of changes to its supervisory statement, SS12/13, on counterparty credit risk, intended to clarify expectations on the treatment of model limitations and assumptions relating to counterparty credit risk under the Capital Requirements Regulation (CRR).
Under Article 286(4) of the CRR, firms using the internal model method (IMM) to calculate the exposure value for derivatives or other transactions are required to have in place a formal process to ensure senior management is aware of the limitations and assumptions of the model, and their potential impact on the reliability of the model output. The PRA has inserted a new chapter 4A to SS12/13 setting out its expectations that firms using the IMM should use a centralised inventory to track all limitations and assumptions that may have and mitigate the impact of model limitations in the particular case of exposures covered by excess collateral through the use of an exposure floor.
The revisions to SS12/13 came into effect on 14 October 2020.
CRR: PRA CP16/20 on approach to overseas IRB models for credit risk
The PRA has published a consultation paper, CP16/20, on its approach to overseas internal ratings based (IRB) models for credit risk.
The PRA proposals in CP16/20 would lead to changes to the PRA's supervisory statement, SS11/13 on IRB approaches to include the PRA's approach to overseas IRB models.
The consultation closes on 12 January 2021. The PRA's proposed implementation date for these changes is 1 July 2021 for overseas IRB models built to non-UK requirements that are not currently used for UK consolidated capital requirements.
Existing overseas IRB models built to non-UK requirements used for UK consolidated capital requirements that meet the proposed criteria can continue to be used for UK consolidated capital requirements. Firms may need to remediate existing overseas models that do not meet the criteria to meet UK IRB requirements. The PRA expects these models to be remediated by 1 January 2023 in line with the planned UK implementation of the final Basel III reforms.
CRR: PRA slides on IRB models for residential mortgage exposures
The PRA has published presentation slides that it used at a roundtable held on 5 October 2020 for firms that use an IRB model to calculate capital requirements for residential mortgage exposures.
CRR: Corrigendum to Regulation amending CRR on statutory prudential backstop for NPLs
A corrigendum to the English version of Regulation (EU) 2019/630 amending the Capital Requirements Regulation (CRR) as regards minimum loss coverage for non-performing loans (NPLs) has been published in the Official Journal of the EU.
The corrigendum amends Article 1(2) (that is, the second subparagraph of a new Article 47a(6)) to read: "Full and timely repayment may be considered likely where the obligor has executed regular and timely payments of amounts equal to either of the following …".
CRR: EBA final draft RTS on prudential treatment of software assets
Following its June 2020 consultation, the EBA has published a final report on draft regulatory technical standards (RTS) specifying the prudential treatment of software assets under Article 36 of the CRR. The final report includes feedback to the EBA's consultation.
The EBA proposes to add a new Article 13a to Delegated Regulation (EU) 241/2014 specifying a prudential treatment of software assets based on their amortisation for prudential purposes. The proposed approach is intended to be simple to implement and applicable to all institutions in a standardised manner.
The EBA proposes that the Delegated Regulation should enter into force on the day following that of its publication in the Official Journal of the EU.
Climate-related financial risk initiatives: BCBS speech
The Basel Committee on Banking Supervision (BCBS) has published a speech by Kevin J Stiroh, co-chair of the BCBS' task force on climate-related financial risks (TFCR), in which he outlines current and future areas of focus for the TFCR.