This Prudential Regulation Authority (PRA) statement follows today’s announcement by the Bank of England’s (Bank’s) Financial Policy Committee (FPC) of its decision to set the UK countercyclical capital buffer (CCyB) rate at 0% with immediate effect. FPC’s decision supports continued provision of financial services to the real economy, including the supply of credit.
The PRA expects firms not to increase dividends and other distributions in response to this policy action and will monitor firms’ distributions against this expectation. The PRA expects boards of PRA-regulated firms to consider this when deciding distributions.
The PRA expects firms to ensure that any proposals or discussions relating to potential dividend or share buybacks are undertaken in a manner consistent with firms’ safety and soundness and subject to a transparent governance process. In particular, any relevant proposals should be consistent with the obligations enshrined in the PRA’s Fundamental Rules (FRs) for a firm to “act in a prudent manner” (FR3) and maintain adequate financial resources at all times (FR4). The PRA expects firms to identify a Senior Manager to:
- lead the effective discussion, oversight, and scrutiny of any proposals relating to dividend distributions or share buybacks relating to the reduction of the UK CCyB rate; and
- discuss these matters with the PRA if called upon to do so.
Similarly, the PRA expects the individual performing the Chair of the Remuneration Committee Senior Management Function (SMF12) (as defined in Rule 4.5 of the Senior Management Function part of the Rulebook) or, if different, the Senior Manager holding the Prescribed Responsibility for “overseeing the development of, and implementation of the firm’s remuneration policies and practices” (under Rule 4.1(18) in the Allocation of Responsibilities part of the PRA Rulebook) to take reasonable steps to ensure that any:
- proposals to amend bonus pools directly or indirectly as a result of the reduction in the UK CCyB rate are appropriately discussed, recorded and, if appropriate, challenged by the RemCo and board as a whole; and
- decisions relating to the bonus pools are consistent with the maintenance of a sound capital base, incentivise and reward prudent risk management and accurately reflect firm, business unit and individual performance.
The PRA may engage with relevant Senior Managers and/or check written records, such as relevant board minutes, to assess whether any relevant decisions were subject to an appropriate level of discussion, documentation and oversight.
The FPC expects to maintain the 0% rate for at least 12 months, so that any subsequent increase would not take effect until March 2022 at the earliest. To aid with firms’ capital planning, the PRA will take the FPC’s expectation into account when assessing broader capital plans submitted by firms.
Further, the PRA reminds firms of its approach to capital buffers: they are there to absorb losses and provide an additional layer of capital above minimum requirements that can be drawn down. The Basel Committee on Banking Supervision also recently reaffirmed that capital buffers provide an additional layer of capital resources that are, amongst other objectives, intended to help maintain the provision of key financial services to the real economy in periods of systemic stress by reducing incentives for banks to deleverage abruptly and excessively. The PRA reaffirms that buffers can be used as intended to continue to support the real economy during periods of stress.
The PRA requests that firms note the following when considering whether to use their capital buffers:
- use of the PRA buffer or CRD IV combined buffer is not a breach of capital requirements or Threshold Conditions;
- the PRA buffer is confidential and the automatic distribution restrictions associated with the CRD IV combined buffer do not apply to it; and
- automatic distribution restrictions resulting from use of the CRD IV combined buffer are a capital conservation measure. Such restrictions are consistent with the overarching aim of these buffers, which is to enable banks to continue to support the real economy and avoid amplifying a system-wide stress.
Transitional Measures on Technical Provisions (TMTP) relief for insurers
In line with SS6/16 Maintenance of the ‘transitional measure on technical provisions’ under Solvency II, the PRA monitors market conditions since the previous biennial TMTP recalculation (December 2019) and also considers whether changes in market conditions since then can reasonably be considered to have been sustained. Movements in risk free rates (RFR) since 31 December 2019 meet the threshold for a material change in risk profile as set out in SS6/16, and the PRA’s view is that the risks posed by the advent of coronavirus (Covid-19) are sufficient to meet a broad definition of a change in risk profile that for some firms may be material.
The PRA is therefore willing to accept applications from firms to recalculate TMTP as at 31 March 2020. In any application, the PRA expects firms to be able to demonstrate that a material change in risk profile has occurred.