CP10/24 – Updates to the UK policy framework for capital buffers

1: Overview

1.1 The Capital Buffers Regulations^{footnote [1]} (CBR) is a piece of assimilated law,^{footnote [2]} retained from the EU, which sets out the statutory framework for the Countercyclical Capital Buffer (CCyB), Capital Conservation Buffer (CcoB), Global Systemically Important Institutions (G-SII) buffer, Other Systemically Important Institutions (O-SII) buffer and the Systemic Risk Buffer (SRB). The Prudential Regulation Authority (PRA) and Financial Policy Committee (FPC) implement these buffers in line with their respective responsibilities as set out in the CBR.

1.2 Under Financial Services and Markets Act (FSMA) 2023, HM Treasury (HMT) has the power to revoke assimilated law relating to financial services. Under the FSMA 2023 Regulatory Framework, financial services regulators will generally take responsibility for setting the direct regulatory requirements that were previously contained within that assimilated law, acting within a framework set by HM Government and Parliament. This means that detailed regulatory requirements that currently sit within assimilated law, and can currently only be amended by primary or secondary legislation, can move into the regulators’ rules and policy materials, in line with the UK’s model of operationally independent regulators and where they will be easier and less time-consuming to update.

1.3 Consistent with this agreed approach, the PRA and HMT are proposing amendments to the UK framework on capital buffers. These amendments would result in some regulatory material on the UK capital buffers framework being removed from the statute book and replaced by PRA policy material.

1.4 This consultation paper (CP) sets out the PRA’s proposals to streamline some of its policy materials on capital buffers as part of this process, to enhance usability and clarity. These proposals include consequential amendments to, and streamlining of, PRA statements of policy (SoPs), PRA rules that refer directly to the current CBR, and UK Technical Standards (UKTS). In this consultation, the PRA is not proposing changes to its policy approach on the implementation of capital buffers. The policy proposals included in this CP are:

• revocation of the UKTS on the methodology for the identification of G-SIIs;^{footnote [3]}
• introduction of a new SoP setting out the PRA’s approach to G-SII identification and buffers, which will replace the aforementioned UKTS and relevant provisions to be revoked in the CBR;
• minor amendments to the PRA’s existing SoPs on O-SII designation and O-SII buffer setting to reflect proposed amendments to the CBR;
• minor consequential amendments to PRA rules that refer directly to the current CBR.

1.5 In parallel, HMT is publishing its draft statutory instrument (‘draft HMT SI’), which proposes further amendments to other parts of the CBR, including the CCyB, CCoB and SRB. These amendments propose a transfer of responsibilities to the PRA, including setting the scope of application of the CCyB and CCoB. The PRA has published on the same day as this CP, its proposals on the capital elements of the Strong and Simple regime for Small Domestic Deposit Takers (SDDTs). These proposals include making use of the PRA’s enhanced responsibilities under the draft HMT SI to amend the capital buffers framework for SDDTs. These proposals are set out separately in the CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs).

1.6 The material in this CP has been prepared on the assumption that the Government legislates in line with the approach that it has indicated via the draft HMT SI, and the policy materials consulted on may require amendments to reflect the final version of HMT’s SI.

1.7 The CP is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies, as well as credit institutions, investment firms, and financial institutions that are subsidiaries of these firms, regardless of their location. It is also relevant to counterparties of the above-listed entities to the extent that counterparties have financial contracts with such entities governed by third-country law. It is not relevant to credit unions.

1.8 The proposals in this CP to update PRA policy materials on O-SII and G-SII identification and buffer setting are designed to streamline these materials while maintaining the current outcomes for firms. Given the proposed policy materials would simply preserve current requirements, they would not result in additional costs for firms. The PRA considers that streamlining its policy materials on the O-SII and G-SII buffers would provide benefits in the form of clarity for firms. The PRA is not required to carry out a Cost Benefit Analysis (CBA) for the changes proposed in this CP because the proposals do not increase costs.

