Risk & Regulation Round-up October to December 2017

This is the latest round-up in the series covering key announcements and developments in UK financial risk and regulation.

As usual I adopt a summarised and simplified approach to the main stories. Links to underlying source stories or documents are contained in individual articles in this blog.

Substantive guidance is now starting to emerge from the regulators on Brexit; in particular the need for some firms to apply for relevant authorisations to do business in the UK post-Brexit, irrespective of the likely implementation period and temporary permissions regime. See section 1 below.

A major regulatory announcement came in December from the Basel Committee: the final set of revisions to the Basel III capital rules. These included confirmation of the new capital floor, delays to the implementation timeline and other changes. See section 2 below.

*** Note: The articles in this blog do not constitute advice, but please contact Prism-Clarity for further information, including where to get the best advice. ***


1. Brexit

Key announcements were made separately in December by HM Treasury, the FCA and the Bank of England/PRA on the progress of Brexit negotiations, a newly-agreed temporary permissions process and other elements of Brexit relevant to UK financial services.

PRA letter to firms on Brexit preparations

Bank of England Prudential Regulation Authority (PRA) chief executive Sam Woods also issued a letter to firms doing cross-border activities between the UK and the rest of the European Union. The letter highlighted some of the risks and issues that are emerging in firms’ Brexit preparations and contingency planning; including the continuity of existing cross-border contracts and the cross-border flow of personal data following UK withdrawal. The PRA said it welcomed the announcement from HM Treasury that the government planned to act, if necessary, to mitigate risks to the continuity of EEA firms’ outstanding contracts in the UK.


The letter also confirmed that, in the absence of continued passporting rights post-Brexit, firms currently exercising rights to establish a branch or provide services into the UK (‘inbound firms’) would need to seek PRA authorisation to carry on PRA-regulated activities in the UK. This was even though it had now been agreed there would be an implementation period, during which firms could be able to continue undertaking cross-border activity between the UK and EU in much the same way as today. The letter reminded firms needing to seek authorisation that the scale of the authorisation challenge for the regulators is significant, and that authorisations could take up to 12 months from the point of application.


The PRA also indicated that, for the time being, firms could plan on the assumption that equivalence requirements between the UK and the EU would be met. Therefore firms could apply for authorisation as branches. The only exception was the few existing EEA bank branches which are conducting material retail business, which would need to apply for authorisation as subsidiaries, consistent with Bank Supervisory Statement 10/14.

The PRA noted, however, that this equivalence assumption may be revisited as Brexit negotiations proceed. It also commented on the fact that firms would need to meet Threshold Conditions prior to authorisation, and that it was prepared to apply specific regulatory requirements to systemically important branches where it cannot gain sufficient assurance about the supervisability of the firm.


Given the complexity of the authorisation/permissions process, the PRA is encouraging firms to make an approach as soon as possible if they wish to apply for authorisation. The PRA said it planned to use the new temporary permissions regime announced by HM Treasury as a fall-back only.

Further information on the authorisation process, including how to apply, can be found on the PRA’s website. For more background on passporting more generally, see this Prism-Clarity blog from September 2016.

2. FSB and Basel announcements

Key FSB announcements

The Financial Stability Board (FSB) continued to be active in the fourth quarter, as set out in this index of its announcements in the period October to December 2017. These announcements included publication of the FSB’s 2017 list of global systemically important banks (G-SIBs); and further important consultations on improving resolution planning and resolvability regimes for both G-SIBs and insurers.

A number of FSB Regional Consultative Groups (RCGs) took place in Q4, covering the Americas, Asia, the Commonwealth of Independent States, the Middle East and North Africa, and Europe. The FSB also issued interesting new papers on cyber-security regulation and supervision and the financial stability implications of AI/machine learning. Finally the regulatory oversight body also issued its planned work programme for 2018 which emphasised the themes of cyber-security, misconduct risk and market-based finance (shadow banking) in addition to its more routine work on global systemically important institutions, and evaluating the impact of reforms already implemented.

Basel III update: final wrap-up

The Basel Committee on Banking Supervision (BCBS) announced the final set of Basel III rule changes, the final phase of a sweeping programme of capital rule changes started a decade ago in the aftermath of the financial crisis. The main elements were as follows.

    (I) So-called floor on using internal statistical models to determine overall capital requirements; set at 72.5% of the amount calculated using standardised capital rules.
    (II) Delayed implementation timetable for the final rules, including the new total floor, with a transition period stretching from January 2022 (50% floor) to 2027 (final 72.5% floor).
    (III) Further delay to implementation of the Fundamental Review of the Trading Book (FRTB), also pushed back to 2022.
    (IV) Elimination of the modelled capital approach for operational risk, again with the parameters used to determine the risk being phased to make the impact more gradual.
    (V) Changes to the standardised approach for credit risk capital, alongside constraints on the use of models for credit risk capital.
    (VI) For the largest and most significant global banks (G-SIBs), an additional surcharge on their minimum leverage ratio – a simple measure of capital strength based on a bank’s total assets – i.e. not taking risk weights into account.

