Greg Kilminster
Head of Product - Content
PRA issues batch of banking capital consultations
The UK’s Prudential regulatory Authority has published a package of banking capital consultation papers including proposals that would significantly simplify the capital regime for Small Domestic Deposit Takers (SDDTs); proposals to streamline the Pillar 2A capital framework and capital communications process; plans to restate Capital Requirements Regulation (CRR) provisions on the definition of capital into the PRA Rulebook and plans to update and streamline the UK’s policy framework for capital buffers. We look at each consultation below.
This framework seeks to enhance the regulatory environment for smaller UK banks and building societies, reducing unnecessary complexity while ensuring the stability of these firms and the broader financial sector.
Background
The Strong and Simple Framework was first proposed in DP1/21, reflecting the PRA’s intention to design a simplified prudential regime for non-systemic firms. This initiative aims to maintain resilience among small banks and building societies while encouraging competition within the UK banking sector.
The process has evolved through subsequent consultations. CP5/22 outlined the initial criteria for firms eligible for the SDDT regime, which was further refined in CP16/22 and finalised in Policy Statement PS15/23. The PRA is now focused on implementing the proposed simplified capital requirements specifically for SDDTs, which are covered in this latest consultation.
Proposed simplifications
The key proposal in CP7/24 is a simplified capital regime tailored for SDDTs. This includes streamlined Pillar 1 capital requirements, along with proportionate Pillar 2A capital buffers, which would be set on an individual and consolidated basis where applicable.
Additionally, the PRA suggests implementing a non-cyclical stress test framework and simplified capital deductions rules, aimed at reducing the regulatory burden on smaller firms. This approach should allow SDDTs to meet essential prudential standards without being subject to the full complexity of the Capital Requirements Regulation (CRR).
Impact on mutuals
The PRA notes that the impact of these proposals on building societies, which represent the mutual sector within the SDDT regime, would be similar to that on banks with a similar business model. However, the benefit of more predictable capital requirements may be particularly valuable to mutuals, given the constraints they face in raising and distributing capital.
Implementation timeline
The PRA proposes that the simplified capital regime for SDDTs take effect from 1 January 2027. This extended timeline is intended to allow firms sufficient time to adapt to the new rules and to ensure a smooth transition.
The PRA also invites feedback from stakeholders on the proposed changes by 12 December 2024.
CP 8/24: Definition of Capital: restatement of CRR requirements in PRA Rulebook
CP8/24 details the PRA’s plans to restate Capital Requirements Regulation (CRR) provisions on the definition of capital into the PRA Rulebook. This is part of a broader regulatory transition following the Financial Services and Markets Act (FSMA) 2023, which allows the PRA to revoke and replace EU-derived regulations like CRR with UK-specific rules.
Restatement of CRR provisions
The PRA proposes to restate most of the existing CRR requirements without substantive changes, ensuring continuity in capital definitions and preserving the existing prudential framework. These rules relate to the definition of own funds, which are synonymous with regulatory capital.
Minor adjustments for proportionality and transparency
The PRA also proposes seven policy adjustments aimed at improving proportionality and transparency in how capital rules are applied:
- Proposal 1: Restating existing requirements with minimal changes to ensure alignment with UK-specific regulation.
- Proposal 2: Introducing proportionality in the Pre/Post-Issuance Notification (PIN) regime, easing compliance for frequent issuers of Common Equity Tier 1 (CET1) instruments.
- Proposal 3: Including interim profits in CET1 capital resources, streamlining processes for firms.
- Proposal 4: Reducing additional Tier 1 (AT1) and Tier 2 capital instruments to increase flexibility for capital planning.
- Proposal 5: Clarifying the treatment of non-CET1 shares in the capital framework.
- Proposal 6: Requiring PRA permission for additional forms of capital reduction.
- Proposal 7: Allowing CET1 instruments to include provisions for future capital reductions without committing to them.
Implementation and impact
The proposed changes are set out in the following draft policy documents:
- Amendments to the Own Funds and Eligible Liabilities (CRR) and Definition of Capital parts of the PRA Rulebook.
- A new statement of policy on the PRA’s approach to waivers and permissions under Own Funds (CRR).
- Updates to Supervisory Statement (SS) 7/13 – Definition of Capital.
The PRA expects these changes to reduce administrative burdens and compliance costs for firms, particularly those that frequently issue CET1 instruments, such as for employee share programs. Additionally, the proposals are intended to clarify and simplify requirements, enhancing proportionality in the regulation of regulatory capital.
