FS regulatory affairs newsletter – Q3 2023
Welcome to our recent instalment of the FS regulatory affairs newsletter. In this edition, we delve into the regulatory developments of the second quarter of 2023.
This quarter saw the PRA decide to postpone implementation of major capital reforms under the name of Basel 3.1 by 6 months. The PRA also had its secondary competition objective expanded under law with a greater focus on international competitiveness and growth. There was new guidance proposed around the general requirements for securitisation by the regulatory authorities. Finally, the PRA released CP10/23 on orderly solvent exit for non-systemic banks. As we enter the final quarter of the year there is something to keep an eye on, Sam Woods Mansion House speech in late October, which may provide further insight into the future regulatory landscape. Timeline of Basel 3.1 ImplementationThe PRA announced a delay in the implementation of Basel 3.1 by six months to 1 July 2025. The end-state date is still 1 Jan 2030, which means the transition period will decrease to 4.5 years. This aligns with the US Basel proposals; however, it deviates from EU’s implementation date, 1 Jan 2025. The PRA’s decision to delay implementation is less a reflection of their intent to align with the US, and more a concession to the level of complexity this transition brings. The PRA received an overwhelming number of responses to CP16/22, and have decided to release near-final policies in two parts:
The implementation of Basel 3.1 interacts with other reviews the PRA is conducting. The capital framework for Strong and Simple will depend on the credit risk provisions for Basel 3.1. Similarly, the PRA stated their intention to perform a complete review of the Pillar 2 methodologies by 2024, so Pillar 2 requirements and corresponding reporting requirements will align with the changes in the Pillar 1 framework in Basel 3.1. The PRA is yet to provide any updates on whether timelines for the Strong and Simple framework and Pillar 2 review will change. |
What management should considerFirms should take this delay as an opportunity to conduct more in-depth impact analysis exercises, given the significant impact Basel 3.1 is likely to have on their Pillar 1 requirements. They also need to consider that a shorter transition period of 4.5 years will lead to a more aggressive adoption of the transitional provision such as the output floor for firms with internal modelling capabilities. Firms with operations in the US and the UK benefit from the delay in the UK’s implementation timeline, because they can use their impact analysis and change management protocols across jurisdictions. European firms, however, will not gain from this change and will need to continue working towards the January 2025 implementation date. |
PRA’s Approach to Measuring the Contribution of Regulation to Competitiveness and GrowthThe Financial Services and Markets Act (FSMA) 2023 has introduced a new secondary objective for the Prudential Regulation Authority (PRA), emphasising the promotion of the country's international competitiveness and long-term growth, while aligning with global standards. However, this objective cannot compromise the primary objectives of safety, soundness, and protection. This objective will sit alongside the existing secondary objective for the regulation of banks it supervises, to facilitate effective competition between firms. To implement this new objective, the PRA is working to better understand and measure its progress. They hosted an international conference on 19 September 2023 to explore the core linkages between regulation, competitiveness, and growth, which has been published here. This paper focuses on how to measure the PRA's progress and presents various metrics for consideration. Metrics should be directly under the PRA's control to ensure accountability. These metrics include:
Our view is that while these metrics are important, there are risks associated with using the "wrong" metrics, such as unintended consequences and conflicts with primary objectives. For example, there is a risk that the PRA relaxes regulation to advance financial firms’ profitability, jeopardising safety and soundness in the process. Additionally, the paper suggests reporting on broader macro-indicators of competitiveness and growth, although these should not be considered performance metrics. These indicators could provide context for the PRA's functions and include:
It's important to note that these indicators provide a broader context for the PRA's work but are not direct measures of its performance. |
What management should considerAlthough the way the PRA measures competitiveness and growth does not particularly impact firms directly, we recommend that banks partake in any surveys or assessments with the PRA. Providing input is essential for the PRA to have a holistic oversight of the potential problems within the sector. This understanding will help the regulator to implement adequate solutions that could positively impact the competitiveness and growth of the industry. |
CP15/23 – Securitisation: General requirementsCP15/23 presents the PRA’s proposed rules to replace relevant EU provisions within the Securitisation Regulations, Risk Retention Technical Standards and Disclosure Technical Standards. The proposed implementation date for the PRA changes is 2024, dependent on the progress of the draft Securitisation Regulations Document 2023. 1. The proposals for replacing requirements in the Securitisation Regulation are as follows:
2. Proposals for replacing relevant requirements in the Risk Retention Technical Standards are as follows:
3. The PRA replacements of relevant provisions in the disclosure technical standards will preserve the substance of the current requirements and does not replace the EU Securitisation Regulation 2017’s directions to firms. The PRA may change this in the future. |
What management should considerFirms may need to adjust their securitisation strategies which could involve changes in the types of assets they securitise, the structure of securitisation transactions, and risk retention strategies. Any firms which will be eligible for exemption from the cash collateralisation requirement with the new rules may revise their strategies regarding cash and liquidity. Firms will need access to data on securitisation transactions, including information on underlying assets, risk assessments, and compliance with retention requirements. Effective data management will be critical to meeting reporting requirements and making informed decisions about risk retention and other aspects of securitisation. |
CP 10/23 – Solvent Exit PlanIn June 2023, the PRA published CP10/23 (CP)which covers proposals for in-scope firms to prepare (and where necessary, execute) an ‘orderly solvent exit’. This is an extension of the PRA’s positioning in its 2022/23 business plan to do more to promote confidence in the ability of firms to exit the market with minimal disruptions to the wider market. A solvent exit is the process by which firms discontinue PRA-regulated activities (deposit taking) while remaining solvent. Firms will be required to transfer or repay (or both) all deposits as part of their solvent exit which will end with the removal of the firm’s Part 4A PRA permission. Its scope is restricted to:
Impact on firmsThe CP proposes two thresholds (reasonable prospect of solvent exit and commencement of solvent exit) for firms within its scope. Firms would be expected to:
The proposals in the CP provide an opportunity to bridge the gap between recovery planning and resolution (insolvency). Solvent exit would sit alongside recovery and resolution, as a route for non-systemic firms facing stress or wishing to exit from PRA-regulated activity for any reason (forced, or strategic). Such firms would be expected to test their solvent exit analysis against a range of idiosyncratic and market-wide scenarios. This is similar to expectations under the recovery regime and is intended to help firms understand the behaviour of customer deposits and enhance the overall resolution capabilities. |
What management should considerWhile the PRA has proposed an implementation date of Q3 2025 (which is not far from the March 2025 deadline for solvent wind-down for larger banks), the consultation closes on 27 October 2023. In-scope firms may consider previous implementations done under their existing recovery planning regime to meet regulatory expectations per this CP. Firms may also consider the following:
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