Intrinsic to the new rules, in particular the new 72.5% floor, is a requirement that banks will have to calculate and publish their standardised rules Risk Weighted Assets (RWA) and capital, even if they have approval to use internal risk models for capital purposes. This is intended to increase both transparency and comparability of different banks’ capital measures.

No change to zero risk weight for sovereign debt

Exposures in sovereign debt, meanwhile, will continue to carry a zero risk weight. Officially zero risk weights only apply for sovereign debt rated better than AA- but with discretion for regulators at national level to apply it more widely, which is widely exercised, leading to a zero weight in practice. This discretionary element is not expected to change under the revised Basel framework. ECB President Mario Draghi and BCBS Chair Stefan Ingves said there was limited appetite to revise the treatment of sovereign debt exposures under the updated Basel framework, which was why it would remain unchanged. A new discussion paper was issued to assist the BIS’s longer term thinking on this topic but will not represent an official BCBS consultation.

Other BCBS announcements Oct to Dec 2017

Given its focus on the major Basel III wrap-up, the Basel Committee did not issue as many new consultations or other publications in Q4 as it had done in the first three quarters of 2017. This link represents the most recent index of announcements. They included a long-awaited consultation paper on stress testing principles which updates a paper last issued back in 2009; and an associated technical report on the range of supervisory and bank practices on stress testing.


3. EBA announcements

EBA work programme for 2018

In October the EBA published its planned work programme for 2018, based around seven key strategic objectives:

    (I) Play a central role in the regulation and policy framework, with the development and maintenance of the Single Rulebook.
    (II) Strengthen its role as the EU data hub for the collection, dissemination and analysis of data on EU banks.
    (III) Promote efficient and coordinated crisis management of credit institutions, investment firms and financial market infrastructures in the EU.
    (IV) Promote the convergence of supervisory practices to a high standard so as to ensure that regulatory and supervisory rules for going-concern and crisis situations are implemented consistently across the EU.
    (V) Identify and analyse trends, potential risks and vulnerabilities, and support efforts to resolve non-performing loans.
    (VI) Protect consumers, monitor financial innovation and contribute to efficient, secure and easy retail payments in the EU.
    (VII) Be a responsible, competent and professional organisation, with effective corporate governance and efficient processes.

More specifically the EBA envisages its main priorities in 2018 being:

    (a) contributing to CRR/CRD and BRRD developments, and reviewing the consequences of the FRTB;
    (b) implementing a data infrastructure and analysis project to enhance its role as a data hub for banks in the EU;
    (c) monitoring and evaluating the impact of Brexit;
    (d) Fintech, including prudential and operational risks and opportunities, impacts on the business models of credit institutions, consumer protection, retail conduct of business issues, and changes in other areas such as resolution of financial firms and AML/CFT;
    (e) fostering proportionality in relation to policy developments while monitoring the consistent application of the Single Rulebook and its impact on institutions; and
    (f) contributing to the European Council’s action plan to tackle NPLs in Europe.
Other EBA and EU developments Oct to Dec 2017

Elsewhere the EBA published its methodology for the 2018 EU-wide stress test, the results of which are scheduled to be reported in November 2018. It was also confirmed that the EBA would be relocating from London to Paris after Brexit.

Given the high number of publications from the EBA, readers seeking more comprehensive coverage are urged to visit this EBA news and press release link.

On this occasion we have focused primarily on European Banking Authority (EBA) publications rather than EU/European Commission documents.

This is not to say there was a shortage of material issued by the Commission in Q4 – but much of it was technical, preparing for the key implementations occurring in 2018 (MiFID, PSD2, IDD, GDPR) and technical preparations for the Capital Markets Union (CMU) rather than strategic or policy-focused. In view of this the next edition of this round-up will include a special detailed section on EU and EC policy developments and announcements.

In the meantime please approach Prism-Clarity if you need specific information on EU or EC activities or publications that have not been covered in this bulletin.

4. PRA announcements

The Bank of England Prudential Regulation Authority (PRA) website page What’s New: as at December 2017 summarises the PRA rules that are currently out for consultation and due for implementation.

Stress testing

As foreshadowed in the last round-up, in November the Bank published results of the latest stress test for the seven major UK banks and building societies, based on an annual cyclical scenario (ACS) and biennial exploratory scenario (BES) agreed earlier this year by the Financial Policy Committee and Prudential Regulation Committee.

