HM Treasury published the government response to the feedback received on the consultation for updating the prudential regime of UK before the end of the Brexit transition period. The government has laid the secondary legislation—entitled "The Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020"—implementing the relevant CRD5 provisions before Parliament on October 15, 2020, after dialog with BoE, PRA, and FCA as well as after considering feedback to the consultation. The government will implement EU legislation that applies before the end of 2020 and this includes the transposition of CRD5 into the national law by December 28, 2020. The government is expected to publish a consultation in Autumn 2020 toward the implementation of certain provisions discussed in this response.
The government ran a consultation on its proposed approach to implementation of the Capital Requirements Directive 5 (CRD5) from July 16, 2020 to August 20, 2020. This Directive updates the prudential legislative framework that applies to banks and systemic investment firms. The consultation outlined proposals of the government for new requirements on financial holding companies, changes to the macro-prudential toolkit, and the intention to exempt non-systemic investment firms from the scope of CRD5, and sought comments. The government received eight responses from a mixture of industry bodies and financial institutions, including BNY Mellon, Building Society Association, The Investment Association, and UK Finance. The responses broadly highlighted agreement with the proposed approach of the government but noted a few areas that required clarification or highlighted specific complexities. These areas related to the macro-prudential updates and the holding company approval regime. The following are the key highlights of the government response:
- PRA and Financial Policy Committee will be given powers to set an other systemically important institution, or O-SII, buffer, to require ring-fenced banks and large building societies to hold a sufficient level of capital. The legislation will also make necessary updates to the definition of Other and Globally Systemically Important Institutions to reflect changes set out in the Directive. PRA plans to consult on the implementation of these provisions in Autumn of 2020.
- PRA will be given a power over the CRD5 systemic risk buffer and will have the ability to recognize third-country systemic risk buffers. PRA intends to explain its approach to the revised CRD5 systemic risk buffer in its Autumn consultation. FPC and PRA will continue to be able to apply macro-prudential Sectoral Capital Requirements.
- A bespoke holding company approval regime will be created for parent holding companies and other holding companies required to comply with the Capital Requirements Directive or the Capital Requirements Regulation (CRR) on a consolidated or sub-consolidated basis. The government will legislate to provide PRA with the enforcement powers required to supervise holding companies, as required for transposition of CRD5. Other holding companies that are not the ultimate parent or responsible for sub-consolidated requirements will not be subject to approval.
- PRA will also be given the power to remove members of management boards where an individual is no longer of sufficiently good repute, no longer possesses sufficient knowledge, skills, experience, honesty, integrity, or independence of mind, or is no longer able to commit sufficient time.
- The Senior Managers and Certification Regime, or SMCR, will not be extended as part of the legislation.
Finally, in its response, PRA noted that it does consider climate risks as part of its Supervisory Review and Evaluation Process (SREP) and that its approach to SREP is covered in the supervisory statement SS3/19.
Keywords: Europe, UK, Banking, CRD5 Transposition, Regulatory Capital, Basel, Brexit, SM&CR, CRD5, Responses to Consultation, HM Treasury
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