The key regulatory reforms expected in 2021
The financial services industry needed to prepare for the end of the Transition Period while the regulators had been working on defining the Temporary Transitional Power(TTP). Statutory instruments and regulatory rules have been discussed and refined to ensure that the UK continues to have an independent and fully functioning financial services regulatory regime after 31 December 2020.
The final EU Exit Instruments (Binding Technical Standards and Rules) and TTP directions were published in December 2020 by the PRA and the Bank of England (BoE). These will apply to all firms authorised and regulated by the PRA, financial market infrastructure providers (FMIs) currently supervised by the BoE and firms subject to the BoE’s powers as resolution authority from 1 January 2021. Some of the provisions will also be applicable to firms authorised and regulated by the FCA, and subject to the Financial Services Compensation Scheme (FSCS).
The TTP is giving time to firms to transition to the new UK regulatory regime, from 11pm on 31 December 2020 until 31 March 2022.
The regulators have indicated the key areas firms should have focused on in the last months before the EU-exit but most firms may need to continue to work on those in 2021:
Finally, the PRA expects that firms submit a formal application as soon as possible to access the temporary permission regime or request for waivers or modifications.
Covid-19 provided a real-life test of operational resilience. In October 2020, the BoE confirmed that given the consultation response and the lessons learned from the crisis, the fundamental approach based on the concept of ‘Important Business Services’ (IBS) as set out in previous consultations from the BoE, PRA and FCA is unlikely to change. Therefore, firms should have started identifying their IBS, setting the associated impact tolerance and having a view on the whole chain behind the provision of its IBS so as to be ready to implement new requirements from Q1 2021.
The final policy statements are expected to come in Q1 2021 and be followed by an implementation period of at least one year.
A proposal of Operational Resilience Incident Reporting Policy is expected in Q2 2021. This will set out what information should be submitted by FMI, banking and insurance firms when operational incidents occur.
UK regulators endeavour to secure a fair, clear and orderly transition from LIBOR to robust, reliable and clean alternative risk-free rates. SONIA will become the primary interest rate benchmark in sterling markets as LIBOR cessation is planned at the end of 2021.
The Financial Services Bill 2020 published on 21 October 2020 amends the UK’s retained version of the EU’s Benchmarks Regulation (BMR) to support LIBOR transition and provides additional powers to the FCA.
HM Treasury published a statement on the same day: market participants should actively transition away from LIBOR and do so as soon as possible, and the use of so called ‘synthetic LIBOR’ should be avoided to the greatest extent possible.
The Senior Managers and Certification Regime (SM&CR) entered in to force for banks in March 2016 and was extended in full to insurers in December 2018. Since, the PRA has been evaluating the effectiveness of this reform and is expected to publish its findings by the end of 2020. This could lead to consequential policy proposals that would be put out for consultation in 2021.
New deadlines for public disclosures on resolvability assessment
In July 2019, the PRA and BoE published the Resolvability Assessment Framework (RAF) setting out how the BoE, as the UK’s resolution authority, assesses financial firms’ resolvability. The RAF applies to UK firms notified by the BoE that their preferred resolution strategy is bail-in or partial-transfer and material subsidiaries of overseas-based firms operating in the UK. Firms are responsible for demonstrating how prepared they are for resolution.
The RAF also introduces a public disclosure regime. However, after the Covid-19 outbreak, the PRA offered firms in scope a one-year delay for their first reporting to reduce operational burden. In-scope firms are now required to submit an assessment report of their preparations for resolution by October 2021 and publish a summary report by June 2022. The BoE intends to make its first public statement on these firms’ resolvability by June 2022.
In-scope firms, and in particular their senior management, should understand the objectives and principles behind the RAF, work to comply with the requirements set in the PRA’s Supervisory Statement SS4/19 and meet the new reporting deadlines.
Update to the Operational Continuity in Resolution policy
The PRA, in coordination with the BoE as resolution authority, is proposing to update its Operational Continuity in Resolution (OCIR) policy in four main ways:
The consultation initiated in October ends on 31 January 2021, with the changes planned to come into force on 1 January 2022.
The PRA confirmed therelationship between operational resilience and OCIR. Both are described as two policy frameworks delivering different outcomes but through a taxonomy of critical functions and important business services (IBS).
The PRA expects firms to leverage their existing OCIR arrangements when considering the extent to which further work may be necessary ahead of 1 January 2022. The PRA also expects consistency from firms with regards to what would be ‘Critical’, or would support a firm’s viability for OCIR, and what is ‘Important’ in terms of operational resilience.
Trading and derivatives business wind down
In 2021, the PRA will continue its work to ensure firms develop capabilities to wind down their trading and derivatives businesses in an orderly manner, including where relevant to their recovery and post-resolution restructuring frameworks. A consultation on their approach is expected with policy proposals to be published from April 2021.
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...
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