PS2/25 – Streamlining firm-specific capital communications

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to Chapter 3: Streamlining firm-specific capital communications of consultation paper (CP) 9/24 – Streamlining the Pillar 2A capital framework and the capital communications process. This PS also contains the PRA’s final policy and rules to streamline firm-specific capital communications, which simplify the content and process of the firm-specific capital communications used to set Pillar 2A, the systemic buffers and the Additional Leverage Ratio Buffer (ALRB). These changes have no impact on firms’ capital requirements. The final policy and rules are set out in the following appendices to this PS:

• PRA Rulebook: CRR Firms: Buffers Instrument 2025 (Appendix 1). The instrument makes changes to the following Parts of the PRA Rulebook: Glossary, Leverage Ratio – Capital Requirements and Buffers, Disclosure (CRR), Reporting (CRR), Capital Buffers, and Own Funds and Eligible Liabilities (CRR).
• Supervisory statement (SS) 31/15 – The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP) (Appendix 2). This statement was amended to reflect changes to, and avoid confusion with, rule 4.1 of the Capital Buffers Part of the PRA Rulebook.
• SS45/15 – The UK Leverage Ratio Framework (Appendix 3). The changes reflect that the PRA will no longer use its powers under section 55M or section 192C FSMA to set the ALRB. The calculation of the ALRB and related requirements are now set out in the PRA Rulebook.

1.2 This PS is relevant to all PRA-regulated banks, building societies, designated investment firms, and all PRA-approved or PRA-designated holding companies.

Background

1.3 In Chapter 3 of CP9/24, the PRA proposed to amend the PRA Rulebook and simplify the regulatory process and communications used to set Pillar 2A, the systemic buffers and the Additional Leverage Ratio Buffer (ALRB) as follows:

• amend the Capital Buffers Part of the PRA Rulebook to reflect any Pillar 2A capital and systemic buffers^{footnote [1]} set by the PRA; this ensures that Pillar 2A and the systemic buffers are included, when set, in the rules around capital conservation and Maximum Distributable Amount (MDA) restrictions;
• amend the Leverage Ratio – Capital Requirements and Buffers, Disclosure (CRR) and Reporting (CRR) Parts of the PRA Rulebook to set out the ALRB requirements, including the calculation methodology; and
• make small consequential changes to the PRA Rulebook, SS31/15 and SS45/15.

1.4 In determining its final policy and rules, the PRA has considered representations received in response to the consultation. The changes are intended to make the process of capital setting easier for firms and the PRA. They would be marginally beneficial to the PRA’s secondary objectives – of facilitating effective competition, and the international competitiveness of the UK economy and the growth of the economy in the medium to long term – as the PRA would streamline the policy references and allow simplifications in the process and content of firm-specific communications, which the PRA expects would reduce firms’ costs. In this PS, the ‘Feedback to responses’ chapter contains a general account of the representations made in response to the CP and the PRA’s feedback.

1.5 In carrying out its policy and rule-making functions, the PRA is required to have regard to various matters. In Chapters 1 and 3 of CP9/24, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy and rules. The final policy and rules are consistent with the proposals in CP9/24. Therefore, the PRA considers that its analysis of its objectives and have regards in CP9/24 remains appropriate.

Summary of responses

1.6 This policy statement only covers the policy material and changes that the PRA described in Chapter 3 of CP9/24, which related to streamlining firm-specific capital communications. The PRA will consider responses to the proposals in other chapters of CP9/24 at a later stage, as they have a later proposed implementation date.

1.7 The consultation closed on 12 December 2024. The PRA received 11 responses to CP9/24; however, most related to proposals in other chapters of the CP. For this PS, the PRA considered the five responses that were related to the changes proposed in Chapter 3; these responses were supportive. Of these five, one response provided more detailed comments and one drafting suggestion. These are set out in Chapter 2: Feedback to responses. Appendix 1 sets out the names of the CP respondents who consented to their names being published.

Changes to draft policy

1.8 The PRA is finalising the rule amendments and the changes to SS45/15 as proposed in CP9/24. In response to feedback, the PRA has made one small change to paragraph 5.18 of SS31/15. This change has no meaningful effect on the policy. This is explained in Chapter 2: Feedback to responses.

1.9 The impact on mutuals remains unchanged; the PRA continues to view that the changes will not have a significantly different impact on mutual societies compared to other authorised firms. Similarly, the PRA’s view of the minimal significance of the implementation costs for both the firms and the PRA, as set out in CP9/24, also remains unchanged.

1.10 When making rules, the PRA is required to comply with several legal obligations. In Chapter 3 of CP9/24, the PRA published its explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [2]} The PRA is finalising the rules as proposed in CP9/24 and so those explanations are also applicable to the final rules.

1.11 In carrying out its policy making functions, the PRA is also required to have regard to several matters. In Chapter 3 of CP9/24, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The analysis, as presented in the CP, remains unchanged in light of responses to Chapter 3 of the CP. In addition, the PRA would note that none of the aspects of the Government’s economic policy set out in the HM Treasury (HMT) recommendation letter of 14 November 2024, and to which the PRA has had regard, were considered significant.

