The final prudential reforms of 2020
IndustriesFinancial servicesRegulatory InsightsKey upcoming prudential reforms
The final prudential reforms of 2020
2020 was not a quiet year in the regulatory space. Regulators took significant action to reduce the impact of the Covid-19 crisis on the financial sector, with inter alia, the release of the countercyclical capital buffer, the so-called CRR Quick Fix and moratoria on loan repayment. Although there is ongoing analysis and retrospective learnings, no further measures are expected before the end of the year.
Apart from the end of Transition Period, the key prudential regulatory events happening are; the 28 December 2020 deadline for transposition of two European directives into the UK domestic law, the Capital Requirements Directive V, and the Bank Recovery and Resolution Directive II.
Capital Requirements Directive V
The prudential rules for banks, building societies and investment firms in the EU, and a fortiori in the UK, are currently defined by the EU prudential framework made up of Directive 2013/36/EU (CRD IV) and Regulation (EU) No 575/2013 (CRR). In 2016, the EU revised this framework. The new framework commonly referred to as CRD V / CRR II framework is expected to be implemented, respectively, by 28 December 2020 and 28 June 2021. As a result, CRD V will be transposed into the UK Law before the end of the EU Exit Transition Period and applicable to firms in scope from January 2021 whereas CRR II will not automatically apply to UK firms as its implementation date is set after the EU Exit date.
CRD V further implements Basel III measures, including an enhanced Pillar 2 approach to the management and control of interest rate risk in the banking book (IRRBB) and measures designed to further harmonise micro and macro-prudential supervision and also to incorporate greater proportionality in prudential requirements.
For UK FCA-regulated investment firms that are now expecting the introduction of a specific Investment Firms Prudential Regime (IFPR) for January 2022, HM Treasury said that CRD V will not apply to them: these firms should continue to comply with the relevant current regulation until IFPR is implemented. The scope of application of CRD V therefore includes banks, building societies, PRA-designated investment firms, UK financial holding companies, and UK mixed financial holding companies of certain PRA-authorised firms.
Firms in scope should already be ready to comply with CRD V.
Bank Recovery and Resolution Directive II
The Bank Recovery and Resolution Directive II (BRRD II) amends the original 2014 BRRD’s provisions and in particular, updates the EU Minimum Requirements for Own Funds and Eligible Liabilities (MREL) framework. The directive entered into force on 27 June 2019 and similarly to CRD V, must be transposed into Member States’ national law by 28 December 2020.
Following an HM Treasury consultation process, the UK Government intends to:
- Include sunset clauses in the UK transposition on the aspects that would not be suitable for the UK resolution regime after leaving the EU
- revoke technical standards not implementable or suitable for the UK. These provisions will cease to have effect in the UK from 1 January 2021.
All firms in scope must be ready to comply with BRRD II except for the provisions that will be ‘sunsetted’ on 1 January 2021.
References
- Bank of England announces supervisory and prudential policy measures to address the challenges of Covid-19
- UK withdrawal from the EU: Changes before the end of the transition period
- Prudential standards in the Financial Services Bill: June Update
- Capital Requirements Directive V (CRD V)
- Capital Requirements Directive V (CRD V): Further implementation
- Consultation on the transposition of the Bank Recovery and Resolution Directive II
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Key upcoming prudential reforms
After the publication of the FCA Regulatory Initiative Grid of September 2020, the industry raised concerns about the general volume of regulatory reforms scheduled for 2021. What are these reforms? What should firms be compliant with between now and the end of 2021? Which regulatory points should firms start planning for in 2021? We are going to tackle these three key questions over a series of insight...