Greg Kilminster
Head of Product - Content
BoE publishes resolvability assessment of major UK banks
The Bank of England (BoE) has released the findings of its second assessment of the resolvability of the eight major UK banks under the Resolvability Assessment Framework (RAF). This evaluation forms part of a broader initiative to ensure that these banks are prepared for potential resolution scenarios, safeguarding financial stability and minimising the need for public bailouts.
Some context
The RAF was introduced post-global financial crisis to ensure that banks could be resolved without resorting to taxpayer-funded bailouts. The eight banks under this framework include Barclays, HSBC, Lloyds Banking Group, Nationwide, NatWest Group, Santander UK, Standard Chartered, and Virgin Money UK. This second assessment follows the inaugural evaluation conducted in 2022, reflecting ongoing efforts to embed resolvability into daily banking operations.
Key takeaways
- Progress in resolvability
The assessment indicates that the major UK banks have made significant strides in improving their resolution preparedness. The banks have worked to integrate resolution planning into their business models, ensuring they can manage potential failures without destabilising the financial system. Notably, the Bank's handling of Silicon Valley Bank UK in March 2023 highlighted the effectiveness of current resolution frameworks.
- Areas for further improvement
While progress has been substantial, the assessment also identified new areas for improvement. The detailed review, particularly focused on Adequate Financial Resources, uncovered specific issues that need addressing. These issues vary among the banks, reflecting their unique structures and business models. The BoE expects these banks to prioritise resolving these issues and continuously enhance their resolvability capabilities.
Other areas noted for improvement were as follows.
- There is significant variation in the quality of firms' data and documentation for decision-making during a resolution.
- Firms need to improve their capabilities for conducting timely and robust resolution valuations.
- More work is needed in restructuring planning, focusing on effective and timely execution during a resolution.
- Future assessments and focus areas
The next RAF assessment, scheduled for 2026-27, will emphasise the Continuity and Restructuring outcome. This will involve evaluating banks' readiness to plan and execute restructuring options effectively, ensuring they can address the causes of failure and restore viability. In preparation, the BoE will engage with the banks to refine their resolution capabilities further.
Next steps
- Regulatory adjustments
To facilitate ongoing improvements, the Prudential Regulation Authority (PRA) will consult on extending the timeline for the third RAF assessment by one year. This adjustment aims to give banks and regulators more time to enhance and test their resolution capabilities.
- Continued engagement
The BoE will maintain close collaboration with the major UK banks, focusing on addressing the issues identified in the recent assessment. This includes regular updates on progress and targeted activities to ensure that the banks meet resolvability expectations and address the shortfalls identified above.
- Ensuring readiness
The findings underscore the necessity for banks to keep their resolution preparations current through rigorous testing and assurance processes. This approach ensures that their capabilities evolve with changes in their business, market conditions, and the regulatory landscape. The report notes the BoE remains committed to working with these institutions to maintain a credible and effective resolution regime, adapting as necessary to uphold financial stability.
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FRC seeks feedback on updated going concern guidance
The Financial Reporting Council (FRC) has launched a consultation on proposed changes to its 2016 guidance on the going concern basis of accounting and related reporting, including solvency and liquidity risks (Guidance).
The updates aim to assist companies in preparing company-specific disclosures about their going concern conclusions and how they were reached.
Key takeaways
Revisions to the Guidance include:
- Expanding the scope of the Guidance to include companies applying the Code.
- Reflecting changes in accounting and auditing standards.
- Providing additional guidance on overarching disclosure requirements, especially in situations when significant judgment was involved in the assessment of the appropriateness of the going concern basis of accounting or the conclusion that there are no material uncertainties
- Providing additional guidance on techniques to support the assessment process.
Next steps
The deadline for feedback is 28 October 2024.
The FRC plans to publish the final guidance in early 2025.
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How the PSR is helping consumers make the most of digital payments
In a recent publication, Kate Fitzgerald, Head of Policy at the Payment Systems Regulator (PSR), has highlighted the PSR’s efforts to facilitate consumers’ adoption of digital payment solutions. The article also includes commentary on industry statistics.
Understanding payment preferences in the UK: Key statistics
Industry data reveals that:
- Mobile and digital wallet usage in the UK has surged from 14% to 47% between 2017 and 2022.
- 90% of consumers expressed satisfaction with the range of payment methods. Notably, satisfaction levels are lower among individuals who do not regularly engage in online or mobile banking (74%) and those without contactless debit or credit cards (72%).
- An estimated 3.9 million people face exclusion from digital payments, with 1.1 million being financially excluded or unbanked and around 3.1 million relying on cash.
- Most cash-dependent consumers are not digitally or financially excluded, suggesting an active preference for cash usage.
Barriers to digital payment adoption
The article analyses the potential implications of advancing digital payment technologies and underscores the unmet payment needs of digitally inactive and financially excluded individuals. It identifies three primary barriers to increased digital payment adoption:
- The ability or willingness to access digital payments, often due to insufficient awareness of available payment options.
- Control of spending.
- Trust in digital services.
PSR response to emerging challenges
Actions being undertaken by the PSR include:
- Delivering quantitative research to explore awareness of open banking among consumers and SMEs, aiming to identify how it can assist people, including those in vulnerable circumstances.
- Jointly chairing the Joint Regulatory Oversight Committee (JROC), which oversees the development of open banking.
- Working on new payment methods, such as Variable Recurring Payments (VRP), for the benefit of payers and billers.
- Addressing authorised push payment (APP) scams to incentivise firms to prevent fraud and build consumer trust in digital payments.
