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PRA cranks up the printing press

The PRA has published four papers, three consultations and one discussion, as part of the PRA’s wider “resolution and resilience agenda”.

The implementation of ring-fencing: consultation on legal structure, governance and the continuity services and facilities– CP19\14 sets out the PRA’s proposed ring-fencing policy in three areas: the legal structure of banking groups, governance, and the continuity of services and facilities. Responses are required by 06 January 2015. Consultation on other areas will follow in 2015. The PRA expects to publish final rules and supervisory statements during the first half of 2016. The FCA will consult in 2015 on draft disclosure rules for non-ring-fenced entities which share a group with a ring-fenced bank. The ring-fence regime is scheduled to come into force on 1 January 2019.

Legal Structure:

  • A ring-fenced bank (RFB) should not have an ownership interest in any entity undertaking excluded\prohibited activities
  • An entity undertaking excluded\prohibited activities should not have an ownership interest in a RFB
  • RFBs and excluded entities are expected to be structured as separate subsidiaries beneath a UK holding company- a “sibling structure”. This structure is believed to enshrine independence of the RFB and to facilitate resolution

Governance:

General:

  • RFB must be able to demonstrate ring-fencing rule compliance to the PRA.
  • RFB must be able to take decisions independently of other group members
  • RFB must take all reasonable steps to identify and manage conflicts of interest with other group members

Requirements for the board:

  • At least half of an RFB’s board, excluding the chair, must be independent non-executive directors
  • The chair of an RFB must be independent and must not hold another chair position in another group entity board
  • No more than a third of an RFB’s board members may be current employees or directors of another entity in the group
  • An RFB executive director may not hold an executive position on the board of an excluded activity entity
  • An RFB must have its own risk, nomination, audit and remuneration non-executive board committees

Risk management and internal audit:

  • RFB must have its own sufficient risk management and internal audit resource
  • RFB must have Senior Managers with specific responsibility and accountability for risk management and audit

Remuneration:

  • Remuneration level to be allocated consistent with the effective risk management and long-term interests of the RFB, as distinct from the group or its other members
  • RFB will have responsibility for the remuneration of all RFB employees

HR Policies:

  • The RFB will not depend on personnel that would cease to be available in the event of the insolvency of another group member
  • Vacancies for independent non-executive directors on RFB boards must be advertised publicly.

Individual accountability in RFBs:

  • PRA to introduce an additional Prescribed Responsibility for Senior managers of RFBs, detailing responsibilities for ring-fencing compliance
  • PRA expects this responsibility to be allocated to all the Senior on the board and to at least a majority of the RFBs’ other managers

Continuity of services and facilities

  • An RFB may receive shared services and facilities from other group entities only where such entities form part of the RFBs subgroup or are dedicated intragroup services entities
  • Provision of services and facilities, whose cessation may adversely affect the RFB’s core activities, cannot be disrupted by the acts or omissions of other members of its group.

Firm’s plans on preparations for ring-fencing

The PRA requests that all initially “ring-fencable” firms should submit a preliminary plan of their proposed legal and operating structures to the PRA\FCA by 6 January 2015. Plans should include the following:

  • Provisional UK holding company and UK regulated entity balance sheet and P&L statements
  • Project plan detailing the transition from legacy structure to ring-fenced
  • Details of authorisations, permissions or waivers likely to be necessary and all Part VII transfers for regulatory attestation

The paper also gives notice of future consultations and areas for which it is seeking feedback.

                                                                                                     

Ensuring operational continuity in resolution– DP1/14 sets out the PRA’s principles that firms’ operational arrangements must satisfy to facilitate recovery, resolution and restructuring. It has particular focus on critical shared services, those economic functions whose sudden cessation would lead to material disruption in the functioning of the business. The proposals mirror FSB resolution recommendations published in November 2011 and subsequent guidance on critical functions and services published in July 2013. The discussion paper is divided into three design principles, setting out desired outcomes and eight assessment criteria.

 

 

Design principles:

  • Restructuring capabilities- the organisation\structuring of critical shared services shall facilitate the execution of a firm’s recovery and resolution plan eg. identifying divestment opportunities
  • Contractual service provisions- provided services should be documented with a view to operational continuity. Contractual agreements should not allow a contractor to alter services consequent upon the resolution process
  • Financial and operational resilience- operational capabilities of crtitcal shared services should be unaffected by the failure or resolution of any group entities.

