BoE and PRA consult on structural reform: BoE and the Prudential Regulation Authority (PRA) have published a set of papers proposing changes to improve the resilience of the UK financial system. The papers are:

  • A consultation paper on implementing ring-fencing: banks that meet the threshold for the ring-fencing requirement (having core deposits of more than £25 billion) (RFBs) must submit a preliminary plan of their likely legal and operating structures to PRA by the end of 2014. This paper sets out PRA's policy proposals relating to:
    • the legal structure arrangements of banking groups that are subject to ring-fencing: PRA proposes that RFBs should not own or be owned by entities that carry on excluded or prohibited activities;
    • governance arrangements for RFBs: PRA proposes standards of governance, risk management, internal audit and human resources policies to ensure an RFB can take decisions independently of other group members; and
    • arrangements that will ensure continuity of services and facilities to RFBs: PRA proposes rules that will allow RFBs to receive services and facilities from within their group and from third parties and will mitigate the risks of RFBs being unable to perform core services if other group entities fail.
  • A consultation paper on depositor protection: some of the changes proposed are necessary to implement the Directive on Deposit Guarantee Schemes, namely:
    • ex-ante funding of the Financial Services Compensation Scheme (FSCS), although the funds collected from the UK bank levy would be accessible with PRA approval;
    • extending protection to most large corporate depositors;
    • protection for temporary high balances, for example those resulting from property sales, which would be covered for up to six months for a sum of up to £1 million. This extended coverage would mean consequential changes to firms' customer information materials; and
    • reduction in payout deadlines to seven working days. 

Other changes relate to the UK's single customer view (SCV) regime. Firms would have to produce the SCV file within 24 hours and the opt-out from the regime for firms with fewer than 5,000 eligible accounts will no longer be available. Finally, PRA aims to introduce rules on separation between eligible covered and uncovered balances and on priority of payout for more easily accessible accounts. The aim of ensuring continuity of access by facilitating transfer of covered deposits to another financial institution.

  • A consultation paper on policyholder protection: the proposals are to extend the maximum FSCS protection (100% and no cap on maximum amount of compensation) to claims made under professional indemnity insurance, death or incapacity insurance (including the pure protection element in certain savings products) or annuities. The paper also consults on the cover of policyholders of successor firms and on the operation of the FSCS following an insurer's default. 
  • A discussion paper on ensuring operational continuity in resolution: this paper covers all banks, building societies and investment firms regulated by PRA, regardless of size, although any rules that result will apply proportionately. PRA proposes measures to ensure deposit-taking and critical functions can continue effectively following a firm's failure. The paper looks at arrangements for critical shared services (which support one or more of a group's entities or business units), where those services provide or support critical economic functions (functions whose discontinuation would lead to disruption of vital services). PRA has set out design principles that set out the necessary outcomes and assessment criteria to help firms decide whether they comply. PRA says none of its proposals would replace any of its existing rules or expectations.

PRA asks for comment on all papers by 6 January 2015. (Source: BoE and PRA Consult on Structural Reform

FPC asks for powers of direction over LtI and LtV ratios: The Financial Policy Committee (FPC) has responded, in the course of its latest policy meeting, to the Chancellor's request for recommendations on the powers FPC would need to guard against risks in the housing market. It is proposing that Parliament grants it powers to direct PRA and FCA on placing limits on both owner-occupied and buy-to-let mortgage lending by reference to loan-to-value (LtV) or loan-to-income (LtI) ratios. At the same policy meeting FPC decided to maintain the countercyclical buffer at 0%, while noting that Sweden and Norway are currently applying a 1% that will be relevant to UK-regulated firms with exposures in those jurisdictions. It also noted that its past recommendations on interest rate stress tests when assessing debt affordability and on enhanced disclosure have now been implemented, and that its concerns about cyber security are also being addressed. The statement of the policy meeting also attaches a letter in which FPC expresses its support to the current level of house price cap and lender fee under the Help to Buy Scheme. (Source: FPC Statement From its Policy Meeting - September 2014