Next Steps
The consultation closes on 12 December 2024, with the PRA inviting feedback from affected firms. The proposed rules are part of a broader effort to transition from EU-derived regulations to a UK-specific regulatory framework following the FSMA 2023 reforms.
CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process
CP9/24 outlines the PRA’s proposals to streamline the Pillar 2A capital framework and capital communications process. These changes are relevant to all PRA-regulated banks, building societies, designated investment firms, and holding companies, including Small Domestic Deposit Takers (SDDTs).
Key proposals
The consultation sets out three main areas of reform:
- Retiring the refined Pillar 2A methodology
The PRA plans to retire the 'refined methodology' introduced in 2017 for Pillar 2A capital requirements. This change is aimed at simplifying the existing approach for firms and aligning it with other recent capital reforms. The revised framework will remain in place until the broader review of Pillar 2A methodologies, expected after the finalisation of the Basel 3.1 standards, is completed.
- Streamlining capital communications
The PRA is proposing to simplify the way firm-specific capital requirements are communicated, including the use of Voluntary Requirements (VReqs) and directions under the Financial Services and Markets Act (FSMA). This would involve changes to the PRA Rulebook, the UK Leverage Ratio Framework, and capital reporting processes to improve efficiency and reduce administrative complexity for firms.
- Clarifying Pillar 2A approaches to risk
Minor clarifications are proposed for the calculation of interest rate risk in the banking book (IRRBB) and pension obligation risk under Pillar 2A. These updates are intended to ensure consistency and clarity in how these risks are addressed within firms' capital assessments.
- Impact on firms
The PRA’s proposals are designed to reduce complexity without changing the underlying requirements for firms. The retirement of the refined Pillar 2A methodology will be implemented alongside the Basel 3.1 standards on 1 January 2026, except for SDDTs, which will have a later implementation date of 1 January 2027, subject to the outcome of separate consultations.
The simplified capital communications process is expected to take effect from 31 March 2025 and will apply to firms when their Pillar 2 capital is next reset. This should streamline the process of capital setting, especially for firms undergoing the off-cycle review as part of Basel 3.1 implementation.
Next steps
The PRA is seeking feedback on these proposals by 12 December 2024, with the final rules expected to come into force in 2025 and 2026, depending on the nature of the changes.
CP 10/24: Updates to the UK policy framework for capital buffers
CP10/24 outlines the PRA’s plans to update and streamline the UK’s policy framework for capital buffers. These proposals come as part of a broader initiative to transfer regulatory responsibilities from assimilated EU law to UK regulators following the Financial Services and Markets Act (FSMA) 2023.
Proposed changes to regulatory framework
The current UK framework for capital buffers is largely based on retained EU legislation. Key buffers include the Countercyclical Capital Buffer (CCyB), Capital Conservation Buffer (CcoB), and buffers for Global and Other Systemically Important Institutions (G-SII and O-SII), as well as the Systemic Risk Buffer (SRB). Under the new framework, the PRA will take on greater responsibility for these buffers, removing elements of regulatory material from the statute book and incorporating them into the PRA’s policy materials.
The PRA's proposals are aimed at simplifying its policy documents without altering the overall regulatory approach. This would allow for more agile updates, avoiding the need for primary or secondary legislation.
Specific proposals
The key changes outlined in CP10/24 include:
- Revoking the UK Technical Standards (UKTS) on G-SII identification methodology and replacing it with a new PRA Statement of Policy (SoP) on the subject.
- Minor updates to existing PRA policies for O-SII designation and buffer settings.
- Amendments to PRA rules that currently reference outdated CBR regulations.
HM Treasury is also consulting on further amendments to the capital buffer framework, including changes to the scope of the CCyB and CCoB. These amendments would formally transfer responsibility for setting buffer parameters to the PRA.
Impact on firms
The PRA emphasises that the proposed changes will not affect the underlying policy on capital buffers, and firms should not experience additional compliance costs. The revisions are intended to enhance the clarity of existing rules rather than impose new requirements.
These changes are particularly relevant to UK banks, building societies, and investment firms, as well as their parent companies and subsidiaries. However, credit unions are excluded from the scope of the consultation.
Next steps
The PRA is seeking feedback on the proposals by 12 December 2024. Implementation is expected in Q2 2025, once HM Treasury’s statutory instrument comes into force.
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PRA issues supervisory statements
The Prudential Regulation Authority’s (PRA’s) has published two supervisory statements.
