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    PRA Consults on Depositor Protection Rules, Updates ECL Guidance

    September 23, 2022

    The Prudential Regulation Authority (PRA), via the consultation paper CP9/22, proposed to amend the Depositor Protection Part of the PRA Rulebook, delete the Dormant Account Scheme Part of the PRA Rulebook, and make minor amendments to the supervisory statement SS18/15 on depositor and dormant account protection, the Statement of Policy on Deposit Guarantee Schemes (DGS), and the Statement of Policy on "Calculating Risk-Based Levies for the Financial Services Compensation Scheme deposits class" (RBL). Additionally, the Taskforce on Disclosures about Expected Credit Losses (DECL), sponsored by the PRA, the Financial Conduct Authority (FCA), and the Financial Reporting Council (FRC), published an updated guidance on a complete set of high-quality IFRS 9 Expected Credit Loss (ECL) accounting disclosures.

    The proposed amendments to Depositor Protection Rules are aimed to ensure that the deposit protection framework provides an effective compensation scheme for deposits and minimizes the adverse effect that the failure of an Financial Services Compensation Scheme (FSCS) member could be expected to have on the stability of the UK financial system. Following the withdrawal of the UK from the European Union, PRA has decided to remove rules that it no longer considers appropriate (Continuity of Access rules, Dormant Account Scheme and, Consequential amendments to PRA rules, Supervisory Statements and Statements of Policy sections) and to amend rules to ensure that they accurately reflect the policy intent (Protection for deposits that are safeguarded funds, FSCS protection for firms in default and, Risk based levies sections). The comment period for the Continuity of Access rules and the Dormant Account Scheme will end on October 21, 2022 while the comment period for the remaining proposals will end on December 16, 2022. PRA expects the proposals on Continuity of Access rules and Dormant Account Scheme to come in effect from December 01, 2022, while the remaining proposal are expected to come in effect immediately following the making of the relevant instrument.

    The DECL Taskforce guidance report incorporates and supersedes the disclosure recommendations, guidance, and illustrative examples from the second reports, which were issued in November 2018 and December 2019, respectively. The third report includes the results of assessments, by the Taskforce members, of the progress of preparers toward the adoption of certain of the disclosure recommendations; the assessments revealed very high levels of adoption. The report also includes good practice examples drawn from financial statements of banks and building societies, along with other amendments to address gaps, deficiencies, or to otherwise improve existing material. The third report introduces updates to encourage consistency and comparability, along with further guidance on the “judgmental adjustments” (such as post-model adjustments and overlays) that banks and building societies make to modeled numbers in estimating ECL. The report is aimed primarily at the biggest UK-headquartered banks and building societies, but is also likely to be relevant to a much wider group of preparers. The report builds on the requirements in IFRS 7 Financial Instruments: Disclosures and the recommendations in the December 2015 report of the Enhanced Disclosure Task Force. The report focuses mainly on disclosures that help users to understand the types and extent of credit risk exposure a bank has and how that risk has evolved, the forward-looking information about macro-economic conditions used in estimating ECL, and the sensitivity of ECL provisions to different macro-economic conditions.

     

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    Keywords: Europe, UK, Banking, Depositor Protection, PRA Rulebook, Supervisory Statement, SS18 15, Deposit Guarantee Scheme, FSCS, IFRS 9, ECL, Financial Instruments, Credit Risk, Disclosures, DECL Taskforce, Basel, FCA, PRA

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