Posted on: December 13, 2022

Treasury Call in Power

UK Finance reported on 24th November 2022 that this ‘Call in’ power will not be given to the Treasury. Therefore the UK regulators will remain independent.

Regulatory Reporting Validation Rule Changes

Changes to validation rules applicable under taxonomy 3.0 on which UK CRR is based, were published on 12th December 2022. The necessary changes will be made in WIRES to ensure that the appropriate rules are applied.

Strong and Simple Framework

The PRA has issued a consultation paper about implementation of Basel 3.1. Chapter two of this consultation paper concerns the ‘Strong and Simple’ regulatory regime that will become applicable to domestic banks and building societies, both of which are deemed to be small. The PRA has revised the criteria (detailed in its consultation paper 5-22) to qualify as a ‘simpler regime’ firm. The main changes are shown below.

Criteria Change Proposed
Asset Size Average (over 3 years) maximum asset size has been increased from £15bn to £20bn.
Domestic Business An absolute minimum of 75% (Credit Exposure to UK Borrowers relative to Credit Exposures to All Borrowers) must be met at all times.
The 85% minimum for the aforementioned threshold is now an average over three years.
Mortgage lending secured on UK property, where the borrower is resident overseas, will be treated as a domestic activity.
Trading Activity The activity limits now incorporate smoothing over time. Provided they are not exceeded in three successive months or on more than six out of the previous twelve, then the condition will be satisfied.
Net Foreign Exchange Position The net position must never exceed 3.50% (previously 2%) of own funds.
The 2% limit has had some flexibility added. Provided the limit of 2% of own funds was not exceeded in the last three successive months or on more than six out of the previous twelve, then the condition will be satisfied.

The paper introduced the Transitional Capital Regime (TCR), which will be an option for institutions that meet the criterial to be a ‘simpler regime’ firm, or are part of a foreign group (and so not qualify as a ‘simpler regime’ firm) deemed by the PRA to satisfy the requirements for a waiver. The TCR will allow firms (that meet the aforementioned conditions as at 1 January 2024) to apply Basel III as at 31 December 2024, until the ‘Strong and Simple’ framework becomes effective.

Firms have until 31 March 2023 to respond to this consultation.

Whistlebrook understands that in quarter one of 2023, the PRA will issue some proposed requirements of the new regime. However, this phase one will not cover Pillars 1 and 2 or capital buffers.

Basel 3.1

Consultation paper 16-22 was issued by the PRA on 30th November 2022 and is split into thirteen chapters, covering specific areas subject to change. The areas affected include:

  • Revised standardised and Internal Ratings Based approaches to credit risk
  • Removal of the use of internal models for calculating operational risk capital requirements. A new standardised approach will be introduced.
  • Market risk COREP reporting
  • Removal of the use of internal models for calculating credit value adjustment. A new standardised and basic approach will be introduced as replacements.
  • Introduction of an Aggregate ‘Output Floor’, where the risk weighted amount under internal models, must be no lower than 72.5% of the equivalent under the standardised method (phased in over 5 years).

The implementation date of Basel 3.1 is 1st January 2025. According to consultation paper 16-22, it is understood that firms meeting the PRA’s ‘simpler regime’ criteria, will have the option of applying Basel 3.1 rather than the Transitional Capital Regime.

Cryptocurrency Regulation

Whistlebrook understands that the Treasury is finalising plans for regulation of the cryptocurrency sector. A consultation paper is expected to be launched soon.

Future Regulatory Framework

The FCA reported that the Treasury has concluded its Future Regulatory Framework (FRF) review. Once the Financial Services and Markets Bill becomes law, the UK regulatory framework will change by introduction of the outcomes of the review undertaken. Whistlebook understands that the changes will include:

  • Freeing “retail focussed” banks from the ring fencing regime. That will likely have impacts on capital and regulatory reporting.
  • Consultation on changes to the Consumer Credit Act
  • A review of the Senior Managers and Certification Regime

WIRES Planned Releases

The planned timings of and reasons for WIRES releases as at the date of this newsletter, are shown below. These timings are subject to alteration and will be influenced by changes communicated by regulators.

Time Reason
March 2023 Addition of FSA034, FSA035, AIF001 and AIF002

Enhancements and any fixes

June 2023 Addition of FIN073

Enhancements and any fixes

October 2023 Addition of new Leverage Ratio templates for ‘LREQ’ firms.

Bank of England taxonomy 1.3.0.

Enhancements and any fixes

This regulatory update is Whistlebrook’s understanding of the position as at 12th December 2022.