1.12 Moreover, when making CRR rules or rules applying to certain holding companies, the PRA must also publish a summary of the purpose of the proposed rules.^{footnote [3]} The purpose of the proposed rules is to streamline and simplify the content and process of firm-specific capital communications.

Implementation

1.13 The new policy and rules will take effect on Monday 31 March 2025. This is consistent with the consultation. Firms are not required to take any specific actions to implement the changes.

1.14 One respondent provided two comments on the implementation process. The PRA is addressing these comments by setting out below how the new rules interact with existing capital communications (on Pillar 2A, the systemic buffers and the ALRB) and what actions the PRA will take to ensure consistency between new and old rules.

1.15 For Pillar 2A and the systemic buffers, the PRA will reflect the changes in the capital communications at the time of the firm’s next Pillar 2A capital reset following 31 March 2025.

1.16 Currently, the Capital Buffers Part of the PRA Rulebook only reflects Pillar 1 as a minimum requirement, while the definition of the combined buffer only includes the capital conservation buffer and the countercyclical capital buffer. When the PRA sets a Pillar 2A requirement (which counts as a minimum requirement) or a systemic buffer (which becomes part of the combined buffer), the regulatory framework is modified for individual firms through Model Requirements and Model Directions.^{footnote [4]} These are referenced and incorporated via links in firm-specific Pillar 2A capital communications (Pillar 2A is set exercising PRA powers under s55M(5) FSMA (‘VReqs') for firms, and under s192C FSMA for Holding Companies^{footnote [5]} (‘s192C Directions’)). To prevent any potential conflict between the Model Requirements and Directions, the capital conservation, and the MDA rules, as set out in the Capital Buffers Part, the PRA asks firms and Holding Companies to take up Modifications by Consent (MBC) that disapply the capital conservation and MDA rules in the Capital Buffers Part.

1.17 Following 31 March 2025, as part of each firm’s next Pillar 2A capital reset, the VReqs and s.192C Directions incorporating the Model Requirements and Model Directions will be replaced by new VReqs and s.192C Directions without the Model Requirements and Model Directions. At that point, the PRA will cancel the MBCs that disapply the capital conservation and MDA rules in the Capital Buffers Part; without the Model Requirements and Model Directions, firms will not need MBCs. Without the MBCs, firms and Holding Companies will then become subject to the rules in the Capital Buffers Part that were previously disapplied, including the amendments set out in this PS.

1.18 However, until the firm’s next Pillar 2A capital reset, their existing MBC, Model Requirement and Model Direction will continue to apply. While these remain in place for a firm, the capital conservation and MDA rules in the Capital Buffers Part of the PRA Rulebook (including the amendments in this PS) will continue not to apply to that firm. This has no impact on firms’ capital requirements, ie the applicable Pillar 2A and systemic buffers.

1.19 For the ALRB, the PRA also has a similar process involving VReqs and s.192C Directions with ALRB Model Requirements and ALRB Model Directions.^{footnote [6]} The rule changes in this PS will remove the need for the PRA to issue VReq letters or s192C directions for ALRBs because the ALRB requirements, including how to calculate the ALRB, will be set out in the PRA Rulebook. To reflect this, the PRA will revoke the existing ALRB capital communications for all relevant firms through firm-specific letters when the new rules come into effect on 31 March 2025.

1.20 Unless otherwise stated, any remaining references to EU or assimilated legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [7]}

2: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [8]}

2.2 The PRA has considered the representations received in response to Chapter 3 of CP9/24. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The PRA received five responses in support of the changes proposed in Chapter 3 of CP9/24. The PRA welcomes these responses. One respondent noted that the capital communication process is currently complex and therefore welcomed the review.

2.4 Another respondent provided one small drafting suggestion and two comments regarding the process.

2.5 The drafting suggestion related to paragraph 5.18 of SS31/15; the respondent proposed a small adjustment to provide greater clarity about a requirement imposed on firms. The PRA has considered the drafting again given this response and have deleted the first sentence in paragraph 5.18 completely. That sentence was intended to remind firms of existing requirements set out elsewhere, including rule 4.1 of the Capital Buffers Part of the PRA Rulebook. By deleting this sentence from the SS, the PRA avoids confusion between the rule, which continues to apply (as amended by this PS to also reflect where Pillar 2A is set), and the expectations set out in SS31/15. This change has no impact on the final policy.

2.6 The two comments regarding the process stated that:

• the consultation did not explain whether firms would be expected to take any steps to implement the changes, such as applying for amendments to, or the cancellation of, the MBCs; and
• the consultation was unclear whether there would be a period in which the firms are subject to both (i) their existing VREQs/s.192C directions, and (ii) the rules in the PRA Rulebook, or whether the new provisions of the PRA Rulebook would become binding on the firms only when their existing VREQs/s.192C directions are modified as envisaged.

The PRA has addressed these comments in the Implementation section of this PS and confirmed that firms do not need to do anything to implement the changes. That section also explains how the rules interact with existing capital communications (on Pillar 2A, the systemic buffers and the ALRB), and that firms will not be subject to two sets of capital communications at once.