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On 16 April, the European Parliament formally ratified the EU’s Risk Reduction Measures (RRM) package on bank capital and liquidity, clearing the way for the finalisation of one of the most significant pieces of EU-level banking regulation in years.
This has been more than two-and-a-half years in the making, with a long period of difficult political negotiations following the RRM’s proposal by the European Commission in November 2016. The RRM is a combination of the EU’s fifth Capital Requirements Directive (CRD5), the second Capital Requirements Regulation (CRR2), and the second Bank Recovery and Resolution Directive (BRRD2).
In March 2019, the Prudential Regulation Authority (PRA) published consultation paper (CP 5/19) to update the Pillar 2 capital framework and to reflect on-going enhancements in setting the PRA buffer (Pillar 2B).
As the CP states, its key objective is to “...bring greater clarity, consistency and transparency to the PRA’s capital setting approach. In promoting a greater level of transparency, the PRA seeks to promote financial stability, the safety and soundness of PRA-authorised firms, and facilitate more informed and effective capital planning for banks.”
This CP is relevant to PRA-authorised banks, building societies and PRA-designated investment firms (‘firms’). This CP is not relevant to credit unions, insurance and reinsurance firms. It is open for review, question or comment by 13 June 2019 and the PRA proposes to implement it from 1 October 2019.
Two years ago, the Governor of the Bank of England made a speech warning of a fork in the road in terms of the global approach to financial services (FS) regulation and supervision. The high road - founded on a shared commitment to markets, common minimum global standards, strong regulatory cooperation and resilient institutions and markets - would likely lead to benefits for all. By contrast the low road would involve countries turning inwards and reducing reliance on each other’s financial systems, leading to fragmented markets, less competition and disrupted cross‑border investment.
Two years on, and with Brexit looming, which road are we on?
EIOPA embraces the latest trends in European conduct regulation on value for money, firm culture and customer vulnerability
The European Insurance and Occupational Pensions Authority (EIOPA) recently published a framework to help EU national supervisors (also known as National Competent Authorities – NCAs) assess conduct risks throughout the lifecycle of insurance products. The framework is designed to foster supervisory convergence amongst EU supervisors, and to “provide input to the types of risks EIOPA and NCAs should focus on.”
Importantly, EIOPA has highlighted conduct themes that have been of growing importance and visibility across EU markets. These include the need for supervisors to assess firms’ culture; the importance of value for money as one of the key outcomes firms must deliver to consumers; and the need to protect more vulnerable groups of customers. Some of these conduct themes are already being pursued, to varying degrees, across the EU. However, EIOPA’s framework shows that they are also gathering momentum at a pan European level, and that EIOPA will, as part of its convergence remit, increasingly push for these issues to be scrutinised by supervisors across the EU.
Retail holdings of bail-in-able debt have caused concern for a number of years for supervisors and resolution authorities. From the perspective of supervisors, conduct risks arise from the fact retail investors may not fully understand the risks involved.Partly because of this, and because of high volumes, resolution authorities are concerned that retail holdings of bail-in-able debt have created impediments to resolution.
The Single Resolution Board (SRB) has re-affirmed its opinion that large retail holdings of bail-in-able debt create impediments to resolvability – flagging the potential franchise damage to the restructured bank and the risk that litigation (e.g. for mis-selling) offsets the capital benefit of bail-in. To these impediments could be added the practical difficulty of bailing in a large number of individual investors, and the added political scrutiny it would bring.
Any prospective bank going through the authorisation process will need to deliver three core documents, the Regulatory Business Plan (RBP), the Internal Capital Adequacy Assessment Process (ICAAP) and the Internal Liquidity Adequacy Assessment Process (ILAAP). The key elements of the ICAAP and ILAAP are presented in the RBP, and while the ICAAP and ILAAP serve different purposes, the regulator will expect to see consistent underlying messages across all three documents.
Liquidity is the lifeblood of a bank and the margin between loans and deposits defines how a traditional bank makes money. It is therefore essential that this element is adequately addressed and presented to the PRA in a way that gives it confidence that the applicant firm understands its liquidity and funding risk profile.
Providing inadequate detail on deposits and liquidity risks is one of the reasons that applicant banks sometimes face delays in the process. A robust ILAAP is not a supplement to an application for authorisation, but a core component of it.
The FCA has recently published the final findings of its review of the motor finance sector. The review found that the way some commission arrangements are operating in motor finance may be leading to consumer harm on a potentially significant scale1. The FCA has started work to assess the options for policy interventions - including banning certain commission models - to address the potential harm it found.
The FCA is also not satisfied that firms are meeting regulatory requirements around customer communications and affordability assessments. It plans to follow up its concerns through supervisory work with individual firms.
This blog summarises the key findings of the FCA’s review and sets out the implications for firms, recognising that, whilst the findings and potential remedies of the FCA’s review are targeted at motor finance lenders and brokers, they raise issues of potential relevance to commission models, customer communications and creditworthiness assessments across the consumer credit sector.
- a consultation aimed at improving outcomes in the drawdown market including the introduction of ‘investment pathways’ to help non-advised consumers choose the best way to invest their money; and
- final rules and guidance aimed at improving the information consumers receive in the lead-up to, and after, accessing their pension savings.
The importance of the Department for Work and Pensions (DWP) December 2018 Consultation on defined benefit (DB) pension scheme consolidation does not need to be stated. However, were there any doubt, the breadth and depth of the responses to the consultation, following its close at the beginning of February, underscore how critical the legal and regulatory framework for “superfunds” will be.
This blog explores some of the key proposals in what we consider to be the most critical areas covered by the DWP’s consultation, together with the feedback and proposals that the DWP has received in the respective responses of The Pensions Regulator (TPR), the Pension Protection Fund (PPF) and the Prudential Regulation Authority (PRA).
For the last decade, risk functions have spent considerable time and energy ensuring they are effective and compliant with regulatory change. Many have capitalised on the significant advances in technology to improve efficiency, but are still not yet realising a level of transformation that is possible. Mark Ward, Lead Partner for our Future of Risk and Compliance programme encourages Chief Risk Officers (CROs) to critically assess if they are fit for the future and consider:
- What does transformation mean to you?
- How can you deliver an effective transformation programme?