On 4 February 2021, the Bank of England (BoE) published the minutes of the Monetary Policy Committee (MPC) meeting which took place on 3 February 2021.
Whilst the MPC voted unanimously to maintain interest rates at 0.1%, paragraphs 67-73 of minutes cover a discussion of negative interest rates and its impact on PRA-authorised firms. Last October the PRA sent a letter to selected firms asking them to respond to a structured survey so that it could identify any operational challenges associated with the implementation of zero or negative interest rates. The minutes note that this work has revealed a number of challenges, which the BoE/PRA considers might translate into risks to the safety and soundness of firms should an announcement be made in the short-term. The minutes also show that the MPC has considered the challenges of requesting firms to begin work to mitigate those risks being misconstrued as a signal that the BoE was actively preparing to move negative interest rates; but when weighed against the challenge of not instructing firms to do that – and therefore not moving the dial in terms of their preparedness for such a move – the MPC concluded as follows (para. 72):
“While the Committee was clear that it did not wish to send any signal that it intended to set a negative Bank Rate at some point in the future, on balance, it concluded overall that it would be appropriate to start the preparations to provide the capability to do so if necessary in the future. The MPC therefore agreed to request that the PRA should engage with PRA-regulated firms to ensure they commence preparations in order to be ready to implement a negative Bank Rate at any point after six months. The MPC understood that the PRA would make such a request by way of a follow-up letter to CEOs of PRA-regulated firms.”
PRA-regulated firms such as UK banks and building societies should therefore expect a period of intensive regulatory engagement, focused on addressing firm-specific operational risks to the implementation of a negative central bank interest rate. In order to achieve operational readiness for the implementation of a negative interest rate, firms will need to effectively map the various required work streams. In addition to the IT systems and operational work streams, firms with retail clients or consumers as depositors or borrowers should ensure that the conduct risk implications of the rate move are fully explored, understood and mitigated. Within this, it is clear that the development of comprehensive customer communication programmes will be particularly important. In order to develop implementation strategies across different products, firms will need to understand not only the legal position under relevant contracts, but also take account of regulatory expectations. Again, firms with consumer customers will have a broad range of considerations to accommodate, including the fairness of any variation terms which may be relied upon.
In what is likely to be a busy period for UK banks and building societies, getting the governance of such a wide-reaching project right, including from the perspective of SMCR should not be overlooked.