On 21 August 2018, HM Treasury published a draft of The Capital Requirements (Amendment) (EU Exit) Regulations 2018 (the draft SI), together with an explanatory memorandum.

The draft SI is made under the European Union (Withdrawal) Act 2018, to prevent or mitigate any failure of EU law upon the UK’s withdrawal from the EU. It is intended that the draft SI will not make policy changes, other than to reflect the UK’s future position outside the EU. The changes made by the draft SI will not take effect on 29 March 2019 (Brexit Day) if the UK and EU enter into an implementation period (otherwise known as a transitional period).

The draft SI makes amendments to certain aspects of the Capital Requirements Regulation (CRR) to ensure that it continues to operate effectively in the UK after Brexit Day. In addition, it also amends the following UK statutory instruments which implement the Capital Requirements Directive IV (CRD IV), being the:

  • Regulated Covered Bonds Regulations 2008;
  • Capital Requirements Regulations 2013;
  • Capital Requirements (Country-by-Country Reporting) Regulations 2013; and
  • Capital Requirements (Capital Buffers and Macro-Prudential Measures) Regulations 2014.

The key changes introduced by the draft SI include those relating to:

  • group consolidation. The draft SI amends the geographical scope of all group consolidation provisions to restrict consolidation to the UK. The amendments will not change the application of consolidated capital requirements (the CRR requires groups to consolidate for capital purposes at Member State level regardless of whether the ultimate parent is in the UK, EU27, or a third country. All groups are therefore already conducting capital consolidation under the UK parent, and the draft SI does not affect the requirements on which capital requirements are applied), but will require an EU bank operating in the UK to be subject to a new layer of liquidity consolidation, overseen by the PRA;
  • removal of preferential treatment for EU27 exposures. Once the UK has left the EU, in the absence of an agreement and where no equivalence determination has been made, the EU27 would automatically fall into the category of a third country where EU27 exposures would no longer receive preferential capital treatment;
  • macro-prudential measures. The draft SI seeks to ensure that the tools available to national regulators in times of macro-prudential or systemic risk (for example the ability to adjust risk weights to certain exposures in the event of an asset bubble) remains available to the UK regulators;
  • transfer of functions from the European Supervisory Authorities (ESAs) to the UK regulators. The draft SI assigns those functions that are assigned to the ESAs to the UK regulators;
  • HM Treasury will take on the European Commission’s function of making equivalence decisions for third country regimes, while the PRA will take on the role that the European Banking Authority currently has for providing technical assessments of third country regimes. Where the Commission has already taken equivalence decisions for third countries, these will be incorporated into UK law by the EU (Withdrawal) Act and will continue to apply to the UK’s regulatory and supervisory relationship with those third-countries;
  • savings provisions. Where certain decisions under the CRR are made on or before Brexit Day by a body other than the PRA or the FCA, the draft SI contains a provision whereby such decisions are ‘saved’ post Brexit Day. This means that, post Brexit Day, the PRA and FCA will have the same powers in respect of such decisions after Brexit Day as if they were taken by themselves. This includes decisions taken via joint decision, for example in relation to internal models;
  • binding EU technical standards (BTS). HM Treasury is transferring responsibility for all BTS from the ESAs to the UK regulators, the basis of this exercise is set out in the draft Financial Regulators’ Powers (Technical Standards) (Amendment etc) (EU Exit) Regulations 2018. For the CRR, all relevant BTS will be brought into UK law with responsibility for meeting those mandates transferred to the PRA and FCA; and
  • under the CRR, there are binding obligations on UK authorities to cooperate and share information with EEA authorities –  these obligations will be removed from UK legislation. UK authorities will instead rely on the existing domestic framework provisions for cooperation and information sharing, which allow for this on a discretionary basis.

HM Treasury plans to lay the draft SI before Parliament in the autumn.

Where the CRR will be substantially amended by the Securitisation Regulations (Regulations (EU) 2017/2402 and 2017/2401), these will be amended later by HM Treasury as part of the securitisation onshoring. Similarly, references to the European Markets Infrastructure Regulation and the EU Regulation on the Application of International Accounting Standards will be addressed through subsequent onshoring statutory instruments.

The FCA and PRA will be consulting on changes to their Handbook / Rulebook in the autumn.