The implementation of ring-fencing: prudential requirements, intragroup arrangements & use of Financial Market Infrastructures

Published on 7 July 2016

The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures – PS20/16

Overview

This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback on responses received to Consultation Paper (CP) 37/15 ‘The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures’. 

The appendices to this PS set out the final rules (see Appendix 1) and supervisory statement (see Appendix 2) to implement the proposals consulted on in CP37/15 and the near-final rules and supervisory statements set out in PS10/15 published in May 2015. The appendices also include updated versions of certain PRA publications to incorporate changes in relation to the proposals consulted on in CP37/15, updated for the final policy in this PS (see Appendices 3 to 7).

This PS is relevant to banking groups that will be required by the Financial Services and Markets Act 2000 (the Act) to ring-fence their core activities. This includes both those groups with ‘core’ deposits – broadly those deposits from individuals and small businesses – in excess of £25 billion and those groups with growth plans which expect to exceed this threshold by the Government’s implementation date of 1 January 2019. This PS will also be of interest to financial and other institutions, and customers who have dealings with these banking groups.

This PS covers the following topics:

• Legal structure and holdings of capital
• Establishment of an RFB sub-group and application of requirements on a sub-consolidated basis
• Application of capital and liquidity standards to an RFB sub-group
• Intragroup concessions
• Distributions
• Intragroup transactions and exposures
• Financial market infrastructures
• Governance
• Continuity of services and facilities
• Compliance with ring-fencing obligations.

The policy contained in the underlying rules and supervisory statements has been designed in the context of the current UK and EU regulatory framework. It will come into effect on 1 January 2019. The PRA will keep the policy under review to assess what changes would be required due to intervening changes in the UK regulatory framework, including as a result of the referendum on 23 June 2016.

Other publications

Alongside this PS, the PRA has also published a further consultation on its proposed ring-fencing policy CP25/16 ‘The implementation of ring-fencing: reporting and residual matters’. CP25/16 sets out the PRA’s proposals in relation to the data it intends to collect in support of its obligations under the Act in respect of ring-fencing. CP25/16 also sets out the PRA’s proposals in respect of residual ring-fencing policy matters which the PRA has identified following the publication of CP37/15. 

The PRA has also published PS21/16 ‘Ensuring operational continuity in resolution’ which may be relevant to banking groups required to implement ring-fencing’. 

Firms’ preparations for ring-fencing

The final rules and statements in the appendices to this PS, together with the final policy in PS21/16 and the proposals in CP25/16, provide banking groups that will be 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 PS to their supervisors. Firms with growth plans which indicate they are likely to meet this threshold should discuss with their supervisors.

Policy Statement 20/16

Appendices

1. PRA Rulebook CRR Firms and Non-authorised Persons: Ring-fenced Bodies Instrument 2016  
2. Supervisory Statement 8/16
3. Supervisory Statement 15/13 UPDATE
4. Supervisory Statement 16/13 UPDATE
5. Update to instructions for completing data item FSA078 ‘Pillar 2 Concentration risk minimum data requirements’ 
6. Statement of Policy
7. Update to ‘Pillar 2 reporting schedule’ 

The policy outlined above does not take effect until 1 January 2019. Updates referred to in Appendices 3-7 are available for information on the ‘Supporting materials – ring-fencing’ webpage.

Published on 15 October 2015

The implementation of ring-fencing: prudential requirements, intragroup arrangements and use of financial market infrastructures – CP37/15

Background

The Prudential Regulation Authority (PRA) is required under the Financial Services and Markets Act 2000, as amended by the Financial Services (Banking Reform) Act 2013, to make policy to implement the ring-fencing of core UK financial services and activities.

This CP is one of two papers published by the PRA on 15 October, which form part of the post-crisis reforms to enhance the resilience and resolvability of firms. Restructuring efforts, including through ring-fencing of core activities, will support bank resolvability and increase the resilience of ring-fenced bodies (RFBs) to risks originating in other parts of their group or the global financial system and facilitate restructuring of banking groups before and after resolution. On 15 October, CP38/15 ‘Ensuring operational continuity in resolution’ was also published. 

This consultation paper (CP) is relevant to banks which will be required to ring-fence their core activities. This includes both those groups with ‘core’ deposits – broadly those deposits from individuals and small businesses – in excess of £25 billion and those groups with growth plans which expect to exceed this threshold by the Government’s stated implementation date of 1 January 2019. It will also be of interest to financial and other institutions and customers who have dealings with these banks.

The Government has stated its intention for ring-fencing to take effect from 1 January 2019. The PRA intends to undertake further consultation and to publish final rules and supervisory statements in 2016 to provide firms with sufficient time for implementation. Further information is available on the dedicated ‘Structural reform’ webpage.

Summary of Proposals

This CP sets out PRA policy proposals in three areas:

• the capital and liquidity requirements applicable to a ring-fenced body and how the PRA will determine the adequacy of its financial resources;
• the management of intragroup exposures and arrangements; and
• the use of financial market infrastructures.

The CP also includes a preliminary discussion on potential reporting requirements, setting out the PRA’s initial thinking ahead of future consultation. Chapter 8 therefore does not include specific policy proposals.

The PRA expects firms in scope to submit near-final plans for implementing ring-fencing by 29 January 2016 to their PRA and FCA supervisors, which build on the initial plans that were sent on 6 January 2015 and/or any subsequent updates submitted by firms during 2015. PRA supervisors will contact firms directly to specify the level of information the PRA expects to receive in the plans.

The CP appendices include: 

• Appendix 1 and 2 - PS10/15 contained near final rules and a supervisory statement which have been subsequently amended and incorporated in appendix 1 and 2.
• Appendix 3 - Draft amendments to SS16/13 – Large Exposures 
• Appendix 4 - Draft amendments to FSA078 – Pillar 2 Concentration risk minimum data requirements
• Appendix 5 - Draft amendments to Statement of Policy  ‘The PRA’s methodologies for setting Pillar 2 capital’  
• Appendix 6 - Draft amendments to the SS32/15 ‘Pillar 2 Reporting Schedule ‘ Appendix 2
• Appendix 7 - Glossary

Responses and next steps

The consultation closed on Friday 15 January 2016. 

Consultation Paper 37/15