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Financial Services Act 2021

Contents

Schedule 3: Prudential regulation of credit institutions etc.

Part 1: New Part 9D of the Financial Services and Markets Act 2000

  1. Part 1 of Schedule 3 inserts a new Part 9D into FSMA.
  2. Section 144A defines "CRR rules" as rules made under the new power for holding companies in section 192XA, as well as general rules by the PRA about a matter that is the subject of a) a provision of the CRR that has been or may be revoked under subsection (1) in section 3, or b) a CRR Basel standard, as defined in section 4. This is intended to include all rules made by the PRA to implement outstanding elements of the Basel III standards, and any other rules which are made as a result of revocations made under section 3 (which captures where more of the CRR has been revoked e.g. for coherence reasons).
  3. Subsection (5) of section 144A sets out that CRR rules includes matters adapted from the CRR Basel standards. This is intended to account for the fact that the BCBS sets standards for internationally active banks but, in the UK, prudential requirements stemming from the Basel Framework are applied to all credit institutions, including e.g. smaller banks and building societies that focus on domestic lending. CRR rules also includes rules on the subject matter contained in EU tertiary legislation made under the CRR.
  4. Section 144B contains definitions used in Part 9D.
  5. Sections 144C and 144D introduce new accountability requirements for the PRA (taken together, these two sections will be referred to as ‘the accountability framework’). The accountability framework reflects the increased responsibility given to the PRA for setting prudential requirements which is granted to it through this Act. It ensures the PRA considers additional policy priorities HM Treasury has identified as relevant to the implementation of the Basel standards, and which are not currently captured within the PRA’s statutory obligations. It also aims to increases transparency of how these policy priorities impact rulemaking of the PRA through the reporting requirement.
  6. Section 144C requires the PRA to have regard to a new list of matters, specified in this section, when making CRR rules. When having regard to the likely effect of the PRA’s CRR rules on these matters, the PRA should consider both their positive and negative effects. Subsections (3) and (4) include a further matter for the PRA to consider when making CRR rules – the effect of these rules on equivalence decisions specified as relevant by HM Treasury, including decisions made by, and for, the UK by any international jurisdiction. The Government retains responsibility for international relations, which includes equivalence arrangements between the UK and other international jurisdictions. Therefore, the matter of equivalence is treated differently to the others, with a requirement for the PRA to consult HM Treasury in this area. The Government has been clear that financial services equivalence will be judged on outcomes and therefore the consultation between the PRA and HM Treasury will reflect this.
  7. Section 144D imposes a new obligation on the PRA when it a) publishes consultations on draft CRR rules and b) makes final CRR rules. In both these scenarios, the PRA will be required to publish an explanation of the way in which having regard to the new matters listed in section 144C(1) has affected their draft or final rules. When the PRA makes final CRR rules, it must also publish a summary of their purpose. This is intended to increase transparency about PRA rulemaking when it implements the remaining Basel III changes and any further material updates to these regimes.
  8. Section 144E sets out exemptions from when the accountability framework applies.
  9. Subsection (1) specifies that the accountability framework does not apply where the PRA makes CRR rules following a direction or recommendation given by the Financial Policy Committee (FPC) of the Bank of England. This is because the FPC has an existing secondary objective to support the economic policy of the Government, and so they are already required to consider public policy priorities set by the Government.
  10. Taken together, subsections (2) and (3) mean that the accountability framework does not apply where the PRA makes CRR rules which do not differ materially from the CRR. This is because some sections of the CRR may be revoked by HM Treasury for coherence reasons. For example, where a substantial number of articles within a chapter need to change to implement Basel, the whole chapter may be revoked to avoid the regime being split between the CRR and PRA rules in a way that is very difficult to understand as a whole. In this case, the PRA rules which replace the revoked chapter of CRR will include some new rules and some rules that are restated without material modification. The accountability framework (as well as current FSMA consultation and reporting requirements) do not apply to these restated rules if they are copied over from the CRR without material modification. However, the PRA will be required to continue to consult the FCA.
  11. Subsection (4) is self-explanatory.
  12. The accountability framework is intended to apply on an ongoing basis, including to material rule changes where the PRA updates CRR rules in the future. Subsections (5), (6) and (7) exempt immaterial modifications to these rules from the accountability framework.
  13. Section 144F provides HM Treasury with a power to amend legislation as a consequence of the PRA making CRR rules. This includes the power to amend retained direct EU legislation as well as legislation made by the devolved legislatures. The CRR, as well as other legislation that references it, may need to be amended as a result of the PRA making CRR rules to ensure the regime as a whole is workable. For instance, cross-references in the CRR may need to be amended to refer to CRR rules made by the PRA.
  14. Section 144G gives the PRA the power to permit firms not to apply a certain CRR rule or to apply it with modifications. This is intended to ensure the PRA can provide permissions to enable firms to use different approaches within CRR rules, for example IRB approaches to credit risk (as explained in paragraph 314) rather than the SACR (as explained in paragraph 312.
  15. Subsection (1) of section 144H allows the PRA to make rules by reference to the CRR, instruments made under the CRR and to the retained EU law version of the CRD, as defined in subsection (3).
  16. Subsection (2) of section 144H allows for CRR rules to modify (but not amend or revoke) the provisions contained in CRR or associated EU tertiary legislation. This is necessary to make sure that the PRA can make new CRR rules in areas that are currently occupied by the CRR.

