Greg Kilminster
Head of Product - Content
PRA publishes near-final Basel 3.1 policy for credit risk and capital requirements
The Prudential Regulation Authority (PRA) has released a near-final policy statement, PS9/24, on the implementation of the Basel 3.1 standards, which covers credit risk, the output floor, reporting, and disclosure requirements. The policy applies to all PRA-regulated banks, building societies, investment firms, and financial holding companies.
According to the PRA’s latest estimates, the Tier 1 capital requirements for major UK firms will remain nearly unchanged, with an aggregate increase of less than 1% once transitional arrangements conclude in January 2030. The new standards are designed to provide greater certainty on capital requirements, delivering a more balanced and risk-sensitive approach under the Basel 3.1 framework.
The updated rules are expected to support financial stability while fostering growth and competitiveness within the UK. This consideration aligns with the PRA’s new secondary objective focused on growth and competitiveness, now fully in force.
Key adjustments in response to feedback
Following 126 written responses and more than 70 meetings with stakeholders, the PRA has introduced several significant changes to the original proposals, including:
- Lower capital requirements for small and medium enterprises (SMEs): Ensuring no increase in capital requirements, while reducing operational burdens to facilitate lending to SMEs.
- Lower capital requirements for infrastructure exposures: Avoiding any rise in capital requirements for infrastructure projects.
- Lower capital requirements for trade finance-related activities: Retaining the 20% conversion factor for transaction-related contingent items, easing capital requirements for trade finance.
- Simpler approach to residential property valuation: A more risk-sensitive method for valuing residential properties.
- Adjusted output floor calculations: Enhancing consistency with the standardised approaches used by firms without model approval.
Extended implementation timeline
To ensure a smooth transition, the PRA has extended the implementation date for Basel 3.1 standards by six months to 1 January 2026. A four-year transitional period will follow, ending on 31 December 2029, allowing firms ample time to adjust to the new framework.
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ASIC targets misconduct in banking and pensions
The Australian Securities and Investments Commission (ASIC) has released its latest Enforcement and Regulatory Update which outlines ASIC’s regulatory activities and achievements between January and June 2024, highlighting key areas such as consumer protection, financial hardship, superannuation oversight, and anti-scam initiatives.
Some context
ASIC remains one of Australia’s most active regulatory bodies, focusing on maintaining the integrity of the financial system while ensuring fair treatment for consumers. In the period under review, ASIC succeeded in 95% of its civil and criminal prosecutions, resulting in $32.2 million in civil penalties and nine criminal convictions. In addition, ASIC initiated 63 new investigations, commenced 12 new civil proceedings, and completed 550 surveillance activities.
The regulator’s latest enforcement actions continue to target systemic misconduct across a broad range of financial services sectors, including banking, superannuation, and emerging issues such as crypto-assets.
Key takeaways
Financial hardship and lender accountability: ASIC’s review of how 10 major home lenders supported customers in financial distress revealed failures in compliance with hardship obligations. In response, ASIC put lenders “on notice” and has initiated investigations into breaches.
Scam prevention and bank surveillance : ASIC has also turned its attention to the growing issue of financial scams. Following its 2023 review of scam-related activities at Australia’s major banks, the regulator expanded its focus to include 15 smaller banks. The findings are expected to shape ongoing efforts to strengthen anti-scam protections across the financial services sector.
Superannuation fund scrutiny: With superannuation being a key investment for many Australians, ASIC has prioritised ensuring that trustees are managing funds in a way that protects members’ retirement savings. Over the coming months, ASIC will release the findings of its surveillance into superannuation funds’ management of death benefit claims. This follows concerns about trustees’ failure to act in the best interest of members, with ASIC calling for greater accountability and transparency.
Combatting greenwashing: Greenwashing—misleading claims about environmental or sustainable investments—remains a priority for ASIC. The regulator is continuing to investigate and enforce measures to prevent financial institutions from making inaccurate or deceptive statements about their environmental credentials.
Other notable enforcement outcomes: Key court actions in the first half of 2024 included a $10 million penalty imposed on Macquarie Bank for failing to monitor third-party fee withdrawals from customer accounts and significant penalties against Westpac for unconscionable conduct in a complex interest rate swap transaction. ASIC has also been testing legislation concerning crypto-assets, with recent enforcement actions aiming to clarify when these products fall under the regulated financial services framework. A significant victory was achieved against BPS Financial Pty Ltd in May, highlighting the regulator’s proactive stance on emerging financial products.
Next steps
ASIC has made it clear that it will continue to focus on enforcement and regulatory interventions to safeguard consumer interests. In the coming months, the financial services sector can expect further developments, including:
- The release of findings from ASIC’s superannuation death benefits review.
- Ongoing scrutiny of greenwashing claims, with potential legal actions to ensure compliance.
- Continued efforts to address financial scams, particularly in smaller financial institutions.
- Further investigations into breaches of hardship obligations by lenders, which may lead to more significant enforcement actions.