Supervisory statement 3/24 Credit risk definition of default
This SS is aimed at providing greater clarity on its expectations regarding the application of the definition of default. The SS applies to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial or mixed financial holding companies.
Supervisory statement 4/24 Credit risk: Internal ratings based approach
This SS outlines the PRA’s expectations regarding the application of the Internal Ratings Based (IRB) approach for calculating credit risk risk-weighted assets. The guidance applies to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or designated financial or mixed financial holding companies.
The IRB approach allows firms to use their internal models for assessing credit risk, subject to PRA approval under the relevant rules of the Credit Risk: Internal Ratings Based Approach (CRR) Part of the PRA Rulebook. The PRA grants permission to firms that demonstrate material compliance with these requirements, ensuring that the internal models are appropriately conservative.
The SS clarifies that the responsibility for ensuring compliance with the CRR and PRA rules, as well as maintaining conservatism in internal models, lies with firms themselves. The PRA expects that firms using the IRB approach adopt an appropriately conservative stance in calculating regulatory capital requirements, in line with the authority's broader supervisory objectives.
Both near-final versions of these statements are effective from 1 January 2025.
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FCA issues occasional paper on impact of communication timing on pension customers
The Financial Conduct Authority (FCA) has released occasional paper 65, which presents research findings on the influence of communication timing on pension customers’ engagement. The paper supports the FCA’s ongoing efforts to help firms better assist pension savers throughout their consumer journey.
Some context
Occasional papers provide research results and aim to stimulate debate. Even though these may not be the FCA’s official position, they serve as supporting evidence that the FCA can use to inform its views.
Key takeaways
Research parameters: The research involved:
- Three experiments to test how different email subject lines and messages could impact engagement and understanding of pension-related communications.
- A field trial with over 82,000 pension customers from two providers to assess whether sending emails at significant touchpoints would encourage recipients to open and click through to free financial guidance.
Findings: The results indicate that:
- Engagement with emails was low. While around 42-55% opened the emails, just 1-7% clicked through to ‘call-to-action’.
- Older customers were more likely to engage overall, but no key life point was particularly effective at increasing engagement overall.
- Following up with those already somewhat engaged with their pensions was more promising in driving further engagement and use of online services.
Next steps
Based on these research results, firms are encouraged to explore innovative approaches to communicate with consumers about their pensions. The research also highlights the importance of pre-testing communications to ensure they have the desired impact and do not inadvertently discourage consumers.
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TD Bank to pay $28 million for inaccurate credit reporting
The Consumer Financial Protection Bureau (CFPB) has ordered TD Bank to pay $28 million in penalties and redress following the discovery of widespread errors in the bank’s reporting of customer information to consumer credit agencies. The failures, which affected tens of thousands of consumers, were found to have significantly harmed individuals by providing inaccurate data on credit card delinquencies and personal bankruptcies, as well as sharing false information related to fraudulent accounts.
Inaccurate credit reporting
The CFPB’s investigation revealed that TD Bank had been repeatedly sharing incorrect and damaging information about its customers with consumer reporting agencies. The errors primarily concerned credit card accounts and bank deposits, with some reports containing inaccuracies about serious financial matters such as bankruptcies and delinquencies. Even after recognising the issue, TD Bank delayed correcting the errors, in some cases for over a year.
The inaccuracies affected the credit profiles of thousands of consumers, limiting their ability to access credit, housing, and employment opportunities. The bank’s failure to promptly address these problems led to a violation of both the Fair Credit Reporting Act (FCRA) and the Consumer Financial Protection Act (CFPA).
Fraudulent account data
The investigation also found that TD Bank continued to furnish incorrect information about bank accounts that it suspected or knew to be fraudulent. As early as January 2022, TD Bank identified hundreds of thousands of deposit accounts that were either confirmed or suspected to be opened fraudulently. Despite this knowledge, by April 2023, the bank had not taken adequate steps to ensure that the information shared with consumer reporting agencies was corrected. Consequently, many consumers’ credit reports reflected false, derogatory information, further damaging their credit scores.
Failure to investigate consumer disputes
TD Bank also failed to investigate consumer disputes properly. The CFPB found that the bank lacked adequate processes for handling disputes over credit reporting errors and had diverted resources away from addressing these issues. In some cases, no investigation was carried out at all. The bank’s handling of disputes was deemed insufficient, failing to meet legal requirements to resolve discrepancies in a reasonable and timely manner.
Regulatory action
As part of the enforcement action, TD Bank has been ordered to pay $7.76 million in redress to tens of thousands of affected consumers. Additionally, the bank must pay a $20 million civil money penalty.
