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Proposed no deal rules for PRA firms

Proposed “No-deal rules” for PRA firms

1st November - The Bank of England (Bank) and the Prudential Regulation Authority (PRA) are consulting on proposed changes to the UK requirements and EU-derived Binding Technical Standards (BTSs), which will be brought into effect in the event of a “no-deal” Brexit at the end of March 2019. They have also outlined their post-Brexit approach to EU non-legislative material, such as guidelines and Q&As issued by the European Supervisory Authorities (ESAs). In addition, “Dear CEO” letters have been sent to affected firms and infrastructure providers.

The consultations are relevant to all firms authorised and regulated by the PRA (or those that intend to seek authorisation) and to financial market infrastructure providers (FMIs) currently supervised by the Bank (or that intend to apply to the Bank for recognition). Some of the proposals are also relevant to firms authorised and regulated by the Financial Conduct Authority (FCA) and to the Financial Services Compensation Scheme (FSCS).

They seek comments by 2 January, with feedback and final statements scheduled for Q1 2019.

Implications for firms

Firms will need to determine the impact of any revised provisions and supervisory changes, and to consider how to reflect these changes in their current governance arrangements, policies and procedures. Particular attention will be needed to the inter-relations and interdependencies between the various amendments, and any re-papering requirements, which may require communications with consumers/investors, counterparties and suppliers.

In particular, firms should continue to make every effort to comply with the ESAs’ Level 3 guidance, in so far as they remain relevant after exit day, and until such time as the PRA informs otherwise.

Moreover, the regulators note that UK firms and FMIs should also plan on the assumption that there may be a Brexit deal and an implementation period, in which case they will have to comply with requirements arising from new EU legislation that comes into effect during that period.

Under their temporary transitional power, the regulators are willing to waive or modify some requirements to allow for a smooth transition in the event of no deal, meaning that they do not expect firms and others subject to these proposals to prepare now to implement the new requirements (see box). However, they will not apply waivers or modifications to contractual recognition of bail-in rules, contractual stays or FSCS protection.

The regulators state that they intend to apply the temporary transitional power broadly and have identified a number of particular areas where it could be applied, including those set out in the box. However, the duration of any such reliefs is still being considered by the regulators, so firms should nevertheless assess the impact of a no-deal Brexit on their regulatory solvency or capital position and consider what contingency measures could mitigate any potential future solvency or capital requirements breach.

The overall approach

The regulators’ aim is to ensure a functioning legal framework after exit day. If the UK leaves the EU without a deal, the UK would default to treating the EU and its Member States in the same way as other third countries, i.e. there will be no preferential treatment of EEA firms or of EU exposures held by UK firms.

For example, the ranking in the insolvency hierarchy of deposits made through EU branches of UK banks will be aligned with the ranking of deposits held by third country branches of such banks. For insurers, assets to cover both sterling-denominated and the solvency capital requirement of UK branches will need to be kept in the UK. Where group requirements are currently overseen at an EU level only (for example consolidated capital or liquidity and insurance group supervision), this will also be required at the UK level after exit day.

Exceptions will be made to this default approach where appropriate, including where this is justified in order to ensure financial stability, or to minimise disruption and avoid material unintended consequences for the continuity of service provision to UK customers, investors and the market. Some transitional reliefs may be made available, but the full detail of these is not included within this consultation.

The amendments proposed to update technical regulatory references and concepts are generally straightforward. References to EU institutions will be replaced, for the most part, by references to equivalent UK institutions, and references to EU laws will be replaced by UK rule references.

The regulators are generally not proposing to amend existing supervisory statements (SSs), statements of policy (SoPs) or reporting requirements, but to publish additional SSs and SoPs that explain how the existing material should be interpreted when the UK is outside the EU. Also, the regulators are not proposing changes to policy or non-Brexit related matters.

The regulators welcome comments from stakeholders on the proposed approach – in particular, which changes that affect their regulatory obligations would be particularly challenging for firms to implement in time for exit day, and how much time would be needed to implement those changes in an orderly way.

If there is a deal, and therefore an implementation period, the changes will take effect at the end of that period rather than at exit day, but further modifications may be necessary to take account of changes to EU rules and guidance issued during that implementation period.

Use of the transitional relief power

The regulators state that they intend to apply the transitional relief power broadly and have identified a number of particular areas where it could be applied, including:

  • Firms and FMIs would continue to treat EU27 exposures and assets preferentially, under the applicable capital frameworks, and under the CRR liquidity and large exposure regimes;
  • Firms and FMIs would continue to report and disclose regulatory data on the same basis as before exit day;
  • UK groups that are part of EEA headquartered banking groups would not need to comply with consolidated liquidity requirements at the UK level;
  • Certain UK branch requirements, including coverage of insurance solvency capital requirement;
  • If HM Treasury relieves the PRA of its obligation to exercise group supervision at the level
    of any UK sub-group, EEA-headquartered insurance groups would not need to calculate or report their Solvency II group solvency position in relation to this UK sub-group; and
  • Credit unions could continue to place deposits with EEA credit institutions.

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