The UK government confirmed, in its June 2020 statement, that the Capital Requirements Directive V (CRD V) and the vast majority of the Banking Recovery and Resolution Directive II (BRRD II) would be transposed by the required date of 28 December 2020. New regimes would be implemented in relation to the majority of the provisions of the Capital Requirements Regulation II (CRD II) and the Investment Firms Directive (IFD) and Investment Firms Regulation (IFR), both of which would apply after the end of the Brexit transition period.

Capital Requirements Directive V

CRD V was transposed by a mixture of secondary legislation (where required) and PRA rules (where secondary legislation was not required). Although the UK was not legally required to do so given its application after the end of the transition period, this included the new requirement that financial holding companies (FHCs) and mixed FHCs in existence on 27 June 2019 must obtain approval by 28 June 2021 and thereby become subject to the PRA’s direct supervision.

An additional Prudential Regulation Authority (PRA) rule was introduced, also from 28 December 2020, requiring PRA-regulated subsidiaries of FHCs and mixed FHCs to be responsible for ensuring the group’s compliance with CRR consolidated prudential requirements until the above approval is received. The PRA considers this is necessary to preserve the continuity of consolidated supervision and the safety and soundness of such firms.

Banking Recovery and Resolution Directive II

The BRRD II was also transposed by the required date with the exception of a number of provisions which apply after the end of the transition period, including the revised MREL regime given it applies from 1 January 2024.

A number of provisions were ‘sunsetted’ on the basis they were not suitable for the UK resolution regime post-Brexit and would, therefore, only apply between 28 December 2020 and 1 January 2021. These included the provision introducing a pre-resolution moratorium power (which was introduced by including it within the definition of ‘crisis management measure’ in the Banking Act 2009).

Capital Requirements Regulation II

HM Treasury’s June 2020 policy statement indicated that a new prudential regime would be introduced for UK credit institutions through the Financial Services Bill 2020 and implemented through PRA rules on which the regulator would consult (the Regime). The Regime would be largely based on the EU CRR II but potentially deviate from it where necessary to reflect the number, size and nature of UK credit institutions and the structure and operation of the UK market.

The PRA published its consultation in February 2021 which confirmed that the new Regime will largely mirror the EU CRR II with certain modifications to achieve closer alignment with the Basel III standards, increase proportionality and ensure consistency with the UK CRR. These include:

  • software assets: as previously announced, the PRA proposes that software assets should be fully deductible, as intangible assets, from CET1 capital, having found no credible evidence that such assets can absorb losses effectively in stress (the EU CRR II exempts such assets from the deduction requirement);
  • a number of proposed amendments to the large exposures framework to reflect changes made by the Basel Committee, including that the definition of capital for large exposure purposes should be Tier 1 capital.

The consultation also omits any proposed amendments to the UK’s leverage ratio framework given this is being reviewed by the FRC and PRC. Once that review is complete (expected in Summer 2021), the PRA is expected to consult on any necessary changes to the new Regime.

Firms will have been preparing, very sensibly, for the Regime on the basis of the EU CRR II as onshored into UK law, pending clarification of any modifications. Firms will now need to identify any further changes that are needed to their procedures, systems and controls to ensure compliance with the new Regime. This will be particularly important for firms and groups that operate in both the UK and EU, not least because of the different commencement dates (see below), and smaller banks for which the Regime provides some exemptions.

While the Regime had been intended to come into force at the same time as the EU CRR II’s post-Brexit provisions (namely, 1 June 2021), it is now planned to come into force on 1 January 2022. Further requirements can also be anticipated beyond its introduction, following the UK’s government’s announcement in 2020 that it intends to implement the final ‘Basel 3.1’ standards by the required date of 1 January 2023. The Financial Services Bill provides the PRA with the power to implement those provisions.

Investment Firms Directive and Investment Firms Regulation

A new prudential regime for investment firms, the Investment Firms Prudential Regime, is also being introduced through the Financial Services Bill and implemented through FCA rules. The FCA began consulting on the regime in December 2020, which confirms, as indicated in the Treasury’s June 2020 policy statement, that the UK’s regime will be materially similar to the EU IFD and IFR. The regime is currently planned to come into force on 1 January 2022 and for further information on it please see the Spring 2021 edition of our Asset Management – Hot Topics series.