Broader implications
TD Bank’s actions have raised concerns about the handling of consumer data by large financial institutions, especially in a regulatory landscape where accurate credit reporting is vital for consumers to access credit, housing, and employment. The CFPB’s decision should act as a reminder of the importance of robust internal controls and prompt responses to consumer disputes, particularly in a time when financial data plays a critical role in personal and economic stability.
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EIOPA explores key industry trends in contribution to Eurofi magazine
The European Insurance and Occupational Pensions Authority (EIOPA) has published various contributions made for the September edition of the Eurofi magazine on a range of topics.
Some context
The Eurofi Views magazine, published twice a year, features insights from a diverse range of public, private, and civil society representatives. The articles explore Europe’s macroeconomic challenges and their implications for the financial sector, key industry trends such as digitalisation and sustainable finance, and issues related to financial stability and environmental risks. They also provide in-depth analysis of the major policy proposals made in the different sectors, assessing their potential impact on the industry, its clients, and the broader economy.
Key takeaways
The articles published by EIOPA cover the following topics:
Economic challenges, policy, and regulation priorities
- How addressing pensions gaps could help further develop Europe’s capital markets
- Priorities for the next political cycle
- Insurance Nat Cat protection gaps – A multidimensional approach
Digitalisation and technology
- The future of cloud computing and AI in the EU insurance Sector
- The EU’s data and AI landscape for insurance: a work in progress
CMU future steps
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Australia bans use of predictive genetic test results in life insurance underwriting
The Australian Treasury has announced a ban on the use of predictive genetic test results in life insurance underwriting. The ban will ensure that all Australians can benefit from this technology, and consumers will still have the option to disclose a favourable genetic test result.
The government sought input earlier this year on how to address genetic discrimination in life insurance, receiving over 1000 submissions. An overwhelming 97% of these submissions supported a total ban. The ban will be reviewed every five years to avoid unintended consequences.
Christine Cupitt, Chef Executive Officer of the Council of Australian Life Insurers, expressed full support for this announcement. She believes it will benefit working Australians, the government, and the industry. In her statement, she recognised that while Australia’s life insurers established a related industry standard in 2019, genetic testing is now becoming more common, cheaper, and increasingly helping people manage or even avoid hereditary conditions. "Now is the time for strict government regulation," she added.
She also welcomed the 5-year review of the legislation, which "will be essential to ensuring the law keeps pace with advancements in genomic science and the way genetic tests are used in the future."
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EIOPA issues staff paper on PEPP reform
The European Insurance and Occupational Pensions Authority (EIOPA) has published a staff paper on the Pan-European Personal Pension Product (PEPP). This paper proposes reforms to address the obstacles that have hindered its widespread adoption.
Some context
The PEPP is a voluntary personal pension scheme designed to offer European Union (EU) citizens an additional option for retirement savings alongside state-based and occupational pensions. Introduced by the PEPP Regulation in March 2022, it offers similar benefits to other personal pension products and allows mobile workers to transfer their savings when relocating to another EU Member State.
However, its adoption in the EU has been limited so far, both from the supply and demand perspectives.
Key takeaways
The staff paper:
- Explores the need for such a product.
- Examines the reasons for the PEPP’s limited success on both the supply and demand sides.
- Proposes solutions to enhance the PEPP, encompassing actions to be taken on the supply and demand sides, as well as potential measures at the national and EU-wide levels.
Next steps
EIOPA plans to actively contribute to the evaluation of the PEPP Regulation by the European Commission scheduled for 2027.
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MAS consults on regulation amendments to enhance resolution powers for the insurance sector
The Monetary Authority of Singapore (MAS) has issued a consultation paper proposing amendments to the Financial Services and Markets (Resolution of Financial Institutions) Regulations 2024 (FSM RFI Regulations) to enhance resolution powers for the insurance sector.
Some context
On 29 September 2023, MAS consulted on proposals to acquire statutory bail-in powers for the insurance sector and set a maximum duration of two business days for stays on reinsurers' rights to terminate coverage after the start of resolution. After reviewing the feedback, MAS is now seeking input on related amendments to the FSM RFI Regulations.
Key takeaways
- Extension of the statutory bail-in regime: MAS proposes to extend its statutory powers to carry out the bail-in of liabilities to the insurance sector.
- Termination rights: MAS proposes to introduce a new regulation prescribing a maximum duration of two business days for stays on reinsurance contracts.
Next steps
The deadline for feedback is 11 October 2024.
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