Banking and Finance

Bank of England

Silicon Valley Bank - Bank of England publishes statement and Transfer Instrument - 13 March 2023

The Bank of England has published a statement and Transfer Instrument on the resolution of Silicon Valley Bank UK Ltd.

The Treasury Committee has also published an update letter from Andrew Griffith MP, Economic Secretary to HM Treasury to the Chair of the Treasury Select Committee, Harriett Baldwin MP, which states that the government has used its powers under the Banking Act 2009 to provide HSBC UK Bank Plc with an exemption to certain ring-fencing requirements (see item below in this section).

Bank of England statement on Silicon Valley Bank

Silicon Valley Bank UK Limited Mandatory Reduction and Share Transfer Instrument 2023

HM Treasury press release

Letter from the Economic Secretary to the Treasury to the Treasury Committee

The Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023 - Order and explanatory memorandum published - 14 March 2023 

The Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023 has been published, together with an explanatory memorandum.

The Amendments of the Law (Resolution of Silicon Valley Bank UK Limited) Order 2023

Explanatory memorandum

Prudential Regulation Authority

Climate change adaptation - PRA publishes report on climate-related risks and the regulatory capital frameworks - 13 March 2023

The PRA has published a report on climate-related risks and the regulatory capital frameworks applying to banks and insurers (the Report). This follows publication of its Climate Change Adaptation report in October 2021, which set out early thinking on climate change and the regulatory capital frameworks applying to these firms.

The Report sets out an update and key findings on the PRA’s work since its October 2021 report, together with areas for future work. The Report’s key findings include:

• Existing capability and regime gaps create uncertainty over whether banks and insurers are sufficiently capitalised for future climate-related losses. This uncertainty represents a risk appetite challenge for micro and macroprudential regulators. Regulators need to form judgements on whether quantified and unquantified risks are within risk appetite - and act accordingly.
• Effective risk-management controls within PRA-regulated firms can reduce the quantum of capital required in the future for resilience, but the absence of controls might suggest a greater quantum of capital will be required. As a short-term priority, the PRA is focused on ensuring firms make progress to address ‘capability gaps’ to improve their identification, measurement, and management of climate risks.
• The PRA has explored conceptual issues to better understand the nature and materiality of ‘regime gaps’ in the capital framework. The unique characteristics of climate risks mean that their capture by capital frameworks requires a more forward-looking approach than those used for many other risks. Scenario analysis and stress testing will play a key role in this. Regulators need to focus on the development of these frameworks and how they can inform capital requirements. Firms will be expected to make further progress.
• Current evidence suggests that the existing time horizons over which risks are capitalised by banks and insurers are appropriate for climate risks. Therefore, there does not appear to be sufficient justification for regulators, including the PRA, to make a policy change to these time horizons. The PRA will continue to explore how climate risks can be calibrated within the timelines embedded in existing capital frameworks.
• Further work is needed to assess whether there may be a regime gap in the macroprudential framework. Any use of macroprudential tools would need to be assessed carefully against how well they mitigate climate risks, their behavioural impacts, and the potential for unintended consequences. Calibration of macroprudential tools would also be challenging given uncertainties around climate risks and the need for them to help facilitate an orderly transition to net zero. The PRA will explore the nature and materiality of such regime gaps as part of its ongoing policy work and consider whether action to address them would be appropriate.

The PRA will undertake further analysis to explore whether changes to the regulatory capital frameworks may be required. In particular, it will:

• ensure firms continue to make progress to address capability gaps;
• build its capabilities and forward-looking tools to judge the resilience of the financial system to climate risks;
• support initiatives to enhance climate disclosures;
• promote high quality and consistent accounting for climate risks;
• build understanding of, and address, material regime gaps in the capital frameworks;
• supervise against its requirements in Supervisory Statement SS3/19 (on banks and insurers’ climate change-related financial risk management approaches), including work to build an understanding of banks’ evolving approaches to Pillar 2 add-ons; and
• engage in relevant discussions at international fora to inform domestic policymaking.

PRA report on climate-related risks and the regulatory capital frameworks

Non-performing exposures - PRA publishes Consultation Paper (CP6/23) - 14 March 2023

The PRA has published a Consultation Paper (CP6/23) on the non-performing exposures (NPE) capital deduction.

The NPE deduction requirement in the PRA Rulebook derives from the Capital Requirement Regulation (575/2013) (CRR). The PRA has reviewed the appropriateness of the requirement for the UK, considering the requirement's aims, design and the degree to which it advances the PRA’s objectives. The PRA has also considered the availability of supervisory tools to address the risk of UK firms building up significant NPE.

Having reviewed these factors, the PRA believes it would be appropriate in the UK context not to apply the NPE deduction requirement. The Consultation Paper sets out its proposals to remove from the PRA Rulebook the Common Equity Tier 1 (CET1) deduction requirement for NPE that are treated as insufficiently covered by firms' accounting provisions. It also proposes to remove the associated reporting requirements for the NPE deduction and is consulting on amending the related reporting templates.

