United Kingdom (and EU regulation)

HMT consultation on updating the UK’s Prudential Regime before the end of the Transition Period

By Simon Lovegrove (UK) on October 16, 2020 Posted in Brexit, United Kingdom

On 15 October 2020, HM Treasury published its response to the consultation that it published in July 2020 concerning updating the UK’s prudential regime before the end of the transition period. HM Treasury has also published the following draft statutory instrument, The Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-Prudential Measures (Amendment) (EU Exit) Regulations 2020.

Key points in the response include:

The UK Government intends to legislate in a way that is consistent with the original policy intent set out in the consultation.
The PRA and Financial Policy Committee (FPC) will be given powers to set an Other Systemically Important Institution (O-SII) buffer, to require ring-fenced banks and large building societies to hold a sufficient level of capital. To ensure consistency with the wider changes made by the statutory instrument, the legislation envisages allowing the PRA to apply the O-SII buffer at the level of approved intermediate holding companies which contain ring-fenced banks, where those approved intermediate holding companies are required to meet sub-consolidated requirements. The maximum rate of the O-SII buffer will be 3%, in line with what is currently in place for the CRD IV systemic risk buffer (SRB). The legislation requires the FPC to set out a framework for applying the O-SII buffer, which will then be applied by the PRA.
The PRA will consult on their proposed approach to implementing the O-SII buffer. The PRA confirmed in April that it would maintain current CRD IV SRB rates, and those of any successor buffer (in this case the O-SII buffer), and next reassess them in December 2021, with any decision taking effect from January 2023.
The counter-cyclical capital buffer and capital conservation buffer will be capable of being applied by the PRA at the level of approved holding companies on a consolidated/sub-consolidated basis, to ensure consistency with the other changes made by the legislation in respect of the PRA’s powers over holding companies.
The PRA will be given a power over the CRD IV SRB, which will be capable of being applied to UK banks, building societies and PRA-designated investment firms, including at the level of holding companies in line with the broader changes made by CRD V and the revised Capital Requirements Regulation (CRR II).
The PRA will be able to set a rate up to 5%, reflecting the level of regulatory discretion envisaged by the CRD V subject to certain provisions that place a limit on the cumulative level of capital buffers. The PRA will also have the ability to recognise third-country systemic risk buffers. The PRA intends to explain its approach to the revised CRD V SRB in a consultation this Autumn.
A bespoke holding company approval regime will be created for parent holding companies and other holding companies required to comply with the CRD V or CRR on a consolidated or sub-consolidated basis. The UK Government will legislate to provide the PRA with the enforcement powers required to supervise holding companies, as required for transposition of CRD V.
The PRA will be given the power to remove members of management boards where an individual is no longer of sufficiently good repute, no longer possesses sufficient knowledge, skills, experience, honesty, integrity or independence of mind or is no longer able to commit sufficient time.