1.9 The PRA has a statutory duty to consult when introducing new rules (FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult where it would be fair to do so. 

1.10 Given this CP does not contain any proposed policy changes, none of the statutory panels were consulted about the proposals in this CP.

1.11 In carrying out its policy making functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Structure of the CP

1.12 The structure of the CP is as follows:

• Chapter 2 – sets out proposals relating to the deletion of the UKTS and the introduction of a new PRA SoP on the PRA’s approach to G-SII identification and buffers;
• Chapter 3 – sets out proposals relating to updates to the existing SoPs on the PRA’s approach to O-SII identification and O-SII buffer setting;
• Chapter 4 – sets out proposed minor consequential amendments to PRA rules that refer directly to the current CBR; and
• Chapter 5 – sets out a ‘have regards’ analysis for the proposals in Chapters 2 and 3.

Implementation

1.13 The PRA proposes that the implementation date for the changes resulting from this CP will be the date the new SI comes into force, expected to be Q2 2025.

Responses and next steps

1.14 This consultation closes on Thursday 12 December 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP10_24@bankofengland.co.uk.

1.15 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.16 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.17 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [4]}

2: Changes to G-SII policy material

2.1 As part of post-financial crisis reforms, the PRA worked with regulators worldwide through the Basel Committee on Banking Supervision (BCBS) to design and implement the global systemically important banks (G-SIB) framework, which aimed to reduce the probability of distress or failure of these firms. The PRA aligns its methodology with the BCBS G-SIB framework, applying a capital buffer to UK G-SIIs to reflect their greater potential to affect adversely the stability of the global financial system if they experience distress or failure. G-SII is the UK equivalent term for G-SIB.

2.2 The UK’s G-SII identification and buffer framework is currently set out in the CBR and relevant UKTS.^{footnote [5]} The UK framework is designed to ensure outcomes are consistent with the BCBS framework for assessing the global systemic importance of G-SIBs.

2.3 In its draft SI, HMT has proposed to revoke provisions on G-SII identification and buffer setting. This means that the PRA will have sole responsibility for setting out the framework for G-SII identification and buffer setting.

2.4 The PRA’s and HMT’s proposals streamline the regulatory material on the G-SII framework. In line with its approach to delete material from EU-inherited documents and to retain the relevant policy content in PRA policy materials,^{footnote [6]} the PRA proposes deleting the UKTS and introducing a new SoP to replace the UKTS and the G-SII provisions to be revoked from the CBR. The PRA is not proposing any policy changes to its approach to identifying G-SIIs and setting G-SII buffers. The proposed SoP would maintain the UK’s alignment with the BCBS framework.

PRA objectives analysis

2.5 The PRA’s proposals aim to streamline its policy materials, while maintaining its current approach to G-SII identification and buffer setting. The repeal of assimilated law and Technical Standards (on-shored as UKTS) and their replacement with a PRA SoP advances our objective of promoting the safety and soundness of firms by making our materials more coherent and easier to follow. The identification and setting of an additional capital buffer for UK headquartered G-SIIs in accordance with the BCBS methodology developed at international level advances the PRA’s primary safety and soundness objective. It does this by helping to ensure G-SIIs hold appropriate levels of capital, in line with the greater costs of their distress or failure to the financial system and economy.

2.6 The PRA considers that its proposals in this section would be consistent with its secondary competition objective. Maintaining the PRA’s policy approach on G-SII identification and buffer setting, and continuing to align this with the BCBS framework, enhances competition by enabling the PRA to identify and apply enhanced capital buffer requirements to those firms with the greatest potential impact on the global financial system, and by ensuring that the same standards are applied to UK headquartered firms as to their overseas competitors.

2.7 The PRA also considers that its proposals are consistent with the new secondary competitiveness and growth objective. The proposed approach would advance the international competitiveness of the UK economy by ensuring that UK headquartered firms continue to be, with respect to G-SII identification and buffers, subject to the same standards as firms headquartered elsewhere.

