On 11 October 2016, the PRA issued Consultation Paper 36/16 ‘Occasional Consultation Paper’
. Chapter 5 covers amendments to the ring-fencing rules and reporting requirements that the PRA is proposing following HM Treasury’s publication of amendments to the ring-fencing secondary legislation in July 2016 (see External Links). The consultation closes on Monday 12 December 2016.
On 29 July, the PRA issued two consultation papers on: i) operational continuity reporting requirements; and ii) its implementation of the systemic risk buffer.
On 7 July 2016, the PRA issued a consultation paper (CP) and two policy statements (PS):
Structural reform authorisations - to support the implementation of ring-fencing the PRA has created a new section for ‘Structural reform - authorisations’. This includes a webpage with information on how ring-fenced bodies can apply to the PRA to request permission to indirectly access inter-bank payment systems, as referred in PS20/16.
On 26 May, the Financial Policy Committee published its framework for the Systemic Risk Buffer (SRB), which applies to ring-fenced banks and large building societies. The FPC supplemented the SRB framework with a recommendation that states that ‘The FPC recommends to the PRA that it should seek to ensure that, where systemic buffers apply at different levels of consolidation, there is sufficient capital within the consolidated group, and distributed appropriately across it, to address both global systemic risks and domestic systemic risks’. The PRA will consult on its implementation of the FPC’s SRB framework later this year.
On 4 March 2016, the PRA published final policy on its approach to ring-fencing transfer schemes. Details on the skilled person application are also now available – see links below.
On 29 January 2016, the Bank published a consultation paper on the Financial Policy Committee's framework for the systemic risk buffer, including its application to ring-fenced banks. See link below for more information.
The Financial Policy Committee's Framework for the Systemic Risk Buffer (SRB)
On 11 December 2015 the PRA published an addendum to Consultation Paper 38/15 ‘Ensuring operational continuity in resolution’. This addendum clarifies the scope of application of the PRA’s proposals in CP38/15. See ‘Policy development’ for a link to the update.
Note: CP38/15 is one of two consultation papers published in October 2015 as part of post crisis reforms to enhance the resilience and resolvability of firms:
- CP37/15 sets out additional proposed ring-fencing policy, including in the areas of prudential requirements, intragroup arrangements and the use of financial market infrastructures; and
- CP38/15 proposes the creation of a new framework requiring firms to ensure the continuity of critical shared services.
In response to the financial crisis, a number of domestic and international reforms to bank regulation have been introduced or are currently being implemented. Many of these reforms seek to improve the resilience and resolvability of banks, including through making changes to their structure. In the United Kingdom, the PRA is required, under the Financial Services and Markets Act 2000, as amended by the Financial Services (Banking Reform) Act 2013 (‘the Act’), to make rules to implement the ring-fencing of core UK financial services and facilities. Readers are referred to HM Treasury's '2010 to 2015 government policy: bank regulation' (see External Links) and Chapter 1 of CP19/14 for more information - see 'Policy development' below.
The changes are intended to ensure that ring-fenced bodies (RFBs) are protected from shocks that originate in the rest of their banking group or the financial system in order to minimise disruption to the continuity of the provision of core services. They are also intended to ensure that RFBs, and groups containing RFBs, can be resolved in an orderly manner with minimal disruption to the provision of core services. The Act defines three ‘core services’:
- facilities for the accepting of deposits or other payments into an account which is provided in the course of carrying on the core activity of accepting deposits;
- facilities for withdrawing money or making payments from such an account; and
- overdraft facilities in connection with such an account.
Ring fencing is being implemented through primary (the Act) and secondary legislation (see External Links), and PRA rules. The Government has stated its intention for ring-fencing to be implemented from 1 January 2019. The PRA plans to complete its consultation process and publish final rules and supervisory statements in advance of this date to provide firms with sufficient time for implementation.
Plans for implementing ring-fencing
In January 2016, following CP37/15, firms in scope of the regime submitted near-final plans for implementing ring-fencing to their PRA and FCA supervisors. The policy published on 7 July 2016 (see Policy development below), provides banking groups required to implement ring-fencing with the information they need to finalise their plans.
Firms required to implement ring-fencing, ie those which have core deposits in excess of the threshold of £25 billion, should continue to discuss their overall implementation of ring-fencing with their supervisors. Firms should also highlight any changes to their plans made as a result of this PS20/16 to their supervisors. Firms with growth plans which indicate they are likely to meet this threshold should discuss with their supervisors.
In addition, on 26 May 2016, the Financial Policy Committee (FPC) published its framework for the systemic risk buffer (SRB), which applies to ring-fenced banks and large building societies. The FPC supplemented the SRB framework with a recommendation to the PRA that it should seek to ensure that, where systemic buffers apply at different levels of consolidation, there is sufficient capital within the consolidated group, and distributed appropriately across it, to address both global systemic risks and domestic systemic risks on SRB. The PRA will consult on its implementation of the FPC’s SRB framework later in 2016, which will give firms what they need to prepare for ring-fencing.
Structural reform - authorisations
To support the implementation of ring-fencing, firms can access information on the applications that they are required to submit under structural reform, including to appoint a skilled person for ring-fencing transfer schemes and to request permission for indirect participation in payment systems in the ‘Structural reform – authorisations’ section of the PRA’s website.
In CP37/15 published on 15 October 2015, the PRA outlined that it expects firms in scope to submit near-final plans for implementing ring-fencing to their PRA and FCA supervisors by 29 January 2016. These plans build on the initial plans that were sent on 6 January 2015 and/or any subsequent updates submitted by firms during 2015.