Risk & Regulation Round-up January to April 2018

This is the latest round-up in the series covering key announcements and developments in UK financial risk and regulation. I take my usual summarised and simplified approach to the main stories, but as always the regulators have been very busy.

A significant development for some of my clients and readers was the announcement by the Basel Committee of key changes to the Fundamental Review of the Trading Book (FRTB), the proposed revamp of the rules on market risk capitalisation of the trading book, which have been in development and consultation for some years: now due for implementation in 2022. See section 1.

Elsewhere, Fintech planning loomed large in the minds of regulatory and government agencies, especially but not only the European supervisory bodies. In similar vein but more broadly, Bank of England Governor Mark Carney made a thoughtful speech on the future of money in the light of the crypto-currency revolution. See section 2.

The topics mentioned here are just key highlights – see the detailed sections for more stories. See individual articles in this blog for links to underlying source stories or documents.

*** 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. Basel and FSB announcements

Fundamental Review of the Trading Book

For the second quarter in a row the Basel Committee on Banking Supervision (BCBS) came up with a very significant announcement. Following the final Basel III wrap-up last year, reported in the last quarterly round-up, this time the big news was a consultation dealing with important changes to the FRTB. The main changes were to the controversial ‘P&L attribution’ tests to determine whether an internal models approach (IMA) to regulatory capital would be allowed or not for individual desks. Other changes involved recalibrated risk weights for the standardised sensitivity-based approach (SBA) for certain asset classes; an alternative simplified method for banks not wanting to implement the new SBA rules in full; and a request for evidence on why the non modellable risk factors (NMRF) approach in the currently proposed rules does not work.

Later, a speech from BCBS Secretary General William Coen, The market risk framework: 25 years in the making took a long view back over the Basel market risk framework: why it needed revising, why the revisions have taken so long, and how the new framework might get completed in a timely manner.

FSB work on misconduct

THe Financial Stability Board published two documents relating to its ongoing work on conduct, or rather on mitigating misconduct, in financial institutions. One was supplementary guidance on the FSB’s principles and standards on sound compensation practices and the use of compensation tools to address misconduct risk. The other was a toolkit to mitigate misconduct risk, a set of 19 tools which firms and supervisors can use to help them identify and address misconduct in their domains.

Other BCBS and FSB publications during the period

See the BCBS publications page and the FSB publications index for indices of other announcements by the Basel Committee on Banking Supervision and the FSB during the period. [See also the ‘Fintech’ heading below.]


2. European supervisory announcements


Several European and other supervisory and governmental agencies issued papers or made announcements on the topic of financial technology innovation (aka Fintech) during the period.

The EBA published a FinTech Roadmap, which highlighted the EBA’s Fintech priority areas for 2018/2019. These included issues related to the regulatory perimeter, innovation facilitators, the impact of Fintech on business models and prudential risk, cybersecurity, consumer protection and conduct, and Anti-Money Laundering (AML)/Combating the Financing of Terrorism (CTF).

The European Commission also published a Fintech Action Plan, a set of 19 separate initiatives concentrating on three broad themes: (i) enabling innovative business models to reach EU scale; (ii) supporting the uptake of technological innovation in the financial sector; and (iii) enhancing security and integrity of the financial sector. The plan concluded that in such a fast-moving environment, overly prescriptive and precipitous regulation carries the risk of undesired outcomes. But there are also risks that out-of-date policy and regulation may put EU firms at a disadvantage globally; and the possibility that key risks (notably cyber-security) will not be addressed unless the regulations are updated.

Finally: although not European supervisory agencies as such, (i) the BCBS issued a practice note Sound Practices: implications of fintech developments for banks and bank supervisors, and (ii) the UK Treasury weighed in with its own FinTech strategy.

Crypto-currencies and money

The three European supervisory authorities (EBA, ESMA and EIOPA) issued a joint warning to EU consumers regarding the risks of buying virtual currencies citing the lack of a regulatory framework and consumer protection as reasons for virtual currencies being unsuitable as investment or savings products.