The PRA considers that removing the NPE deduction requirement would enhance the definition of capital in a way that aligns with international standards. It would increase the scope for it to take a judgement-led approach to the prudential risks associated with NPE under-provisioning, where necessary. It would also remove a potential competitive disadvantage as firms in some jurisdictions are not subject to the NPE deduction. Removing the associated reporting requirements would reduce firms' monitoring, compliance and data gathering costs.

These proposals would result in changes to the Own Funds and Eligible Liabilities (CRR) Part and the Reporting (CRR) Part of the PRA Rulebook. The PRA envisages that these changes would come into force on the day after the date of publication of the final policy.

The consultation closes on 14 June 2023.

PRA Consultation Paper (CP6/23): The non-performing exposures capital deduction

Financial Conduct Authority

Support for mortgage borrowers - FCA publishes finalised guidance (FG23/2) - 10 March 2023

The FCA has published finalised guidance (FG23/2) clarifying how lenders can support borrowers who are affected by the rising cost of living. The regulator has also published new data and analysis on the mortgage market. This follows the FCA’s consultation on draft guidance published in December 2022.

The purpose of the guidance is to ensure firms are clear about the effect the FCA’s rules and the range of options they have to support their customers, including those who are facing higher interest rates alongside the rising cost of living. The final guidance is largely unchanged from the draft consulted on, subject to three minor changes, to:

• clarify that not all firms will be able to offer contract variations, whether or not the variation is for forbearance purposes;
• more clearly set out the FCA's view of when a switch to an interest-only mortgage for a temporary period can be considered and that the repayment basis is not the only relevant question when considering whether a switch to an interest-only mortgage would be appropriate; and
• clarify that, any decision by a firm only to allow borrowers who are up to date with payments to access mortgage rate switches, is not derived from the FCA's rules, instead reflecting the industry voluntary switching agreement.

Firms offering such options to customers should do so in compliance with their broader obligations under the FCA Handbook.

FCA (FG23/2): Guidance for firms supporting their existing mortgage borrowers impacted by the cost of living crisis

Webpage: Guidance for firms supporting existing mortgage borrowers impacted by rising living costs

Webpage: Research Note: Mortgage borrowers and macroeconomic developments

Press release

Payment firms - FCA publishes Portfolio Letter - 16 March 2023

The FCA has published a portfolio letter addressed to CEOs of payments firms, setting out its priorities and the relevant actions it expects firms to take.

The FCA states that firms should identify the content of the letter that is relevant to them and take appropriate action to deliver three outcomes that the FCA has set for payment firms. These are:

• Outcome 1 - ensuring that customers' money is safe. Firms should ensure they are safeguarding customers' funds in line with applicable legislation and guidance, regularly reviewing their prudential risk management arrangements and ensuring that they have an appropriate wind-down plan in place that is reviewed regularly and kept up to date so it continues to meet the FCA's expectations.

• Outcome 2 - ensuring that firms do not compromise financial system integrity. Firms’ anti-money laundering (AML) systems and controls should be effective and commensurate with business risks. Firms should regularly review their compliance with AML obligations and sanctions requirements and comply with their responsibilities under the Proceeds of Crime Act 2002 and Terrorism Act 2000 through accurate and timely submissions of suspicious activity reports (SARs). They should also take immediate action to protect their customers against fraud risks and ensure that they (the firms) are not being used to receive the proceeds of fraud.

• Outcome 3 - meeting customers' needs. This includes high quality products and services, competition and innovation, and robust implementation of the FCA Consumer Duty.

Further, the FCA also lists three cross-cutting priorities which underpin the outcomes, namely:

• Priority 1 - governance and leadership. The FCA expects firms to take action to ensure their governance and leadership arrangements meet its expectations. In particular, firms must satisfy themselves that directors and individuals responsible for providing payment services (including agents) are fit and proper and have appropriate knowledge and experience. Firms must also regularly review governance arrangements to ensure they are robust and proportionate. Firms are also reminded of their responsibilities when using agents and distributors.
• Priority 2 - operational resilience. The FCA is proactively monitoring firms' progress in complying with the operational resilience requirements introduced in March 2022 and will take action where it identifies deficiencies. It also expects firms to monitor their dependency on providers of critical service providers, including in relation to technology and banking services, and have appropriate contingency plans in place to move providers if necessary.
• Priority 3 - regulatory reporting. The FCA will make more frequent use of its right to charge firms an administrative charge (usually £250) where they fail to meet the reporting deadlines and warns that ongoing failure may result in a referral to enforcement and possible cancellation of permissions.

FCA Portfolio Letter: Priorities for payment firms