Looking at 2022 regulatory schedule…what firms should focus on in 2021

Prudential reforms postponed from 2021 to early 2022

In November 2020 HM Treasury, the PRA and the FCA published a joint statement advising that the implementation of the two prudential reforms included in the Financial Services Bill will be postponed from June 2021 to January 2022. This decision was made to decrease the prudential regulatory burden expected in 2021.

A UK-specific Investment Firms Prudential Regime 

The Investment Firms Prudential Regime (IFPR) will apply to all UK firms in scope of the Markets in Financial Instruments Directive 2 (MiFID 2). This regime is expected to be a domestic version of the new European Investment Firms Directive and Regulation (IFD and IFR) which come into force on 28 June 2021 in the EU. However, the most significant (PRA designated)  investment firms will remain in scope of the CRD/CRR framework.

As it introduces a more proportionate and fit-for purpose regime for investment firms, the new framework brings significant changes. Though the regime is still at a consultation stage, UK investment firms have now approximately a year left to be ready. Firms in scope can start identifying the potential impacts of the new prudential regime on their business using the EU documents already available and the FCA’s discussion paper DP20/2 and consultation paper CP 20/24.

Implementation of the outstanding elements of CRR II

CRR II will apply in the EU from June 2021. This is after the end of the Transition Period and therefore will not automatically apply to UK firms. However, the UK also intends to similarly update the prudential regime for UK credit institutions with the most recent revisions to the Basel standards showing its commitment to implementing leading global standards in financial services.

The CRR II introduces changes to the proportionality rules, the market risk rules (known as the Fundamental Review of the Trading Book - FRTB), revisions to the counterparty credit risk (CCR) framework, new leverage ratio rules and an additional liquidity requirement with the introduction of the Net Stable Funding Ratio (NSFR). In addition to these, CRR II implements the European version of the Financial Stability Board’s Total Loss Absorbing Capacity (TLAC) standard for global systemically important banks, in the form of minimum requirements for own funds and eligible liabilities (MREL).

Compliance with these new measures is expected by the same time the regulatory statement comes into force, i.e. expected to be January 2022. For now, no UK specific regulatory statement has been published and firms should leverage on the EU documents already available.

Outstanding Basel III measures

As a member of the Basel Committee on Banking Supervision (BCBS), the UK has agreed on a full, timely and consistent implementation of all elements of the Basel III reform package.

The Bank for International Settlements (BIS) recommends implementing a set of measures before 1 January 2023. The UK will work to meet the agreed timeline. Most of the measures listed below were initially scheduled to come in force in January 2022 but were differed by one year after the outbreak of Covid-19.

• Revised market risk framework finalised in January 2019.
• Revised Pillar 3 disclosure requirements finalised in December 2018.
• Revised leverage ratio framework and global systemically important institutions (G-SIB) buffer.
• Revised standardised approach for credit risk
• Revised Internal Rating-Based (IRB) approach for credit risk
• Revised operational risk framework
• Revised Credit Valuation Adjustment (CVA) framework for the treatment of counterparty credit risk
• Output floor with accompanying transitional arrangement to 1 January 2028.

References

• Joint statement on the implementation of prudential reforms in the Financial Services Bill
• Prudential standards in the Financial Services Bill: policy statement 
• Governors and Heads of Supervision announce deferral of Basel III implementation to increase operational capacity of banks and supervisors to respond to Covid-19