Assessment criteria:

  • Ownership structure- critical shared services should be structured such that upon resolution of any entity, no serviced entity or business unit is made worse off due to the preferential treatment of any other business unit
  • Objective service agreements- critical shared services should be clearly and precisely identified, and formalised through granular service level agreements (SLA), both internal and external. Such agreements should be valid and enforceable in all relevant jurisdictions, irrespective of the entry into resolution of an affected entity.
  • Charging structure- charges for services should be set on an arm’s length basis.
  • Scale and scope- critical shared services only cover those services that are transactional and can be fully represented in contractual terms.
  • Governance structure- the critical shared services should have their own governance structure
  • Ownership or continued access to operational assets- access to operational assets by the critical shared services provider should not be affected by the resolution of any group member, including the provider itself.
  • Operational resilience- sufficient staff and resources to facilitate restructuring consequent upon the resolution of a group member, which may include credible arrangements to ensure self-sufficiency.
  • Financial resilience- as a minimum: capital resources equivalent to 25% of annual fixed overheads and liquidity resources equivalent to 50% of annual fixed overheads. Further consideration is needed on the definition and location of liquid assets.

Comments are to be submitted by 6 January 2015.

                                                                                                    

Depositor Protection

The consultation paper CP20/14 sets out a series of rule changes to implement the recast Deposit Guarantee Schemes Directive (rDGSD), as well as rules providing continuity of access during resolution for depositors covered by the FSCS, and changes to the single customer view (SCV) rules.

The funding requirements of the recast DGSD

  • Ex-ante funding requirements- ex-ante fund of at least 0.8% of the amount of covered deposits. Member States may apply to the Commission for a lower fund size of 0.5%
  • The PRA proposes flexibility on the timing and amount levied on individual banks and on the industry as a whole
  • The rDGSD requires risk-based levies, the PRA expects to publish further consultation following the finalisation of EBA guidelines

Changes in eligibility for deposit protection

  • The rDGSD extends depositor protection beyond retail and small corporate deposits and requires the immediate identification of eligible deposits
  • The PRA proposes that deposit-takers update their SCV systems to reflect the demands of the rDGSD

Protection for temporary high balances (THB)

  • The rDGSD requires time-limited DGS coverage for deposits resulting from certain events- private residential real estate transaction, marriage\divorce, redundancy, retirement etc.
  • The PRA proposals limit the cover to £1mn. per THB. Coverage is limited to six months.
  • Depositors will be required to provide proof of their THB to the FSCS which would be reconciled with their SCV file
  • THB protection is maintained regardless of subsequent payments in and out of the account. If the THB is transferred, protection is transferred with it, but the time-limit runs from the date of the original deposit

New Disclosure requirements for firms

  • Prescribed information about compensation requirements: The rDSG prescribes the use of an information sheet detailing deposit guarantee arrangements, receipt of which must be confirmed at the inception of a deposit-taking contract
  • The PRA proposes replacement of the disclosure requirements in COMP 16.3 and 16.4 with the expanded rDGSD prescription
  • Disclosure and other requirements relating to mergers or conversions: The rDGSD sets out disclosure requirements in the event of mergers and other notifiable changes
  • The PRA proposes that the penalty-frree amount that can be withdrawn should be restricted to covered amount held by the depositor immediate prior to the notifiable event.

Repayment periods

  • The rDGSD phases in a reduced payout deadline from 20 working days to 7, the transitional period ends on 31 December 2023. Certain categories of deposit are excluded from the deadline.
  • The PRA proposes to accord with the rDGSD timeline above. During transition, if an emergency payment cannot be made within 7 working days, a cost of living payment will be made by the FSCS.
  • The PRA proposes that all excluded categories should be paid within three months, where possible

 

Host DGS payment on behalf of the home DGS

  • The rDGSD institutes non-liability, pre-funded home-to-host payment arrangements. Communication with depositors is the responsibility of the host DGS.
  • The PRA proposes to reflect these arrangements in full

Single customer view changes

Opt-out limit

  • The PRA proposes removing the 5,000 account opt-out limit, rendering SCV reporting mandatory for all firms. The report will be submitted annually in electronic format.

