On 9 December 2020, the PRA published Policy Statement 26/20: Capital Requirements Directive V (PS26/20).

In PS26/20 the PRA provides feedback to responses to Consultation Paper 12/20: Capital Requirements Directive V (CP12/20) and Consultation Paper 17/20: Capital Requirements Directive V – further implementation (CP17/20). It also contains near-final rules instruments, statements of policy, supervisory statements, model requirements and templates.

The PRA reports in PS26/20 that in light of the feedback received to CP12/20 it has amended the following aspects of its draft policy:

• Supervisory Statement (SS) 31/15 ‘The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)’ has been amended to include a clarification regarding group risk add-ons.
• The proposed rules in the Remuneration Part of the PRA Rulebook and expectations set out in SS2/17 ‘Remuneration’ have been amended. These changes relate to the application of deferral and clawback to different categories of material risk takers (MRTs); the treatment of part-year MRTs; the approach to converting other currencies into sterling for the purposes of applying the UK remuneration regime; the definition of branch assets; and firm-wide application of risk adjustments.
• SS34/15 ‘Guidelines for completing regulatory reports’ has been amended to clarify how firms can comply with the recovery plan reporting requirement when a branch recovery plan is not available.

After considering responses to CP17/20, the PRA reports that it has amended the following aspects of its draft policy:

• The period in which the PRA would expect holding companies to submit formal applications for approval or exemption from approval has been moved from 3–31 May 2021 to 1–28 June 2021.
• The date of application for the proposed approach to the interest rate risk in the banking book (IRRBB) has been amended from  31 December 2020 to 31 December 2021. This reflects the concern that some firms may require additional time prior to implementation to map, and ensure, their compliance with the revised PRA rules and expectations, and because of the additional operational pressures on firms from the COVID-19 pandemic.
• The Internal Capital Adequacy Assessment (ICAA) Part of the PRA Rulebook on the treatment of commercial margins in the standardised framework has been amended to recognise practical challenges in incorporating commercial margins into risk-free rates.
• The ICAA Part on the supervisory outlier test (SOT) has been amended to require firms to use appropriate shocks for currencies where shocks are not prescribed, rather than requiring them to ‘develop’ appropriate shocks. The PRA has amended SS31/15 to clarify that firms may use shocks determined by a third party where those shocks are consistent with the Basel Committee standard. These amendments seek to give a degree of flexibility to apply shocks that are appropriately conservative and consistent with the Basel Committee standard.
• The requirement in the ICAA Part of the PRA Rulebook that firms estimate the core portion of non-maturing deposits (NMDs) based on ‘the past 10 years’ has been amended to require an estimation based on ‘a sufficiently long period’. The PRA has introduced a new expectation in SS31/15 that firms are generally expected to consider the past 10 years. The amendment is intended to provide some flexibility for new and growing firms to potentially use a shorter period where 10 years’ data are not available and a shorter period would be appropriate.
• SS31/15 has been amended to clarify that the PRA’s expectations on the monitoring and evaluation of the potential impact of interest rates on earnings volatility should be considered where appropriate in relation to the nature, size, and complexity as well as business activities and overall risk profile of a firm. This seeks to ensure that the expectations are applied proportionately for smaller, less complex, or new firms.
• SS31/15 has been amended to correct a typographical error in the draft rules and align with the text of CP17/20, setting the threshold for the SOT at 15% of a firm’s Tier 1 capital rather than 15% of its CET1 capital.

The policy material in PS26/20 is near final. The PRA does not intend to change policy or make significant alterations to the text of the instruments before the publication of the final policy material. The policy material has been approved for publication as near-final versions by the relevant PRA governance committees, but the instruments have not been formally made at this stage. The instruments are being published now to maximise the time that firms have to review them before the final rules apply. The PRA is not able to publish final instruments at the time of publishing PS26/20, because the power for the PRA to make rules imposing consolidated or sub-consolidated requirements on holding companies cannot be exercised by the PRA before 28 December 2020.

The final rule instruments will be published in a subsequent Policy Statement in time for the implementation deadline of 28 December 2020, once the powers referred to above have come into effect.

On 20 October 2020, the PRA published Consultation Paper 17/20: Capital Requirements Directive V (CRD V): Further implementation (CP17/20).

In CP17/20 the PRA sets out proposed changes to its rules, supervisory statements (SS) and statements of policy (SoP) to implement 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 European Union (EU) exit transition period (transition period).

CP17/20 is relevant to banks, building societies, PRA-designated investment firms, UK financial holding companies, and UK mixed financial holding companies of certain PRA-authorised firms.

CP17/20 should be read in conjunction with CP12/20, which set out the PRA’s proposed approach to implementing other elements of CRD V, and HM Treasury’s (HMT) approach to implementing aspects of CRD V and CRR II that require legislative changes in order to implement them in the UK. HMT’s approach is being legislated for through The Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020.

The CRD V measures covered by this CP 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
• Clarifying the quality of capital required to meet Pillar 2 requirements.

The CRR measures covered 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 it).
• The methods that may be used for the purposes of prudential consolidation.

The deadline for comments on CP17/20 is 17 November 2020.

On 31 July 2020, the PRA published Consultation Paper 12/20: Capital Requirements Directive V (CP12/20).

In CP12/20 the PRA sets out proposed changes to its rules, supervisory statements (SS) and statements of policy (SoP) in order to implement elements of the Capital Requirements Directive V (CRD V).

CP12/20 covers:

• The PRA’s proposed implementation of changes to Pillar 2 provisions relating to firms’ internal capital assessments, supervisory review of those assessments, and the additional capital requirements and guidance that may be applied (chapter 2).
• The implementation of changes relating to remuneration (chapter 3).
• The implementation of CRD V’s intermediate parent undertaking requirements (chapter 4).
• The implementation of the CRD V’s governance requirements (chapter 5).
• Amendments to third country branch reporting (chapter 6).

The proposals set out in CP12/20 have been designed in the context of the UK’s withdrawal from the European Union and entry into the transition period, during which time the UK remains subject to European law.

The PRA has assessed that the proposals would need to be amended under the EU (Withdrawal) Act 2018 (EUWA 2018). A second version of the proposed rules which includes the relevant amendments under EUWA 2018 is set out in Appendix 2 of CP12/20.

With the exception of draft SS2/17 ‘Remuneration’, the draft SSs and SoPs set out in Appendix 3 of CP12/20 should be read in conjunction with SS1/19 ‘Non-binding PRA materials: The PRA’s approach after the UK’s withdrawal from the EU’. The amendments to SS2/17 are due to apply to firms only after the end of the transition period and reflect the fact that EU law will not be applicable at that point.

The deadline for comments on CP12/20 is 30 September 2020.

The PRA will consult in the autumn of 2020 on draft rules to implement the remaining elements of the CRD V not covered by CP12/20 in particular those requiring legislative change and amendments to the Capital Requirements Regulation that apply from 28 December 2020.