The stress test involved a -4.7% decline in UK GDP, a 4% rise in interest rates and a 33% fall in UK house prices, a more severe shock than the 2008-9 global financial crisis. Yet for the first time since the stress tests were launched in the UK in 2014, no banks needed to strengthen their capital position as a result of the stress test. According to the Bank the test results showed that the UK banking system is resilient to deep simultaneous recessions in the UK and global economies, large falls in asset prices and a separate stress of misconduct costs. The seven banks would incur total losses of around £50 bn in the first two years of the stress, which would have wiped out their common equity capital ten years ago but can now be absorbed within their capital buffers.

Also on the topic of financial stress, the Bank launched a new financial stress index (the UKFSI) to monitor the intensity of financial stress in the UK over a period of 45 years including the interconnectedness of different financial markets. The index successfully captures three episodes of heightened stress in UK financial history (the mid 1970s, 1994 and 2008-9). The Bank also assessed how much a financial shock to the UK economy is amplified in a period of stress compared to more normal periods, and found empirical evidence of shocks to the real economy affecting the financial sector and vice-versa.

Other PRA publications

Aside from Brexit-related announcements and stress testing material, the PRA made a number of other key announcements in Q4 concerning the extension of the SMCR, ICAAP and Pillar 2a methodologies, capital requirements and disclosure, and the Solvency II directive. A good source to catch up on PRA publications is the PRA’s monthly prudential regulatory digest: for reference here are the September, October and November 2017 editions.

5. FCA announcements

See this link for a more comprehensive guide to currently open FCA consultations and recent policy/guidance papers.

Forthcoming key legislation

In its November 2017 Regulation round-up the FCA reminded readers that in early 2018 a number of key legislative amendments are coming into effect, as part of a wider programme of changes to collectively enhance the integrity of UK financial services to make markets work well.

The changes happening in early 2018 are:


EU Benchmarks Regulation: The EU Benchmarks Regulation (EUBR) entered into force on 30 June 2016 and most of the provisions will apply from 1 January 2018. It introduces a common framework and consistent approach to benchmark regulation across the EU, aiming to ensure benchmarks are robust and reliable, and to minimise conflicts of interest in benchmark-setting processes.


Revised Markets in Financial Instruments Directive: As noted in the last round-up MiFID II is a major re-working of the framework of European Union (EU) legislation for investment intermediaries that provide services to clients in shares, bonds, collective investment schemes and derivatives (collectively known as ‘financial instruments’) and the organised trading of such. MiFID was originally applied in the UK in 2007. MiFID II aims to improve the functioning of markets in light of the financial crisis, and to strengthen investor protection. The new legislation takes effect from 3 January 2018 and will have far-reaching effects in many areas of firms’ business.


Revised Payment Services Directive: The PSD2 aims to contribute to a more integrated and efficient European payments market, improve the level playing field for payment service providers and promote the development and use of innovative online and mobile payments. It also makes payments safer and more secure and aims to protect consumers by encouraging lower prices for payments. PSD2 governs authorisation and prudential requirements for payment institutions and set the conduct of business requirements for providing payment services.


Insurance Distribution Directive: In December the EU announced an 8-month delay in IDD implementation until October 2018, but still requires the rules to be implemented by member states in February 2018.

Senior Managers and Certification Regime (SMCR)

The FCA also reminded firms that although the final date for implementation of the SMCR is still to be confirmed, it was essential for firms to continue their preparations for the upcoming changes, ahead of the final implementation dates. Consultation papers were also issued in December on the mechanics of the transition of FCA firms and individuals to the new regime (CP17/40) and the specific arrangements applicable for insurers and individuals working in insurance firms (CP17/41).

6. Other Resources

As in earlier bulletins, the above items represent only a selection of key developments in financial risk and regulation over the period.

More comprehensive information is available online, including the following resources which Prism-Clarity uses every day:
A comprehensive portal of regulatory news and analysis covering the UK and Ireland (and thereby the EU)
Contact: Suzanne Charles ([email protected], tel +442076656639)

An independent information source and online community for OTC derivatives professionals globally, providing industry trend analysis, peer commentary and educational resources via articles, podcasts, videos and interactive webinars and webcasts: 15,000 members globally
Contact: Julia Schieffer ([email protected])

Deloitte FS Risk & Regulation Monthly
A comprehensive monthly round-up of key developments in Financial Services Risk and Regulation, from the widely-respected Deloitte EMEA Centre for Regulatory Strategy
Contact: David Strachan ([email protected], tel +442073034791)

Bank of England Prudential Regulation Authority (PRA)
The primary UK prudential regulator: this link contains a valuable source of recent prudential publications and notices

Financial Conduct Authority Regulation round-ups: Sep-17, Oct-17 and Nov-17
The FCA is the primary UK conduct regulator: the above links are to their three latest monthly Regulation round-ups, which summarise key regulatory stories and developments in different financial market sectors

Coffee and Biscuit

Contact Prism-Clarity for further information, including where to get the best advice.