PRA consults on BRRD implementation: Following Treasury's consultation on implementation of the Bank Recovery and Resolution Directive (BRRD) (see FReD 25 July), PRA has now published its proposals. It notes the PRA has limited powers to make rules for financial holding companies and mixed financial holding companies, and no powers to make rules for mixed activity holding companies. The BRRD covers each type of entity, and the PRA consultation envisages it will make rules relating to each. However, Treasury would have to legislate to give PRA additional powers to do this.  The paper covers:

  • preparing, maintaining, and submitting recovery plans: PRA rules will state that firms that are not part of a group subject to consolidated supervision must draw up and maintain individual recovery plans. They will have to update the plans after any material changes (widely defined) and in any event at least annually. For groups subject to consolidated supervision, the European Economic Area (EEA) parent undertaking of the group must draw up and maintain a group recovery plan. Firms must provide the plans within timescales agreed with PRA and notify material changes within one month. PRA has had to make changes to its requirements as a result of the BRRD. These will require firms  to identify critical functions in their plan and to carry out scenario testing of recovery plan options. PRA notes it does not have the power to require individual plans from firms in groups headquartered elsewhere in the EEA and also will not require plans from branches of third country firms operating in the UK but may require sight of a plan which includes an analysis of the UK branch;
  • providing information for resolution planning purposes: PRA will update its resolution rules in the light of the BRRD but does not plan to change its related supervisory statement as there are few practical differences between the PRA's current rules and the BRRD;
  • entering into intragroup financial support (IGFS) arrangements in advance of recovery: PRA rules will implement the conditions for  IGFS arrangements, the terms and conditions for agreements and the need for regulatory approval. The rules will set out the notification requirements on a firm or holding company wishing to use IGFS;
  • notifying the PRA of failure or likely failure: PRA's proposed rules will require firms and qualifying parent undertakings to notify the PRA if its management body considers that:
    • the assets of the firm are, or will be, less than its liabilities;
    • the firm is, or will be, unable to pay its debts or other liabilities as they fall due; or
    • extraordinary public financial support is required; and
  • recognising in the contracts for certain liabilities that they may be subject to bail-in: PRA's rules would require firms and holding companies to include a term in the provisions governing their liabilities by which the creditor recognises that the liability may be subject to the exercise of the bail-in tool by the resolution authority. PRA would in principle introduce the rule from the date bail-in applies, which is scheduled for 1 January 2015. However, it is considering introducing the requirement in two stages, with only some liabilities being covered from 2015 and others from 1 January 2016.

PRA notes that some of its policies and proposals will need review when EBA finalises the various technical measures it needs to produce both before and after the beginning of 2015 when the BRRD takes effect. It also notes that its rules will refer to the EEA, but will apply only in relation to the EU until the BRRD is adopted within the EEA Agreement. The consultation includes five draft instruments, a set of transitional rules and two supervisory statements.  PRA asks for comment by 19 September. (Source: PRA Consults on BRRD Implementation)

PRA and FCA consult on individual responsibility: PRA and FCA have published two joint consultation papers on changes to improve individual responsibility and accountability in the banking sector. The proposals build on the Banking Reform Act and the recommendations of the Parliamentary Commission on Banking Standards.

  • The first paper sets out the new senior managers regime (SMR) for the most senior individuals whose behaviour and decisions have the potential to bring a bank to failure, or to cause serious harm to customers. The regime will not only make these appointments subject to regulatory approval. The new rules will give the regulators better powers to hold senior individuals to account but will also clarify lines of responsibility and require banks to regularly vet their senior managers for fitness and propriety. The SMR would cover not only members of a firm's board but also, for larger and more complex firms, executive committee members (or equivalent), heads of key business areas meeting certain quantitative criteria, individuals in group or parent companies exercising significant influence on the firms’ decision-making, and, where appropriate, individuals not otherwise approved as senior managers but ultimately responsible for important business, control or conduct-focused functions within the firm. Alongside this regime will be a certification regime (CR) under which firms must assess fitness and propriety of staff in positions where the decisions they make could pose significant harm to the bank or any of its customers. These appointments will not be subject to regulatory approval but will require a senior manager to take responsibility for each assessment. The rules will also require firms to carry out these assessments annually. The regulators will prescribe the individuals who fall within the CR. For PRA, it will mainly be "material risk-takers". For FCA, it will be wider, covering also customer-facing roles that are subject to qualification requirements, any individuals who supervise or manage another Certified Person, and any other significant influence function roles under the current Approved Persons Regime not otherwise covered by the SMR, such as benchmark submitters. Finally, the paper proposes statements of high level principle (Conduct Rules) that set out the standards of behaviour for bank employees who fall within the SMR or CR. FCA wants to apply the Conduct Rules to all other employees of relevant firms except staff carrying out purely ancillary functions. These new conduct rules will replace the current Statements of Principle for Approved Persons for firms and individuals to whom they apply. The paper sets out in detail PRA's and FCA's thinking and proposals, and asks several questions.
  • The second paper consults on new remuneration rules.  The main purpose of the rules is to increase the alignment between risk and reward over the longer term. The changes will require firms to defer payment of variable remuneration for a minimum of five or seven years depending on seniority, with a phased approach to vesting. The regulators seek comments on their proposals on the phases and timing of the vesting. Firms will also be able to recover variable remuneration, even if paid out or vested, from senior management if risk management or conduct failings come to light at a later date. FCA is consulting on introducing a similar rule to that just adopted by PRA and described in the following item. The paper also addresses how to address the risk of employees evading malus by changing firms and proposes four options for comment. It then strengthens the existing presumption against discretionary payments where banks have been bailed out. The paper also addresses risk adjustment, disclosure, remuneration of non-executive directors and the need for FCA to review its guidance on sales-based incentives for retail staff in the light of the revised Markets in Financial Instruments Directive (MiFID 2). PRA proposes a new Remuneration Part in its Rulebook.

The regulators ask for comments on both consultations by 31 October and plan to make new rules in early 2015. (Source: PRA and FCA Consult on Individual Responsibility)

PRA makes remuneration clawback instrument: PRA has made the Senior Management Systems and Controls (SYSC) (Remuneration Code - Clawback) Instrument 2014, which will take effect from 1 January 2015 and amends SYSC to specify the remuneration subject to clawback provisions and the circumstances in which the firm must act to recover it. The rules introduce a seven-year minimum period for clawback from the date of award. (Source: PRA Makes Remuneration Clawback Instrument)

PRA updates on Solvency 2: PRA has provided clarifications on some of the issues that insurers are raising as they prepare for the implementation of Solvency 2. As regards the assessment of the availability of group own funds, PRA says insurers must consider both legal and regulatory restrictions on the fungibility and transferability of the relevant own fund items. Own funds of non-insurance undertakings will also be subject to the availability assessment and own funds of third country undertakings should also be assessed in light of the regulatory system of that third country. The update also covers the operation of limits at group level, the matching adjustment and capital requirements arising from firms' employee pension schemes. PRA will consult on transposing Solvency 2 to the PRA Rulebook in August. Later in the year, it will also publish a supervisory statement on the matching adjustment, although the update reminds firms of the earlier announcement that PRA will not prescribe a closed list of eligible assets. The update also clarifies that PRA will assess the eligibility of callable bonds for the matching adjustment on a case-by-case basis. (Source: Update on Solvency 2)