The financial services sector is facing a number of changes and challenges in the regulation to which it is subject. This article highlights some of the more significant modifications to the regulatory arena that firms need to manage over the next few years.

 

Amongst others on the horizon, are the following:

• Contingent leverage under Bank of England (BoE) Banking Taxonomy 3.6.0
• Strong and Simple Regime
• BASEL 3.1 (under BoE Taxonomy 3.7.0)
• Data Collection Transformation
• Amendments to securitisation requirements
• UK Digital Pound

 

BoE Taxonomy 3.6.0 will introduce additional leverage ratio reporting (‘Contingent Leverage’) for firms that are subject to the UK Leverage Ratio Framework. The extra reporting requirement is to be effective from report reference date 30^th June 2024. Whilst the data required are not excessive, there is an additional burden, albeit deemed to be necessary for risk monitoring.

 

The Strong and Simple Regime is currently under development and it will offer an alternative to BASEL 3.1, where a firm meets the qualification criteria as at 1^st January 2024. This regime will offer firms a more proportionate level of regulation, reporting and disclosures. Implementation is to be in phases, with liquidity first, followed by capital. Firms may welcome the regime in terms of its proportionality, but it will require changes to systems and processes. There is a choice available to institutions that meet the conditions to be a simpler regime firm, in that they may prefer to adopt BASEL 3.1, rather than the Strong and Simple framework. Given that the regime is not finalised, the choice may not be straightforward and could need much deliberation.

 

BASEL 3.1 is now planned to be effective in the UK from 1^st July 2025. This regulation will replace the existing capital requirements rules and will implement some material changes to own funds and Credit, Market and Operational exposure amounts. For example, the standard treatment of residential and commercial real estate exposures will alter materially. Internal models will no longer be permitted in measuring credit risk exposures to Governments, Central Banks and Equities. Furthermore, such models will not be allowed in assessing credit value adjustment and operational risk exposures.

 

The Output Floor will require that Pillar 1 exposure risk weighted amount is no lower than a phased-in regulator’s percentage of the value under a standardised approach.

Firms subject to BASEL 3.1 will lose the capital benefits of the SME and Infrastructure Supporting Factors, as both are to be withdrawn.

 

Clearly, BASEL 3.1 will demand a significant amount of effort from firms in order to make the necessary changes required by the new regulation.

 

The UK regulators’ Data Collection Transformation project (expected completion 2031) has delivered benefits in terms of clearer instructions and accessibility of information to firms. It is understood that research is ongoing into how collection of commercial real estate and retail banking business model data, can be made easier. It seems inevitable that firms will be affected by the outcome.

 

Institutions will also be impacted by other activities including possible introduction of a UK digital currency, amendments to securitisation requirements (detailed in PRA CP 15-23) and most likely of particular importance, green initiatives.

 

Regulation is undoubtedly going to demand time and effort, continually, from firms in order to keep up to date with its requirements.

 

by Gordon McMaster
Head of Regulatory Reporting at Whistlebrook