3: Updates to O-SII policy material

3.1 The UK’s O-SII framework is currently set out in the CBR, the FPC’s framework for the O-SII buffer and two PRA SoPs:

• the PRA’s approach to identifying O-SIIs; and
• the PRA’s approach to the implementation of the O-SII buffer.

3.2 O-SIIs are firms that are systemically important in a domestic context. Institutions designated as O-SIIs are subject to enhanced supervision by the PRA, including recovery and resolution planning. Some O-SIIs are subject to higher loss absorbency requirements in the form of an O-SII buffer. An O-SII buffer can only apply to O-SIIs or part of an O-SII that are ring-fenced banks (RFBs) or large building societies.^{footnote [7]} The O-SII buffer raises the capacity of these firms to withstand stress, reflecting the additional damage that these firms could cause to the UK economy if they were close to failure.

3.3 In its draft SI, HMT has proposed to maintain the current balance of responsibilities between the PRA and FPC in identifying O-SIIs and setting O-SII buffers. This means that the PRA will maintain responsibility for identifying O-SIIs and setting O-SII buffers, while the FPC will maintain responsibility over the O-SII buffer framework, which the PRA is required to apply when determining the O-SII buffer.^{footnote [8]} HMT intends to delete most provisions relating to O-SII identification, meaning that the PRA will have sole responsibility in setting out the framework for O-SII identification.

3.4 In the draft SI, HMT has proposed to maintain the current distinction in the scope of firms that can be identified as O-SIIs and the firms to which an O-SII buffer can apply. This means that HMT will continue to restrict the application of the O-SII buffer to ring-fenced RFBs and large building societies, while any firm can be identified as an O-SII.^{footnote [9]}

3.5 The PRA’s and HMT’s proposals streamline the regulatory material on the O-SII identification framework. The PRA is proposing amendments to the O-SII identification SoP to replace the O-SII provisions to be revoked from the CBR. The PRA is not proposing any policy changes to its approach to identifying O-SIIs. The PRA is also not proposing any changes to its approach to implementing the O-SII buffer.

3.6 The PRA’s and HMT’s proposals maintain the current O-SII buffer framework. The PRA is proposing to change the review cycle of its SoP from at least every two to at least every three years, in line with HMT’s proposal in the draft SI to increase the length of the review cycle of the O-SII buffer framework. The PRA considers this is a more proportionate review cycle, considering the framework has become more mature, having been in operation since 2019. The PRA is also proposing to delete a historical paragraph which is no longer relevant.

PRA objectives analysis

3.7 The repeal of assimilated law on O-SII identification and its replacement with an updated PRA SoP advances our objective of promoting the safety and soundness of firms by making our materials more coherent and easier to follow. The PRA considers that maintaining its current approach to O-SII identification and implementation of the O-SII buffer advances the PRA’s primary safety and soundness objective. It does this by helping to ensure O-SIIs are subject to enhanced supervision, and where applicable higher loss absorbency requirements, in line with the greater costs of their distress or failure to the financial system and economy.

3.8 The PRA considers that maintaining its current approach to O-SII identification and implementation of the O-SII buffer would continue to facilitate effective competition, as it would enable the PRA to identify and apply enhanced supervision, and where applicable higher loss absorbency requirements, to those firms whose distress or failure would have a systemic impact on the UK economy or financial system. This helps the PRA continue to ensure that O-SIIs compete in a way that does not compromise their safety and soundness, and thereby have adverse effects on other financial institutions and the real economy.

3.9 The PRA also considers that its proposals are consistent with the new secondary competitiveness and growth objective. Identifying O-SIIs and applying enhanced supervision, and where applicable higher loss absorbency requirements, increases the resilience of those firms whose distress or failure would have a systemic impact on the UK economy or financial system. This increases confidence in the financial system and systemic firms’ ability to continue to provide critical financial services during periods of stress, thus supporting growth in the medium to long-term.

