Consultation Paper 26/18 – UK withdrawal from the EU: changes to PRA Rulebook and onshored BTS (CP26/18) sets out the PRA’s proposals to fix deficiencies in the PRA Rulebook arising from Brexit, and in relation to BTS within its remit that will be onshored into UK law. However, the BTS addressed by CP26/18 are limited to those for which HMT has already published draft statutory instruments for. The PRA also sets out proposals on how its non-binding materials, including Supervisory Statements, Statements of Policy and the Approach Documents, should be read by firms when the UK leaves the EU.
Importantly, the proposals in CP26/18 will only come into effect on Exit day if the Withdrawal Agreement is not ratified. If the Withdrawal Agreement is ratified, then the proposals will not come into effect until after the implementation period (December 31, 2020) and they may be further modified to take into account any agreement the UK and EU may reach on the future relationship.
Non-binding PRA material
Chapter 2 of CP26/18 deals with PRA non-binding materials, and a draft Supervisory Statement is set out in Appendix 1. The draft Supervisory Statement explains that the general approach that the PRA is taking is that it will not be making line-by-line amendments to its non-binding materials (except for Supervisory Statement 18/15: Depositor and dormant account protection) and instead firms will need to interpret these in light of the UK leaving the EU, including any amendments made to UK legislation under the EUWA 2018. The draft Supervisory Statement provides some examples of proposed changes. For instance, it states that any reference to passporting, or processes associated with passporting, are redundant. Where capital or liquidity consolidation was previously only required at the EEA level, this would be required at the UK level after Exit day. Firms will need to interpret references to EEA consolidated group, to UK consolidated group.
The approach to reporting and disclosure requirements is covered in chapter 3 of CP26/18. The general approach is that the PRA is not proposing to make line-by-line changes to regulatory reporting requirements but instead proposes a more proportionate approach that is further described in a draft Supervisory Statement set out in Appendix 2. The draft Supervisory Statement covers a general approach to reporting requirements by setting out various different types of EU-based references and a default approach to how these should be interpreted. It then goes on to describe specific cases including reporting and disclosure requirements based on the Capital Requirements Regulation.
Banks, building societies and designated investment firms
Chapter 4 of CP26/18 is an important chapter in that it describes proposals relating to PRA-regulated banks, building societies and designated investment firms. Of particular importance is the discussion regarding the contractual recognition of bail-in and stay in resolution. The proposed changes to the PRA rules on the contractual recognition of bail-in are set out in Appendix 4.
The PRA makes two important proposals
- It proposes to amend Rule 2.1 of the Contractual Recognition of Bail-In Part of the PRA Rulebook, so that the requirement does not apply in respect of EEA law governed liabilities that were created before Exit day. Firms will be required to comply with the contractual recognition of bail-in requirement in respect of new or materially amended EEA law governed liabilities created after Exit day. Firms’ existing stock of EEA law governed liabilities at Exit day would not need to be updated under the proposals. The PRA does not propose to grant transitional relief in respect of liabilities that are intended to count towards a firm’s minimum requirement for own funds and eligible liabilities (MREL). EEA law governed liabilities, other than phase two liabilities (unsecured debt that is not a debt instrument), that are issued or materially amended after Exit day and that are subject to the contractual recognition of bail-in rules, will not be subject to a temporary transitional power and will be required to include a contractual recognition term. However, in relation to new or materially amended EEA law governed phase two liabilities after Exit day, the PRA does propose to use a temporary transitional power to delay the obligation to include a contractual recognition of bail-in term.
- The Stay in Resolution rules will not be amended although the PRA clarifies that firms would be required to comply with these rules in respect of new EEA law governed financial arrangements (or existing financial arrangements materially amended) after Exit day. The existing stock of financial arrangements governed by EEA law at Exit day would not need to be updated under the PRA Stay in Resolution rules. The PRA does not intend to use a temporary transitional power in respect of the Stay in Resolution rules given their importance to support orderly resolution.
Chapter 4 also covers the regulatory technical standards (RTS) for risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a CCP. This RTS imposes risk management obligations on firms for non-cleared OTC derivative transactions. These obligations apply to firms individually. The general approach that the PRA proposes is to treat Member States as third countries. The PRA notes that this approach to onshoring may require repapering of bilateral agreements, as well as changes to the arrangements counterparties have in place in respect of collateral for these derivative transactions.
The PRA proposes other amendments to the RTS, including those in relation to
- The range of eligible collateral.
- The range of credit institutions where case collected as initial margin can be maintained.
- Covered bond exemption.
- References to UCITS and alternative investment fund managers.
The PRA notes that the RTS contain a number of phase-in provisions (including initial margin and the application of the requirements to single-stock equity options). The PRA advises that whilst as a matter of law these provisions are not onshored under the EUWA 2018, firms should plan on the assumption that “requirements arising from new EU legislation that comes into effect during an implementation period lasting until December 31, 2020 would apply to them.”
In terms of ring-fenced banks, the PRA refers to an earlier HMT policy note confirming that ring-fenced bodies will be permitted to continue operating through a branch or a subsidiary in the EEA immediately after Exit day. However, the PRA proposes to amend one rule (Rule 16.3 of the Ring-fenced Bodies Part of the PRA rulebook) requiring ring-fenced bodies that use non-UK CCPs or CSDs to ensure comparable outcomes in respect of account segregation to those specified for UK-based CCPs and CSDs.
Insurers and credit unions
Chapters 5 and 6 deal with insurers and credit unions respectively. The chapter on insurance covers proposals regarding the location of branch assets and admissible assets. In relation to credit unions the PRA notes that 55 credit unions currently have deposits and investments with non-UK (EEA) providers and that all but one of these providers have confirmed that they intend to apply for UK authorisation following Exit day. The PRA states that “it seems likely that credit unions which have placed funds with these institutions will be able to keep them there (albeit that the funds may be transferred to a different entity of the same banking group).”
Temporary permissions regime
The temporary permissions regime is covered in chapter 7 and the PRA focuses on adjustments to the definition of non-Directive insurer and the applicability of the Senior Manager and Certification Regime (SM&CR) to firms without a branch in the UK.
The PRA proposes to apply the SM&CR rules for UK branches of third country firms to firms in the temporary permissions regime including, with modifications, to cross-border service providers without a UK branch. The PRA also makes specific proposals relating to the shortened notification process known as "deemed approval" under the draft statutory instrument that implements with the temporary permissions regime (The EEA Passport Rights (Amendment, etc., and Transitional Provisions) (EU Exit) Regulations 2018). In particular the PRA proposes to provide firms within the temporary permissions regime with a period of up to 12 weeks from Exit day in which to obtain deemed (or full) approval for individuals who require it. The Certification Regime and requirements concerning regulatory references will also be applied to cross-border service providers who enter the temporary permissions regime (with or without a branch).
Financial Services compensation scheme
The PRA makes a number of proposals in chapter 8 relating to the Financial Services Compensation Scheme (FSCS). In particular the PRA proposes to change its rules to provide that from Exit day, FSCS depositor protection would only protect depositors with eligible deposits held by UK establishments of firms with FSMA Part 4A permissions to accept deposits. The PRA also discusses the position as regards deposits held by UK establishments of EEA firms and deposits held by UK firms’ branches in the EEA. In relation to the latter the PRA proposes to amend its rules such that the deposits will no longer be protected by the FSCS.