Banking and finance regulatory news, 7 December 2020

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Banking and finance regulatory news, 7 December 2020

FIG Bulletin

07 December 2020

Recent regulatory developments focussing on banking and finance. See developments of broader scope in the Related Materials links.

The Bank Recovery and Resolution (Amendment) (EU Exit) Regulations 2020 (SI 2020/1350) have been published, together with an explanatory memorandum. The Regulations transpose aspects of the amending Bank Recovery and Resolution Directive (BRRD) (BRRD II), which make amendments to the EU bank resolution framework set out in the BRRD. They also correct deficiencies arising in retained EU law relating to bank resolution to ensure the UK maintains a fully functioning regulatory and legal framework following the end of the transition period.

Parts 1 to 3 and Chapter 3 of Part 4 of the Regulations, which relate to elements of BRRD II that the UK intends to retain, come into force on 28 December 2020. Part 4, which relates to amendments which correct deficiencies in UK legislation relating to bank resolution arising from Brexit, comes into force on IP completion day, with the exception of Chapter 3. Part 5, which contains provisions relating to elements of BRRD II that the UK does not intended to retain, comes into force on 28 December 2020, but ceases to have effect on IP completion day.

Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020

The Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020 (SI 2020/1406) have been published, together with an explanatory memorandum. The Regulations implement the Capital Requirements Directive V (CRD V) which amends the EU Capital Requirements Directive IV (CRD IV).

As HM Treasury's implementation of CRD IV delegated significant responsibility to the Prudential Regulation Authority (PRA), these Regulations only contain provisions which are legislatively necessary to update the UK's implementation of CRD IV (to reflect the amendments to CRD IV that have been made by CRD V). This includes providing the PRA with new or updated powers to implement CRD V, and to ensure that the PRA can update its rulebook as needed.

In addition, the Regulations address deficiencies in retained EU law arising from the withdrawal of the UK from the EU.

Regulations 1, 4, 5(5) and 9 to 20 came into force on 27 November 2020. Regulation 2(7) (which inserts a new Part 12B (Approval of certain holding companies) into the Financial Services and Markets Act 2000 (FSMA) comes into force on 28 December 2020 to the extent necessary for making rules under new section 192V of FSMA, and on 29 December 2020 for all other purposes. The other provisions in the Regulations come into force on 29 December 2020.

Holding company regulatory transaction fees: PRA CP21/20

The PRA has published a consultation paper, CP21/20, setting out a proposed rule on regulatory transaction fees for applications for approval or exemption as a holding company made under section 192Q of FSMA. The PRA explains that CRD V introduces new requirements for certain types of parent financial holding companies (FHCs) or mixed FHCs (MFHCs) that substantively control their group. They will be subject to supervisory approval and consolidated supervision.

The Financial Holding Companies (Approval etc) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020 (see above) extend powers to the PRA to supervise, monitor, exercise discretions, impose additional requirements, and enforce breaches of obligations in respect of approved FHCs and MFHCs.

The PRA proposes a regulatory transaction fee of £2,500 for an application for approval or exemption as a holding company. The proposed fee amount has been set to recover the approximate costs to the PRA of assessing each application, including related system changes and other linked regulatory transactions. The PRA will keep these costs under review and will consider consulting on changes to the fee in the event of material cost changes.

Comments can be made on the proposals until 8 January 2021. The PRA proposes to implement the new rule on 1 March 2021.

Operational resilience: PRA and ECB statements on supervisory cooperation

The PRA has published a statement regarding supervisory cooperation on operational resilience in which it states that the PRA recognises the global and interconnected nature of banks and the importance of supervisory coordination. The PRA is committed to working closely with the European Central Bank (ECB) and the Federal Reserve to ensure that supervisory approaches on operational resilience are well coordinated. The ECB has published a similar statement emphasising its commitment to work closely with the PRA and the Federal Reserve.

Shari'ah compliant non-interest based deposit facility: BoE speech

The Bank of England (BoE) has published a speech by Andrew Hauser, BoE Executive Director, Markets, on why Islamic finance has an important role to play in supporting the recovery from COVID-19 and how the BoE's new Shari'ah compliant non-interest based deposit facility can help. Points of interest in Mr Hauser's speech include:

the Basel III liquidity rules give national supervisors discretion to treat sukuk as high quality liquid assets (HQLA), subject to haircuts or other conditions. However, the proportion of sukuk classed as eligible for regulatory buffers remains relatively modest compared to demand. Islamic banks can therefore face an uneven playing field relative to conventional banks when it comes to liquidity management;
in 2015, the BoE began work to assess the feasibility of establishing a standalone non-interest based facility, aimed at providing greater flexibility to UK Islamic banks in meeting their Basel III liquidity requirements. It consulted on possible models in 2016 and 2017;
following this process, the BoE's new Alternative Liquidity Facility (ALF) will launch in Q1 2021. The ALF will provide UK Islamic banks (and other UK banks with formal restrictions on engaging in interest-based activity) with greater flexibility in meeting HQLA requirements, enabling them to hold a reserves-like asset in a non-interest based environment;
the ALF will be structured as a wakalah or fund-based facility (that is, participant deposits will be backed by a fund of assets, the return from which, net of hedging and operational costs, will be passed back to depositors in lieu of interest);
the ALF will grow as the UK Islamic bank sector grows, and it will be well-placed to exploit the growing diversification of available HQLA-eligible sukuk assets; and
over the coming months, the BoE will finalise legal documentation, complete its operational testing and begin the onboarding process for eligible applicants. Firms should expect to commence this work from January 2021. Once operational, the ALF will help put the UK Islamic finance sector on a more level footing, giving firms greater flexibility in meeting liquidity requirements, and helping them compete with conventional peers while staying true to their founding principles.