Changes in reporting

  • The PRA proposes that firms submit a single report detailing SCV implementation and SCV compliance
  • The SCV report will include information on new areas: dependencies (eg. reliance on a parent firm), procedures and controls to protect SCV data, SCV production testing including stressed scenarios, treatment of legally dormant accounts, the process of creating the exclusion file

In-flight transactions

  • The PRA’s approach identifies deposit amounts at a fixed point in time on the compensation date. Subject to exclusions, this is compensation amount and should be reflected in the SCV
  • In-flight payments would be treated as new payments to be settled by the acquiring bank under continuity of access provisions

Speed of producing file

  • The PRA proposes reducing the SCV file production time from 72 to 24 hours

Standardised file format

  • The PRA proposed rules standardise the fields and format of the SCV file, and ensure consistency with the FSCS

Exclusions definition

  • The PRA proposes to exclude the following categories of deposit from the SCV file: depositor not absolute entitled, accounts under formal notice of legal dispute and\or competing claims, deposits subject to restrictive measures imposed by national\supranational bodies, e.g. financial sanctions, dormant accounts

Exclusions file format

  • The PRA’s proposal details the file structure and format for the exclusions file, essentially similar to those for the SCV.
  • The exclusions file is to be submitted to the FSCS with the SCV

BRRD

  • The BRRD mandates a deposit hierarchy in insolvency proceedings- EEA covered deposits get paid out first, then by ascending order of depositor size. The PRA proposes that firms’ systems identify and account for natural persons and micro, small and medium sized enterprises
  • The propose rule does not extend to credit unions, as they are outside the scope of the BRRD

Keys and codes and flags

  • The PRA proposes new rules to mark accounts by size of depositor and dormancy

New fields

  • The PRA proposes the inclusion of new fields in the SCV to support payout and account transfer: BIC numbers, IBAN numbers and country location

Joint accounts

  • The PRA clarifies that for the purposes of compensation, in the absence of express terms, joint accounts should be split 50:50 to the nearest penny

Verification

  • The PRA proposal requires firms to submit a full file for verification, including both the SCV and exclusion files.
  • Verification is currently required within three months of authorisation, or within three months following a material change. The proposal clarifies that firms must also submit their SCV file to the PRA or FSCS on request

Continuity of Access

  • While FSCS pay-out is the initial and preferred option, the Banking Act 2009 provides powers under insolvency procedures for the transfer of eligible deposits

Identifying and freezing accounts

  • The PRA proposal requires firms to create systems to differentiate between FSCS-eligible and non-eligible deposits, allowing the freezing of non-eligible accounts at the point of resolution

Separating covered and uncovered balances

  • The PRA proposal allows firms flexibility in choosing how to identify and (in resolution) separate FSCS-covered and uncovered balances
  • Rule 11.15 delineates a hierarchy for covered\uncovered balances across multiple accounts, prioritising day to day economic activity over fixed-term deposits. Where the aggregate balance exceeds the covered amount, fixed term deposit accounts are therefore the first to be reduced by transfer

Deposit-taker verification and reporting

  • The PRA proposal mandates that all firms must submit a self-certification report describing compliance with Appendix 2 rules. The report should also include applicable submissions by any internal or external auditor
  • The PRA will develop a more intensive assessment process to complement self-certification

Scope of firms

  • Continuity of access rules would apply to all firms excepting credit unions
  • Waivers may be considered under Section 138a FSMA if full compliance would be unduly burdensome, would not meet the rules’ purpose and would not adversely affect the advancement of the PRA’s objectives

                                                                                                    

The fourth paper is a consultation on rule changes with respect to insurance policyholder protection. CP21/14 joins a series of consultation which, in aggregate, aim at replacing the Compensation sourcebook (COMP) and the sections of the Fees (FEES) dealing with FSCS levies. Insofar as the proposed changes contribute to FSCS future efficacy, the proposals may be grouped within the wider resolution and resilience agenda. However, given that they do not bear directly on RRP concerns, only a very brief summary follows:

Increased FSCS limits for Long-term and General Insurance

  • The PRA proposes to increase maximum FSCS pay outs for certain categories in the event of insurer insolvency
  • The following insurance types will have their maximum increased form 90% to 100%: annuity cover (decumulation phase), pure protection, and claims arising from death or incapacity and professional indemnity insurance. All other categories remain unchanged

Successor firms

  • The PRA proposes that FSCS protection will be available to policyholders who hold outstanding claims against a firm whose policies have been transferred. The successor firm must be PRA-authorised

Operational changes for the FSCS

  • Assignment and subrogation: The PRA proposes enhancing the FSCS’ ability to seek recovery of paid compensation from failed insurers and third parties, by the grant of new powers of automatic and electronic assignment and automatic subrogation of policyholder rights

 

 

 

 

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