Elsewhere Bank of England Governor Mark Carney made a thoughtful speech on the future of money. He explained that although crypto-assets do not fulfil the traditional role of money, they still represent a risk to both financial stability and consumer protection, and accordingly should be required to fulfil the same regulatory standards as the rest of the financial system.

Other European priorities

High on the European supervisory priority list is the issue of non-performing loans (NPLs). Daniele Nouy, Chair of the Supervisory Board of the ECB noted in a speech in Frankfurt that NPLs remain a continuing challenge for European banking supervisors, while the EC published a proposal for statutory prudential provisioning backstops for newly non-performing loans. The EBA also consulted on NPL disclosure guidelines.

Separately the Commission also published an action plan on financing sustainable growth. The EC proposes to incorporate sustainability into prudential requirements, to develop a unified EU classification system for the definition of sustainability, and to create an EU “green label” for financial products deemed sustainable.

Elsewhere, at a conference in Frankfurt in January, two senior banking supervisors made key remarks on the finalisation of Basel III: Andrea Enria, European Banking Authority Chair, and Stefan Ingves, Chair of the BCBS. The title of the conference was “Basel III: Are We Done Now?” The answer, judging from the senior supervisors’ remarks, is “probably not quite”.

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

Meanwhile, please approach Prism-Clarity if you need specific information on any European activities or publications that have not been covered in this bulletin.

3. PRA and FCA announcements

The Bank of England Prudential Regulation Authority (PRA) website page What’s New: as at May 2018 summarises the PRA rules that are currently out for consultation and due for implementation. Similarly, see this link for a guide to currently open FCA consultations and recent policy/guidance papers.

2018-19 Business Plans

Both the Prudential Regulation Authority and the Financial Conduct Authority published their 2018-19 business plans. Across the two plans there was a understandable focus on a few key themes: Brexit, Fintech, insurer solvency rules, MiFID, culture, management accountability and pensions.

Stress testing

The Bank of England published key elements of its 2018 stress test for the UK banking system. The stresses applied to the economic and financial market prices and measures of activity will be unchanged, but banks will be expected to complete the stress test using the new IFRS9 approaches to credit provisioning and loss absorbency.

PRA technical papers

At the end of April the PRA took the opportunity to publish a whole raft of technical papers and supervisory statement updates covering topics from its supervisory approach to Pillar 2 capital, ICAAP and SREP, Model Risk principles for stress testing, and its approach to supervising liquidity and funding risks.

As always, a good source to catch up on PRA technical publications is its monthly prudential regulatory digest, listed in the Other Resources section at the foot of this blog.

FCA publications on culture

The FCA published a discussion paper on Transforming Culture in Financial Services, “to provide a basis for stimulating further debate on transforming culture in the sector.” The paper presented a variety of views from academics and industry thought leaders, and reaffirmed the FCA’s prioritisation of culture and governance, highlighting the regulator’s continuing focus on individuals as well as firms, and suggesting four main drivers of culture in firms: their business purpose, their leadership, their approach to compensation and management of staff, and their governance arrangements. Meanwhile the FCA also published a speech by CEO Andrew Bailey, which focused on the key role of the new SMCR and remuneration rules in mitigating poor conduct by firms and individuals going forward.

4. Brexit

Draft withdrawal agreement and Chancellor’s speech

The EU and the UK agreed in principle to have a transition period as part of the proposed draft withdrawal agreement. Also the Chancellor gave a speech on Brexit and financial services in which he outlined his ideas on what a future EU-UK trade deal should look like regarding the mutual recognition of financial services. Especially relevant, he thought the UK should be allowed to achieve ‘equivalence’ in financial services rules in different ways to those arrangements currently applied to other countries that have market access to the EU for financial services.

5. 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)

The Prudential Regulation Authority, a division of the Bank of England, is the primary UK prudential regulator: the links below are to its four latest monthly Regulatory digests, which summarise key prudential developments in different financial market sectors:
January 2018
February 2018
March 2018
April 2018

The Financial Conduct Authority is the primary UK conduct regulator: the links below are to its four latest monthly Regulation round-ups, which summarise key regulatory conduct developments in different financial market sectors:
January 2018
February 2018
March 2018
April 2018

Coffee and Biscuit

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