The article also mentions the upcoming mandatory reimbursement requirements to enhance consumer protection and ensure fair treatment.
The PSR will continue to update its understanding of barriers to using digital payments and respond to emerging challenges in support of its statutory objective to promote the interests of service users.
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FCA secures £4 million order against unauthorised mortgage brokers
The Financial Conduct Authority (FCA) has successfully obtained a £4 million order against London Property Investments (UK) Limited (LPI) and NPI Holdings Limited (NPI) for their unauthorised mortgage activities, targeting vulnerable consumers. Daniel Stevens, the director of both LPI and NPI and his father, Tony Stevens, were found liable for their involvement in these activities.
LPI arranged mortgages, and NPI purchased properties without FCA authorisation. These properties were then rented back to the sellers.
The judgement is in relation to 26 individuals identified by the FCA. The four defendants are ordered to pay around £4 million to the FCA. The FCA will need to recover funds before any compensation can be paid to affected individuals.
Some context
In November 2022, the FCA obtained a judgment against LPI, NPI, Daniel Stevens, and Tony Stevens concerning 45 individuals.
The judgment revealed that the defendants arranged high-interest, unaffordable bridging loans and purchased homes from owners facing repossession, exploiting vulnerable consumers for personal gain. This judgment takes the total number to 71.
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US agencies approve final guidance on certain banks resolution plans
The Federal Deposit Insurance Corporation (FDIC) Board of Directors and the US Federal Reserve (the agencies) have approved the final joint guidance to assist certain large banks in further developing their resolution plans.
In a statement, Michelle W Bowman, Member of the Federal Reserve Board of Governors, expressed some reservations about the final guidance and hopes that the agencies revisit resolution planning rules and guidance over time to improve their real-world utility.
Some Context
Large banking organisations are required to periodically submit resolution plans, also known as living wills, outlining how they would be wound down in an orderly manner in the event of failure. The resolution plan submissions' content and frequency are determined based on the organisation’s size and complexity, with covered companies divided into three groups of filers: biennial filers, triennial full filers, and triennial reduced filers.
On 29 August 2023, the agencies invited public comment on proposed guidance for domestic and foreign triennial full filers' resolution plans, addressing key challenges in resolution based on issues identified during the agencies’ review of firms’ 2021 resolution plans.
Key takeaways
The final guidance:
- Applies to domestic and foreign banks with more than $250 billion in total assets but that are not the largest and most complex banks, for which guidance is already in place.
- Focuses on key areas of potential vulnerability, such as capital, liquidity, and operational capabilities that could be needed in resolution.
Unlike the guidance for the largest and most complex banks, this guidance outlines agency expectations for both single point of entry and multiple point of entry resolution strategies, which are different strategies banks have adopted for their rapid and orderly resolution. It also recognises that the preferred resolution outcome for foreign banks is often a successful home country-led resolution and guides foreign banks on how to address the global resolution plan in their US plan.
Next steps
When the agencies issued the proposed guidance, triennial full filers were required to submit their next resolution plans on or before 1 July 2024.
On 17 January 2024, the agencies announced an extension of the resolution plan submission deadline for the triennial full filers from 1 July 2024 to 31 March 2025.
Now, the agencies are further extending the 2025 resolution plan submission deadline for all triennial full filers to 1 October 2025 to provide the firms with sufficient time to develop their full resolution plans in light of the final guidance.
The agencies are also clarifying that all triennial full filers’ subsequent resolution plan submission, a targeted resolution plan, is due on or before 1 July 2028 and that future resolution plan submissions will be due every three years after that, alternating between full and targeted resolution plans.
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HKMA publishes conclusions of three-tier banking system review
The Hong Kong Monetary Authority (HKMA) has released the conclusions of the consultation regarding the review of the three-tier banking system, which currently comprises licensed banks (LBs), restricted licence banks (RLBs), and deposit-taking companies (DTCs).
Some context
In a consultation launched in June, the HKMA proposed simplifying the three-tier banking system into two tiers.
The main proposals were:
- Maintaining LBs as the “first-tier institutions” and merging DTCs into the second-tier institutions, which will still be known as RLBs.
- Keeping the requirements for the “second-tier institutions” unchanged, including the minimum capital requirement of HK$100 million, the minimum deposit size requirement of HK$500,000 and no restriction on deposit maturity.
- Providing a transition period of 5 years for existing DTCs to upgrade to the “second-tier institutions”.
Key takeaways
Based on the feedback received, HKMA has made the following additional changes:
Existing DTCs will be converted to RLBs without the need for them to submit fresh license applications, provided they demonstrate to the satisfaction of the HKMA that they have met the minimum capital requirement of an RLB before the end of the 5-year transition period.
The converted RLBs may continue to hold and renew or roll over outstanding deposits taken before the upgrade up to the end of the 5-year transition period, subject to the pre-existing deposit size and maturity requirements of DTCs (HK$100,000 and 3 months, respectively).
Next steps
The HKMA will now prepare detailed legislative amendments to effect the proposed changes and provide guidance to DTCs to transition to the new framework.
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EIOPA releases latest RFR for July 2024
The European Insurance and Occupational Pensions Authority (EIOPA) has released technical information on the risk-free interest rate term structures (RFR) and the symmetric adjustment of the equity capital charge for Solvency II as of the end of July 2024.
In accordance with the Solvency II Directive, EIOPA publishes technical details regarding RFR term structures and the symmetric adjustment monthly in a dedicated section on its website.
The publication aims to ensure uniformity in calculating technical provisions across Europe.