ASIC’s priority remains to ensure a strong, fair, and efficient financial system. As cost-of-living pressures continue to affect consumers, the regulator is particularly focused on protecting vulnerable Australians from financial exploitation and misconduct.
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OCC takes action against Wells Fargo for AML program failures
The Office of the Comptroller of the Currency (OCC) has issued an enforcement action against Wells Fargo Bank in the form of a formal agreement.
This action was taken due to deficiencies identified by the OCC in the bank's anti-money laundering (AML) internal controls and financial crimes risk management practices, as well as violations of various laws, rules, and regulations, including those relating to the internal controls pillar, suspicious activity reporting, customer due diligence, customer identification program, beneficial ownership, currency transaction reporting, and the travel rule.
As part of the formal agreement, the bank is required to take comprehensive corrective actions to strengthen its Bank Secrecy Act/anti-money laundering and US sanctions compliance programs. This includes establishing a compliance committee and submitting an action plan outlining the remedial actions necessary to achieve and maintain compliance.
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SRB releases report on resolution planning for LSI
The Single Resolution Board (SRB) has released its second report on resolution planning and crisis management for less significant institutions (LSIs), focusing on the 2023 resolution planning cycle (RPC). The report outlines the progress LSIs have made in terms of minimum requirements for own funds and eligible liabilities (MREL) and resolvability and looks at sector trends, such as the emergence of digital-only banks.
Some context
LSIs, with the exception of cross-border LSIs, are under the direct responsibility of national resolution authorities (NRAs), with SRB oversight. As part of its oversight role, the SRB ensures consistent application of resolution standards and promotes a level playing field across LSIs and banks.
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NZ FMA publishes ethical investing disclosure report
The New Zealand Financial Markets Authority (FMA) has issued a report highlighting the outcomes of its targeted supervision efforts, focusing on whether ethical investing claims are accurately reflected in product disclosures and advertising.
Key takeaways
Disclosure inconsistencies
One of the major findings of the FMA's review was the persistence of confusing or inconsistent disclosures across the ethical investment landscape. In its examination of 10 MIS schemes, the FMA identified multiple instances where product disclosure statements (PDS), statements of investment policies and objectives (SIPO), and responsible investment policies lacked sufficient detail. Common issues included:
- Using ethical labels without clarifying the applied ethical strategy.
- Vague descriptions of ethical scoring systems, leaving investors unsure about their actual role in investment decisions.
- Unclear procedures for addressing assets that no longer comply with ethical criteria.
However, there were also examples of good practices. Some issuers clearly stated where detailed information could be found, cross-referencing documents like the SIPO to ensure investors could access comprehensive strategies. Transparency around any changes in investment policies was another positive step.
Advertising and reporting issues
In several cases, ethical claims made in advertisements did not align with the SIPO or responsible investment policies, potentially confusing investors. Issues included failure to report on carbon offset targets or engagement with invested companies, which had been prominently advertised.
The FMA's intervention resulted in improvements to these areas, including the voluntary withdrawal of misleading advertisements. Some managers enhanced transparency by publishing lists of excluded companies and providing voting reports when shareholder voting was part of their strategy.
Asset compliance in MIS funds
The FMA also reviewed the assets held by certain MIS funds to verify whether they complied with the managers' ethical exclusion policies, such as prohibitions on investments in tobacco, controversial weapons, or fossil fuels. While most managers could justify their asset choices, a few elected to divest holdings to eliminate any doubts about compliance.
The FMA acknowledges the complexity of verifying sector exclusions, noting that different data providers may offer conflicting information. This underscores the need for robust systems to ensure investments genuinely reflect ethical claims.
Next steps
The FMA intends to continue its supervision of ethical investment practices, with a focus on improving the quality of disclosure. Issuers will be expected to align their advertising and reporting with their stated ethical strategies, ensuring clarity and transparency for investors.
Regulatory powers may be used where conduct is found to be misleading or deceptive, or where advertising causes confusion. Issuers are advised to ensure that any omissions in disclosure do not leave investors without essential information.
Green and sustainability-linked bonds
The FMA has also responded to market demand for streamlined issuance of green, social, sustainability, and sustainability-linked (GSSS) bonds. A proposed class exemption may allow certain bonds to be issued without full disclosure, provided they are similar to existing bonds on the market. The FMA is currently reviewing feedback from its public consultation on this proposal and expects a final decision by 2025.
Climate-related disclosures
In its role as the regulator of the climate-related disclosures (CRD) regime, the FMA is taking an educative approach during the early stages of implementation. The first climate statements were submitted in April 2024, and the FMA will provide feedback to help climate reporting entities (CREs) improve future disclosures. A monitoring report is expected in November 2024.
Future regulatory trends
As ethical and sustainable investing grows, national and international trends are moving towards clearer definitions and standardised frameworks. The FMA will monitor developments in this space, including the Sustainable Finance Taxonomy currently being developed by New Zealand’s Ministry for the Environment. This taxonomy aims to help investors more easily identify sustainable activities, potentially influencing future ethical investment practices.
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