Lead prudential regulator in the UK sets sights on various new frameworks

UK PRA sets its focus on progressing important prudential frameworks

The UK’s banking and lead prudential regulator (PRA) has issued feedback on its initial consultation on a new ‘Pillar 2’ framework covering issues such as required disclosures and the treatment towards consolidation in regard to calculating prudential needs related to matters including relevant and eligible liabilities, overall ‘own fund’ requirements. But also the approach towards assessing and sizing specific liquidity and funding risks, for example forming part of any liquidity coverage requirement (LCR) etc. It is expected that the PRA will issue further consultation on related risk matters before setting-out final policy proposals around mid-2017.

The PRA has also issued a formal statement to help clarify and define its working interpretation of the Capital Requirements Regulation (CCR) in specific respect to ‘durable links’. This issue concerns the capital treatment of investments held in the hands of firms, with firms’ expected to proportionately consolidate its participation interest(s) in such investments. For capital and accounting purposes then the existence of any durable link can be a key factor and consideration where there is some element and scale of ‘significant influence’ involved, in terms of the power to actively or even passively participate in the operational and/or financial policies and decisions of any investment undertaking, and the resulting extent and accounting impact of any such participation interest(s) under the capital and prudential regime. The evidence of both intention and outcome can be key here, with the PRA looking to also consider other factors in determining if any durable link exists, such as the role and capacity of a firm to influence the governance and management of any investment undertaking, as well as the strategic relevance of any investment stake to the firm and its transparent communication to all key stakeholders.

The PRA has also set-out its own policy statement (see PRA PS 29/16) concerning the implementation of the revised Markets in Financial Instruments Directive (MiFID II) as it will apply to deposit-takers and other PRA regulated/ designated firms. This covers a range of transposition issues, including the systems and controls in regard to algorithmic trading and the necessary direct electronic access to trading venues. However, this recognises that various important and practical regulatory technical standards (RTS) continue to be developed by European supervisors e.g. ESMA, at which point the final and definitive rules and guidance can be put into place before the updated MiFID II regime commences in the UK from January 2018.