In February, the PRA published a consultation paper containing its proposals as to how the eligibility criteria for guarantees to be treated as unfunded credit protection under the Capital Requirements Regulation (CRR) should be interpreted (our blog is here).

Those proposals have proved to be controversial. In particular the PRA:

• suggests that the requirement for the guarantor to be obliged, contractually, to pay out ‘in a timely manner’ means that the pay-out should be made without delay and “within days, but not weeks or months”, of the date on which the obligor fails to make payment. This proposal, if correct, would render most export credit cover and credit insurance policies ineligible as credit risk mitigants for CRR purposes;
• further suggests that the requirement for institutions to obtain legal opinions in respect of the effectiveness and enforceability of credit risk mitigants under Article 194(1) CRR goes much further than is current market practice; and
• seeks to explain the requirement for the guarantee to be “incontrovertible” in a manner which may give rise to difficulties for guarantees governed by certain laws.

Norton Rose Fulbright has replied to the PRA consultation paper setting out why it believes the regulator’s proposals cannot be justified. For a copy of that reply, please contact Kenneth Gray.