In this blog post, we round-up forthcoming developments in the UK and at EU and International levels in financial services regulation which are expected for March 2021.
Following the publication of DP20/2: Prudential Requirements for MiFID Investment Firms in June 2020 (see our blog post), the FCA has now published its consultation on the new UK prudential regime for MiFID investment firms (IFPR) (CP20/24). Continue reading
On 12 November, Sam Woods (CEO of the PRA) used his Mansion House speech (the Speech) to discuss the merits of introducing a new “strong and simple” regime of prudential regulation for small banks and building societies in the wake of the UK’s exit from the EU, as well as providing some general commentary on the PRA’s post-Brexit approach.
The Chancellor of the Exchequer delivered the 2020 Budget to Parliament on 11 March 2020. This includes a package of related policy documents, many of which highlight planned reforms to the financial services sector.
Of particular note for banks and investment firms is the policy statement on prudential standards published by HM Treasury, which confirms the government’s intention to implement:
- CRD V and the related Basel III banking standards through powers in the forthcoming Financial Services Bill, including the more recent “Basel 3.1” reforms not incorporated within the EU CRR II regulation; and
- an updated prudential regime for investment firms in the UK. The policy statement notes the instrumental role played by the UK Government in developing the EU prudential regime for investment firms (ie the Investment Firms Directive and Regulation), although there is no specific commitment to closely mirror the EU regime, or indeed the CRR II rules.
The possibility of divergence in approach is also hinted at in the closing comments, which note that HM Treasury is conducting a review to determine how the regulatory framework will need to adapt to the UK’s position outside of the EU, including examining the ongoing allocation of regulatory responsibilities between Parliament, HM Treasury and the regulators. Both the Government and the regulators will consult on proposals to implement the various prudential reforms “in due course”.
Authors: Jenny Stainsby, Vicky Man and Cat Dankos
While there have been other reviews1 into the near failure of the Co-operative Bank (“Co-op Bank”), on 6 March 2018, HM Treasury announced that it had directed the Prudential Regulation Authority (“PRA”) to conduct a further investigation, specifically focused on the prudential supervision of Co-op Bank between 2008 and 2013 with a view to reporting on any lessons learned and making appropriate recommendations (“the Review”). The review period covers a significant period for the Co-op Bank, including its merger with Britannia Building Society (“Britannia”) in 2009 and its withdrawal from the bidding process to purchase 632 bank branches from Lloyds Banking Group in 2013.
This is the first example of the use of a statutory power enacted in 2012 whereby the Treasury may require the PRA (or Financial Conduct Authority (“FCA”)) to investigate where it considers that it is in the public interest that the PRA (or FCA) should carry out an investigation into ‘relevant events’ and it does not appear to the Treasury that such an investigation has been or is being undertaken2. The Government had announced its intention to invoke this power in 2013, stating at that time that the review would not commence until the conclusion of all regulatory enforcement action relating to Co-op Bank.
With Treasury’s approval, the PRA appointed Mark Zelmer as independent reviewer to conduct the Review. Mr Zelmer’s report was published on 27 March 2019. In it, Mr Zelmer addresses the eight areas of investigation which were set out by HM Treasury; and provides eight recommendations. The PRA and the Bank of England’s (“BoE”) Joint Response was published on the same day and welcomed the report.
Many of the observations made in the report are unsurprising, and to a considerable degree, as acknowledged in the report itself, the shortcomings in supervision during the period of the review will have been addressed during the restructure of the UK regulatory regime in 2013. While a clear theme coming from the Review is the need to ensure ongoing compliance with regulatory and statutory requirements, there are a handful of forward-looking points from the Review and Joint Response of particular note:
- the Review draws particular attention to the importance of stress testing, and it seems likely that as stress testing methodology continues to evolve, it will do so with a particular eye to incorporating “the inherent uncertainty that would prevail as a stress scenario unfolds in real life”, the most recent ‘real life’ example to be included in stress tests being cyber stress tests;
- the Review considers various threats to the safety and soundness arising from technology, (for example, cyber-attacks), but notably draws out the potential impact of Open Banking on bank runs which may highlight for some firms the need to review both “early warning” detection strategies and crisis management preparedness;
- in the joint response, the PRA explains that it is considering whether to set either formal or informal asset encumbrance limits; should the PRA proceed with limits, this will have an impact on balance sheet calculations; and
- the Review also notes that the PRA said that it intends to assign firms’ senior managers (as designated under the Senior Managers and Certification Regime or “SMCR”) to be accountable for actions in letters to the largest UK deposit takers; the September 2018 letter on LIBOR transition is an illustration of this.
Below we consider in more detail some of the key recommendations, the BoE and PRA response, and implications for firms.
Authors: Mark Ife and Paul Ellerman
After over two years of debate, agreement has finally been reached on the proposed directive amending the Capital Requirements Directive (which is generally being titled CRD5), and the European Council has published its final text.
As detailed in our previous briefing, however, the proposed new prudential regime for investment firms, will remove most investment firms from the scope of CRD5 and subject them to the specific remuneration rules in the new Investment Firms Directive (IFD) and Investment Firms Regulation (IFR). Consequently, the revised CRD5 is likely only to apply to banks and “bank-like” investment firms.
- New remuneration rules for banks and reclassified CRD investment firms
- The proportionality principle – bonus cap and deferral
- Changes to the de minimis principle
- Minimum deferral periods
- Share-linked instruments
- Application on a group level
- Gender neutral remuneration policies
- Impact of BREXIT on CRD5
- Next steps for CRD5
Authors: Mark Ife and Paul Ellerman
Agreement has now been reached between the European Parliament, the Commission and the Council on the final texts of two Directives which will impact on the remuneration provisions which apply to banks and investment firms. The first is the Investment Firms Directive (IFD), which will introduce a new prudential regime for investment firms. The second is the Directive which contains the fourth set of amendments to the Capital Requirements Directive (which is generally being titled CRD5). The European Parliament will consider both Directives in its plenary sessions between 15 and 19 April 2019.
This briefing sets out details of the remuneration provisions contained in the IFD and the related Investment Firms Regulation (IFR). A subsequent briefing will cover the revised provisions contained in CRD5.
- New remuneration rules for investment firms
- Ability to apply proportionality?
- Impact of BREXIT on the IFD/IFR
- Next steps for the IFD