Prudential Regulation Authority

PRA Issues Policy Statement on Approach to Identifying O-SIIs

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The UK’s Prudential Regulation Authority (“PRA“) has issued a policy statement on its approach to identifying other systemically important institutions (“O-SIIs“). The statement is relevant to all credit institutions, investment firms, EEA parent institutions, EEA parent financial holding companies and EEA parent mixed financial holdings companies within the domestic financial sector at their highest level of consolidation in the United Kingdom. The proposals contained in the consultation and the policy statement do not apply to branches operating in the UK.

The statement provides feedback to responses to a PRA consultation paper as to which firms can be identified as O-SIIs; application of discretion afforded within the European Banking Authority’s mandatory scoring methodology for O-SII identification; application of a supervisory overlay to  capture adequately systemic risk in the UK banking sector; proposals to use the methodology of the PRA’s existing potential impact framework to inform this assessment; and the timetable for O-SII identification and publications related to O-SII identification. The PRA has made no material changes to its policy as a result of the consultation.

The PRA Publishes Guidance on Financial Conglomerate Waivers

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On January 4, the Prudential Regulation Authority (“PRA”) published guidance on the application and supplementary forms that should be submitted by firms requesting a Financial Groups Directive waiver.

The Financial Groups Directive supplements existing sectoral rules with additional requirements for groups with substantial banking/investment and insurance business. Groups are identified as financial conglomerates according to the threshold tests found in the Financial Conglomerates section of the rulebook.

The PRA document is designed to assist firms applying for a financial conglomerate waiver and firms notifying the PRA that a consolidation group is or has ceased to be a financial conglomerate. Document.

Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 Published

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On January 13, 2015, the Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) Regulations 2015 were published.

The Regulations amend the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 to introduce a systemic risk buffer (SRB) that will apply to ring-fenced banks (RFBs) and certain large building societies. This measure implements Articles 133 and 134 of the Capital Requirements Directive IV (CRD IV).

The Financial Policy Committee (FPC) will be responsible for setting out the framework for determining which institutions should hold the buffer and, if so, how large the buffer should be. It will need to publish this methodology by May 31, 2016. The Prudential Regulation Authority (PRA) will be responsible for applying the framework and will have ultimate discretion over which firms must hold the buffer and its size.

The Regulations were made on January 12, 2015 and come into force, unless otherwise stated, on May 31, 2016. The systemic risk buffer is applicable from January 1, 2019.  Regulations.

UK PRA and FCA Publish Final Policy on Implementing the FPC’s LTI Ratios

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On October 1, the Prudential Regulation Authority (PRA) issued PS9/14 and the FCA published FG14/8 setting out their final policies on implementing the Financial Policy Committee’s (FPC) recommendation on loan to income (LTI) ratios in mortgage lending.

The policies were published after the FPC noted that acting against the excessive indebtedness caused by a high number of mortgages with high LTI ratios will make the financial system more stable.

The FPC made its recommendation on LTI ratios in June. The FPC recommended that the PRA and the FCA should ensure that mortgage lenders limit the proportion of mortgages at LTI multiples of 4.5 and above to no more than 15% of their new residential mortgages. The final policies of the PRA and FCA include permitting the application of the LTI limit to be at a group level rather than at the level of each regulated entity.  PRA Policy Statement.  FCA Finalized Guidance.

Co-Op Bank Subject to Enforcement Investigation by the UK PRA and FCA

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On January 6, The UK Regulator, the Prudential Regulation Authority (PRA) published a press release confirming its intention to undertake an enforcement investigation into the Co-Op Bank.  The UK’s other regulator, the Financial Conduct Authority (FCA), has confirmed in a press release that it will also be investigating the bank and events up to June 2013.  The PRA will be considering the role of senior managers at the bank.  Press Release.  FCA Press Release.

PRA Updates Webpages Following Implementation of CRD IV

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On January 1, the CRD IV Directive came into force, following the Prudential Regulation Authority’s (PRA) webpage update on reporting requirements for firms within the scope of CRDIV.  Reporting Requirements.

Additionally, the PRA updated the following passporting webpages:

Prudential Regulation Authority Statement on Liquidity

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On August 28, Mark Carney, Governor of the Bank of England, confirmed that the Prudential Regulation Authority (PRA) Board will implement the June 2013 recommendation of the Financial Policy Committee (FPC) regarding the amount of liquidity held by banks and building societies.

Governor Carney said: “for major banks and building societies meeting the minimum 7% capital threshold, the Bank of England will reduce the level of required liquid asset holdings. The effect will be to lower total required holdings by £90 billion, once all eight major banks and building societies meet the capital threshold. That will help to underpin the supply of credit, since every pound currently held in liquid assets is a pound that could be lent to the real economy.”

The PRA will amend its current liquidity framework such that firms should hold highly liquid assets broadly equivalent to 80% of the ‘Liquidity Coverage Ratio’ (LCR) agreed by the Basel Committee on Banking Supervision (BCBS) in January 2013.  The LCR requires internationally active banks to hold sufficient liquid assets to cover their expected net cash outflows under a 30-day liquidity stress scenario.  News Release.

FCA Launches Consultation on Implementation of CRD IV

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On July 31, the UK’s Financial Conduct Authority (FCA) published a consultation paper on proposals for implementing CRD IV for investment firms (CP13/6).

CRD IV is a package of reforms intended to address issues arising during the 2007/8 financial crisis and replaces the existing 2006 Capital Requirements Directive.  The principal aim of CRD IV is to implement the Basel III reforms but the package contains other prudential requirements for credit institutions and investment firms and CP13/6 includes proposals on capital buffers, common reporting, remuneration and existing FCA rule waivers.

The closing date for responses to CP13/6 is September 30.  The Prudential Regulation Authority (PRA) is publishing a separate consultation on CRD IV as it applies to its authorised firms (banks and building societies and designated investment firms).  Consultation Paper.

UK Financial Policy Committee (FPC) Issues New Recommendations on Banks

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In its latest Financial Stability Report, the FPC (a committee of the Bank of England) set out recommendations for the UK’s new regulator – the Prudential Regulation Authority – to improve the stability of the UK banking sector, including:

  • using the Basel III liquidity coverage ratio to assess liquidity;
  • increasing the consistency and comparability of Pillar 3 disclosures; and
  • calculating regulatory capital ratios under end-point Basel III definitions using the standardised approach to credit risk.  Report.

Tracey McDermott Appointed as FSA’s Permanent Director of Enforcement

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The FSA has confirmed that Tracey McDermott, the FSA’s acting head of enforcement, will become the permanent director of enforcement and financial crime.

McDermott joined the FSA as an associate in enforcement 2001, and has been acting as director since April 2011.  During her time as acting head of enforcement, she has secured 10 convictions for insider dealing and imposed the largest FSA fine to date of £59.5 million on Barclays Bank plc for attempting to manipulate the LIBOR rate.

The FSA will divide into the Prudential Regulation Authority and the Financial Conduct Authority in 2013.  McDermott’s role will transfer over to the Financial Conduct Authority.