PRA, via the consultation paper CP12/20, proposed changes to its rules, supervisory statements, and statements of policy to implement certain elements of the Capital Requirements Directive (CRD5). The proposed changes are related to Pillar 2, remuneration, intermediate parent undertakings, governance, and third-country branch reporting requirements. Among other changes, PRA proposes to update the branch reporting rules in the Regulatory Reporting Part of the PRA Rulebook. The consultation closes on September 30, 2020. PRA shall consult in Autumn 2020 on the draft rules to implement the remaining elements of CRD5 that are not covered in this consultation paper—in particular those requiring legislative change—and amendments to the Capital Requirements Regulation (CRR2) that apply from December 28, 2020.
The proposals in CP12/20 are included in the following chapters:
- In Chapter 2, PRA sets out the proposed implementation of changes to Pillar 2 provisions related to firms’ internal capital assessments, supervisory review of those assessments, and the additional capital requirements and guidance that may be applied. The proposals in this chapter would amend Statement of Policy on methodologies for setting Pillar 2 capital (Appendix 3, Chapter 1) and SS31/15 on Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 3, Chapter 2).
- In Chapter 3, PRA sets out the proposed implementation of changes related to remuneration. The provisions of CRD5 on remuneration are intended to enhance the risk management of firms and the risk-taking behavior of individuals and to introduce greater consistency in the approaches applied across firms. The proposals in this chapter would amend the Remuneration Part of the PRA Rulebook (Appendix 1, Chapter 7 and Appendix 2, Chapter 2), along with SS2/17 on remuneration (Appendix 3, Chapter 3).
- In Chapter 4, PRA sets out the proposed implementation of intermediate parent undertaking requirements of CRD5. These requirements are intended to simplify and strengthen the resolution process of non-EU groups with significant activities in EU. The proposals in this chapter would make amendments to the Groups Part of the PRA Rulebook (Appendix 1, Chapters 2 and 3) and to SS15/13 on groups (Appendix 3, Chapters 5 and 6).
- Chapter 5 sets out proposals to implement CRD5 requirements on governance. The CRD5 provisions on governance are intended to help ensure that firms and their management organize and control their affairs responsibly and effectively. The proposals in this chapter would make amendments to the General Organizational Requirements Part of the PRA Rulebook (Appendix 1, Chapter 1), the Internal Capital Adequacy Assessment Part of the PRA Rulebook (Appendix 1, Chapter 4), the Related Party Transactions Risk Part of the PRA Rulebook (Appendix 1, Chapter 6), and SS28/15 on strengthening individual accountability in banking (Appendix 3, Chapter 4).
- Chapter 6 sets out proposals for implementing the CRD5 third-country branch reporting requirements. CRD5 introduces new, annual reporting requirements for third-country branches of credit institutions. These changes formalize the requirement for third-country branches to report data, some of which PRA already collects. The proposals in this chapter would make amendments to the Regulatory Reporting Part of the PRA Rulebook (Appendix 1, Chapter 5 and Appendix 2, Chapter 1), SS34/15 on guidelines for completing regulatory reports (Appendix 3, Chapter 7), SS4/16 on internal governance of third country branches (Appendix 3, Chapter 8), and SS1/17 on liquidity reporting (Appendix 3, Chapter 9). PRA also proposes to update the branch reporting rules in the Regulatory Reporting Part of the PRA Rulebook.
CRD5 is required to be transposed by December 28, 2020. Most of its requirements apply from December 29, 2020. Certain aspects require legislative changes to implement them in UK. HM Treasury is consulting on its proposed approach to transposing these aspects of CRD5. PRA proposes not to implement the requirements of CRD5 that do not need to be complied with by firms until after the end of the transition period, in particular some of the EU Intermediate Parent Undertaking and Pillar 2 requirements for the leverage ratio. CRD5 also introduces the following measures that will be addressed in the Autumn 2020 consultation of PRA:
- A new requirement for approval and supervision of holding companies
- Clarification of the capital stack
- A revised definition of the maximum distributable amount
- Revisions to the capital buffers that may be applied
- The introduction of supervisory requirements to measure, monitor, and control interest rate risk in the banking book (IRRBB)
The proposals set out in CP12/20 have been designed in the context of the current UK and EU regulatory framework. PRA will keep the policies under review to assess whether any further changes would be required due to changes in the UK regulatory framework, including those arising once any new arrangements with the EU take effect. Except where otherwise stated, the proposals set out in CP12/20 would continue to apply after the end of the transition period. PRA has assessed that the proposals would need to be amended under the EU (Withdrawal) Act 2018 (EUWA 2018). A second version of the proposed rules, which include the relevant amendments under EUWA 2018, has been set out in Appendix 2 of CP12/20.
Comment Due Date: September 30, 2020
Keywords: Europe, UK, Banking, Securities, CRD5, PRA Rulebook, Pillar 2, Governance, Reporting, Remuneration, ICAAP, SREP, Regulatory Capital, Proportionality, Transition Period, IRRBB, CRR2, Credit Risk, Basel, HM Treasury, PRA
EIOPA published the financial stability report that provides detailed quantitative and qualitative assessment of the key risks identified for the insurance and occupational pensions sectors in the European Economic Area.
EBA published its risk dashboard for the first quarter of 2020 together with the results of the risk assessment questionnaire.
EBA announced that the next stress testing exercise is expected to be launched at the end of January 2021 and its results are to be published at the end of July 2021.
PRA published the consultation paper CP11/20 that sets out its expectations and guidance related to auditors’ work on the matching adjustment under Solvency II.
MAS published a statement guidance on dividend distribution by banks.
APRA updated its capital management guidance for banks, particularly easing restrictions around paying dividends as institutions continue to manage the disruption caused by COVID-19 pandemic.
FSB published a report that reviews the progress on data collection for macro-prudential analysis and the availability and use of macro-prudential tools in Germany.
EBA issued a statement reminding financial institutions that the transition period between EU and UK will expire on December 31, 2020; this will end the possibility for the UK-based financial institutions to offer financial services to EU customers on a cross-border basis via passporting.
SRB published guidance on operational continuity in resolution and financial market infrastructure (FMI) contingency plans.
ECB extended its recommendation to banks on dividend distributions and share buy-backs until January 01, 2021.