Implementing CRD V: PRA update

The PRA has published a statement explaining when firms can expect further information on the PRA's approach to transposing CRD V, including its approach to revisions to the definition of capital for Pillar 2A. The PRA states that it intends to publish a policy statement by mid-December 2020. It will summarise the responses to its consultation and explain the PRA's policy approach, including any further supervisory processes required for implementation.

COVID-19: LSB resource for firms on problem gambling

The Lending Standards Board (LSB) has published a resource for firms that considers how, in the context of the COVID-19 pandemic and the associated restrictions the government has put in place, firms can identify the early signs of problem gambling and act to protect and support vulnerable customers.

COVID-19: EBA reactivates guidelines on legislative and non-legislative moratoria on loan repayments

On 2 December 2020, the European Banking Authority (EBA) published a press release announcing the reactivation of its guidelines on legislative and non-legislative moratoria on loan repayments in light of the second wave of COVID-19 and the continued constraints on the availability of credit to businesses and private individuals. It has also published a document containing amendments to the guidelines and a consolidated version of the guidelines themselves.

The EBA has introduced a new deadline for the application of moratoria of 31 March 2021, replacing the previous date of 30 September 2020. The EBA has also amended the guidelines to introduce new constraints intended to ensure that the support provided by moratoria is limited to bridging liquidity shortages triggered by the new lockdowns and that there are no operational restraints on the continued availability of credit:

the period of time for which payments on a loan can be suspended, postponed or reduced as a result of the application (and reapplication) of general payment moratoria should not exceed an overall length of nine months; and
banks are requested to notify to the relevant competent authority or authorities their plans for assessing borrowers' unlikeness to pay in relation to exposures subject to legislative or nonâ€legislative general payment moratoria.

Transitional arrangements will apply to exposures that would have met the criteria specified in the guidelines in the period between 1 October 2020 and 1 December 2020.

Bank boards and supervisory expectations: ECB speech

The ECB has published a speech by Elizabeth McCaul, ECB Supervisory Board Member, on bank boards and supervisory expectations. Among other things, Ms McCaul indicates that the ECB will publish a revised guide on fit and proper assessments in 2021, clarifying its expectations on the suitability of bank directors. The ECB has also established a dedicated fit and proper department, and an enforcement and sanctioning committee, to streamline the process further.

SSM banks: ECB guide on climate-related and environmental risks

The ECB has published a guide on climate-related and environmental risks for banks in the single supervisory mechanism (SSM). The guide applies with immediate effect. Banks are expected to consider the extent to which their current management and disclosure practices for climate-related and environmental risks are sound, effective and comprehensive in light of the expectations set out in the guide. Where needed, banks are expected to promptly start enhancing their practices. A report has been published alongside the guide that aims to provide an overview of the level of disclosure of climate-related and environmental risks in SSM countries.

CRR: EBA final draft RTS on treatment of non-trading book positions subject to foreign exchange risk or commodity risk

The EBA has published a final report containing final draft regulatory technical standards (RTS) on the treatment of non-trading book positions subject to foreign exchange (FX) risk or commodity risk under Article 325(9) of the CRR.

Article 325(9) mandates the EBA to develop draft RTS to specify how institutions should calculate the own funds requirements for non-trading book positions that are subject to FX risk or commodity risk in accordance with the alternative standardised approach (SA) and the alternative internal model approach (IMA). In addition, Articles 325bf(4) and 325bg(9) mandate the EBA to draft RTS to specify how institutions are to calculate the changes in hypothetical profit and loss (HPL), actual profit and loss (APL) and risk theoretical profit and loss (RTPL) for the purpose of the back-testing and P&L attribution requirements.

The EBA proposes that the draft Delegated Regulation should enter into force twenty days after its publication in the Official Journal of the EU (OJ).

The EBA will submit the final draft RTS to the European Commission for adoption.

SRB 2021 work programme and multi-annual programme

The Single Resolution Board (SRB) has published a document containing its work programme for 2021 and its multi-annual programme, covering the period 2021-23.

SRF: Eurogroup statement on early introduction of common backstop

The Eurogroup has announced that it has decided to proceed with the early introduction of the backstop to the Single Resolution Fund (SRF) with the aim of its entry into force by the beginning of 2022.

BRRD II: European Commission notice on interpretation

A European Commission notice relating to the interpretation of certain legal provisions of the revised bank resolution framework in the BRRD (in reply to questions raised by member states' authorities) has published in the OJ. The notice also considers the interaction of certain aspects of BRRD II with the CRR, CRD IV and the Single Resolution Mechanism Regulation.

Mitigating COVID-19 impacts: BCBS oversight body commits to coordinated approach and endorses future direction of work

The Basel Committee on Banking Supervision (BCBS) has published a press release announcing that the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of the BCBS, has committed to a coordinated approach to mitigating COVID-19 risks to the global banking system and endorsed the future direction of BCBS work.

Reporting on Principles for Responsible Banking: UNEP FI consults on guidance

The United Nations (UN) Environment Programme Finance Initiative (UNEP FI) has published a consultation paper on a draft guidance document designed to support signatories of the Principles for Responsible Banking with reporting on their implementation of the principles. The principles were launched in September 2019, with related guidance, to provide a global framework for a sustainable banking system.

UNEP FI member banks can submit comments on the consultation until 29 January 2021.