PRA publishes consultations on ring-fencing and operational continuity

Introduction

The PRA is required under the Financial Services and Markets Act 2000 (the Act), as amended by the Financial Services (Banking Reform) Act 2013 to make policy to implement the ring-fencing of core UK financial services and entities.

The PRA has now published PRA Consultation Paper 37/15: The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures (CP37/15). Together with PRA Consultation Paper 38/15: Ensuring operational continuity in resolution (CP38/15) these papers form part of the post-financial crisis reforms to enhance the resilience and resolvability of firms.

CP37/15

In CP37/15 the PRA sets out policy proposals in three areas:

the capital and liquidity requirements applicable to a ring-fenced body and how the PRA will determine the adequacy of its financial resources;
the management of intragroup exposures and arrangements; and
the use of financial market infrastructures.

CP37/15 also contains a preliminary discussion on potential reporting requirements, setting out the PRA’s initial thinking ahead of future consultation.

Draft rules, a draft supervisory statement, as well as other proposed consequential changes to existing PRA publications are set out in the appendices to CP37/15, together with a glossary of terms.

CP38/15

In CP38/15 the PRA sets out a proposed framework to require firms to ensure continuity of critical shared services to facilitate recovery action, resolution or post resolution restructuring.

The main areas that are set out in CP38/15 include ensuring the critical shared services provider:

has arrangements in place that are capable of being continued or replaced in resolution and are well documented;
has sufficient financial resources and capability to allow the firm to operate in resolution and the service arrangements are capable of being restructured;
if in a group, has clearly defined reporting lines that are capable of continuing in resolution; and
if in a group, is structured so that upon failure or resolution, no group entity receives preferential access to critical services over another.

Next steps following CP37/15

The deadline for comments on CP37/15 is 15 January 2016. The PRA intends to publish a Policy Statement together with final rules and supervisory statements by mid-2016. The PRA is also planning to publish a further consultation paper by mid-2016, setting out proposals in relation to the data it intends to collect to support its supervision of firms’ compliance with the Act and the PRA’s ring-fencing rules, as well as any residual issues the PRA subsequently identifies on which it needs to consult.

The PRA believes that the publication of CP37/15, as well as near-final rules and supervisory statements included in an earlier Policy Statement (PS10/15), mean that firms now have good visibility on the proposed ring-fencing regime. The PRA expects firms in scope to submit near-final plans by 29 January 2016 to their PRA and FCA supervisors, which build on the initial plans that were sent on 6 January 2015 and/or any subsequent updates submitted by firms during 2015. Such plans should take into consideration the proposals set out in CP37/15. PRA supervisors will contact firms directly to specify the level of information the PRA expects to receive in the plans. This applies to all firms that currently meet the core deposits threshold of £25 billion. Firms with growth plans which indicate they are likely to meet this threshold by 2019 should consult with their supervisors to determine whether such a submission would be appropriate.

Next steps following CP38/15

CP38/15 is relevant to banks, building societies and PRA-authorised investment firms. The proposals are also likely to be of interest to practitioners involved in the resolution of failed firms.

In CP38/15 the PRA does not define a precise boundary for firms to be in scope, rather it provides clarity on the proposed policy to enable firms, particularly ring-fenced banks, to start planning their approach. The PRA intends to issue an addendum to the consultation defining the scope of application alongside a planned Bank of England consultation on the calibration of the minimum requirement for own funds and eligible liabilities. The PRA invites feedback on CP38/15 but mentions that respondents may wish to wait for the publication of the addendum, which will set a closing date for the consultation period at the same time. The PRA intends any eventual rules to apply from 1 January 2019.

View The implementation of ring fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures, 15 October 2015

View Ensuring operational continuity in resolution – CP38/15, 15 October 2015