Part 2: PRA’s powers in relation to certain holding companies

  1. Part 2 of Schedule 3 provides the PRA with a power to make rules in relation to holding companies approved or designated under Part 12B of FSMA (as introduced through the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020) and includes these rules within the accountability framework in sections 144C and 144D.
  2. Section 192XA (which replaces the rule-making power in section 192V inserted into FSMA for the purpose of the transposition of CRD V) sets out which holding companies the PRA can make rules in relation to and the subject matter to which these rules must relate.
  3. Subsection (1) sets the scope of the PRA’s power to only those holding companies which are approved or designated under part 12B of FSMA, and that the PRA can exercise this power only where it is necessary or expedient to advance any of its objectives (safety and soundness being the PRA’s primary objective).
  4. Subsection (2) restricts the use of the power to several subject areas. Subsection (2)(a) sets out the focus of the power, which is to secure the application of prudential requirements on a consolidated or sub-consolidated basis, as defined in the CRR to mean requirements which apply at a certain level of a firm’s group structure as if the entirety of that element of the group were one firm. Subsections (b) to (f) are self-explanatory and ensure that the PRA can effectively make rules to impose necessary requirements for the implementation of Basel standards indulging rules needed to mitigate risks that could affect the group beyond consolidated and sub-consolidated requirements.
  5. Subsections (3), (4) and (5) replicate section 144H for rules made in relation to approved holding companies.
  6. Subsection (6) applies section 137H of FSMA where the PRA makes rules relating to holding companies. This will allow remuneration provisions in employment contracts issued by holding companies in breach of rules to be voided, and payments made under the void provision to be clawed back.
  7. Subsection (7) gives HM Treasury the power to direct the PRA to consider whether the remuneration policies of those holding companies comply with the regulator’s rules. HM Treasury is obliged to consult with the regulator before issuing them with a direction to undertake a review.
  8. Subsection (8) ensures that consequential amendments of references to rules as under section 141A can be made in relation to rules made under section 192XA.
  9. Subsection (9) sets out definitions to be used in this section, in particular, that group risk relates to risk that adversely affect the financial position of a holding companies arising from the relationships between the holding company and other members of its group and other matters.
  10. Section 192XB sets out that, where section 192XA rules are CRR rules, Part 9D applies, and that where these rules are not CRR rules (i.e. they do not relate to a CRR revocation or a CRR Basel Standard) the accountability framework set out in section 144C, the reporting requirements in section 144D, and some of the exemptions from the accountability framework in section 144E continue to apply. The elements of these sections which do not apply are those which are specific to CRR rules, i.e. that are only triggered where a section of the CRR is revoked, which cannot occur where the rules are not CRR rules.
  11. Section 192XC replicates section 144G for section 192XA rules.
  12. Paragraph 8 of Part 2 amends section 192Y of FSMA in order to allow the PRA to take disciplinary action against a holding company for contravention of any Part of the CRR or instruments made under that Regulation, rather than just breaches of certain parts of the CRR.

Part 3: Minor and consequential amendments of other enactments

  1. Part 3 of Schedule 3 includes minor and consequential amendments to FSMA that are a consequence of the changes to FSMA in Schedule 3.
  2. In particular, paragraph 9 includes approved holding companies within the FPC’s power of direction and recommendation, now that they are responsible for group consolidated and sub-consolidated requirements.
  3. Part 3 also includes an amendment to the Capital Requirements Regulations 2013 (S.I. 2013/3115) to apply the current procedural requirements for CRR permissions to permissions granted under new section 144G FSMA.

Part 4: Transitional provision

  1. Part 4 of Schedule 3 allows for consultation requirements in relation to CRR rules and 192XA rules that are not CRR Rules, to be satisfied by things done by the PRA before, as well as after, Royal Assent. Paragraph 24 specifies what counts as a relevant equivalence decision. Paragraph 25 sets out that the carbon target described in section 143G(1) applies to CRR rules and 192XA rules made after 1 January 2022.
  2. To ensure continuity paragraph 26 also provides that rules made under section 192V of FSMA as inserted by the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020, are to be deemed as section 192XA rules and that breaches of section 192V rules can continue to be enforced against following their repeal and replacement.

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