4: Minor Rulebook updates

4.1 The PRA proposes making minor consequential amendments to PRA rules that refer directly to the current CBR. The PRA is also proposing minor simplifications to G-SII reporting rules by deleting legacy EU reporting items. These proposed amendments make no change to the substance or intent of the rules.

4.2 The PRA proposes to make minor consequential amendments to:

• The definition of the ‘countercyclical buffer rate’ in the Capital Buffers Part of the PRA Rulebook to update the cross-reference to the CBR with the draft HMT SI.
• Article 20 of the Reporting (CRR) Part of the PRA Rulebook to delete the cross-reference to the CBR. The draft HMT SI does not contain provisions for identifying G-SIIs or assigning G-SII buffer rates.
• Article 447 of the Disclosure (CRR) Part of the PRA Rulebook to delete the reference to the combined buffer requirement in the CBR and replace it with a reference to the Capital Buffers Part. The draft HMT SI does not contain provisions for a combined buffer.
• Article 440 of the Disclosure (CRR) Part to delete the cross-reference to the CBR and replace it with a reference to the Capital Buffers Part.
• Article 441 of the Disclosure (CRR) Part to delete the reference to the CBR and replace it with a reference to the G-SII reporting template under the Reporting (CRR) Part (Annex XXVI). The draft HMT SI does not contain provisions for identifying G-SIIs and assigning G-SII buffer rates.
• The definition of ‘O-SII’ in the Glossary to update the cross-reference to the CBR with the draft HMT SI.

4.3 The PRA is also proposing minor simplifications to the G-SII reporting instructions (Annex XXVII) and template (Annex XXVI) under Article 20 of the Reporting (CRR) Part of the PRA Rulebook to delete legacy EU reporting items. G-SII reporting requirements will otherwise remain unchanged. G-SII reporting (COR016) is currently reported using version 3.0 of the EBA taxonomy. Given the PRA’s proposal would only involve a minor change to reporting requirements, the PRA is not planning to reflect this in the taxonomy at this stage. The PRA may issue an updated taxonomy at a later stage.

PRA objectives analysis

4.4 The PRA considers that ensuring the clarity and completeness of its rules helps firms understand and comply with them and provides firms with the confidence to follow PRA policies. This contributes to the PRA’s objective to promote the safety and soundness of PRA-authorised firms.

4.5 The PRA considers that deleting legacy EU reporting requirements that are now obsolete, would enhance clarity and marginally reduce G-SII reporting costs for firms. This contributes to the PRA’s objective to promote the safety and soundness of PRA-authorised firms. Given that these proposals do not increase costs, the PRA is not required to carry out a CBA for the changes proposed.

4.6 The PRA does not expect that these proposals would have any impact on its secondary objectives as the proposals do not make changes to existing policy.

5: ‘Have regards’ analysis and other considerations

‘Have regards’ analysis

5.1 In developing these proposals, the PRA has had regard to its framework of regulatory principles. The regulatory principles that the PRA considers are most material to the proposals include:

1. The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden: The PRA considers that streamlining its policy materials on the capital buffers framework will provide benefits in the form of clarity to firms.

2. The need to use the resources of each regulator in the most efficient and economic way: The PRA’s general approach to replacing provisions in the CBR and updating cross-references in the PRA Rulebook has been to preserve its current policy approach. Once regulatory material has been transferred into PRA policy documents, the PRA considers that the process for making any policy adjustments in future would be more efficient. This is compared to the current arrangement whereby regulatory material is spread across legislation, PRA policy material and UKTS.

3. The principle that the PRA should exercise its functions as transparently as possible: The PRA considers that streamlining its policy materials on the capital buffers framework, including deleting a UKTS and replacing it with a PRA SoP, would provide more transparency on its approach.

5.2 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for these proposals.

Impact on mutuals

5.3 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms. This is because the criteria applied under the G-SII framework and O-SII framework do not distinguish between mutuals and non-mutuals; this is independent of whether the cohort of UK G-SIIs or O-SIIs contain mutuals and/or non-mutuals.

Equality and diversity

5.4 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that, given the nature of the changes proposed, there is no impact.