Regulatory Changes: What is in the Pipeline?

By Gordon McMaster | 15 June 2016

The UK financial services sector has had to deal with significant changes in regulation since 2008. Further developments of regulatory requirements for banks and building societies in the UK are ongoing. This article describes my understanding of the main forthcoming developments in the pipeline.

IFRS 9 and Macro Hedging

The rules to be applied for hedge accounting of interest rate risk management of a portfolio of loans, have not been finalised. I understand that as at the time of writing, it is not clear when the rules will be available. In the meantime, institutions are to continue to apply the requirements of IAS39. Macro hedging is not allowed under UK GAAP FRS102 but firms can report under that standard and adopt IFRS 9.

Taxonomy 2.4.1

This taxonomy will be implemented for report reference date 30th September 2016. It will then be replaced by taxonomy 2.5 at the end of 2016. Taxonomy 2.4.1 introduces changes to COREP leverage ratio templates and implements liquidity coverage ratio (LCR) forms C72 to C76 for EBA reporting. Investment firms will continue to report LCR C51 to C54. Multi-currency reporting will become effective for COREP and Additional Liquidity Monitoring Metrics.

New Reporting

Buy to Let: The PRA has proposed that buy to let lending data at an individual loan level, be collected. The proposal will affect all firms that offer buy to let loans. The quarterly returns will only be required where new buy to let lending exceeds £20million per year. If introduced, first reporting will be for quarter two of 2017.

IFRS 9: The PRA has proposed changes to regulatory reporting given the introduction of IFRS 9 in January 2018. Under this proposal, four new returns (PRA104-PRA107) will replace FSA014 for collection of forecast balance sheet and Profit or Loss data. Firms not currently submitting FINREP returns, would be required to prepare some of those forms, initially for Profit or Loss, Balance Sheet and Statement of Comprehensive Income. It is possible that further proposals will be made for collection of other FINREP tables, where they fulfil an identified PRA data need.

The PRA has requested views of institutions on changes to reporting of credit risk, given the introduction of expected losses as part of IFRS 9. I understand that there may also be implications for credit risk reporting under UK GAAP FRS102. The PRA’s proposal may lead to changes to reporting of management and governance risk, pension risk, business model analysis, market risk and counterparty credit risk.

COREP and Prudent Valuation: Following a consultation by the EBA, the addition of prudent valuation of fair value positions reporting within COREP, may be introduced. Prudent valuation is defined as a price at 90% confidence that a firm could achieve upon exit to an exposure. Under the proposal, four new templates will be introduced. Where a threshold (i.e. total absolute value of fair value on and off balance sheet items is Euro 15billion) is not exceeded, only one template would require to be submitted.

COREP Geographical Exposures Breakdown: Templates C09.01 and C09.02, may be required at a total level, even where firms have only domestic exposures.

Leverage Ratio

Under the UK Leverage Ratio Framework, a decision will be taken by the Bank of England in 2017 on whether to extend the leverage ratio threshold of 3% and countercyclical leverage ratio buffer, to all PRA regulated firms.

The European Commission is expected to report to the European Parliament, during 2016, on the leverage ratio. That may have a legislative proposal to introduce a binding ratio threshold or minima for various business models, applicable from 1 January 2018 onwards.

Basel: Standardised Approach to Counterparty Credit Risk (SA-CCR)

SA-CCR is specific to measurement of counterparty credit risk associated with Over the Counter and exchange traded derivatives and long settlement transactions.

The new approach is effective from 1 January 2017.

Basel: Standardised Approach Credit Risk (SA-CR)

Under this proposal, the loan-to-value ratio will be the main driver in determining the risk weightings for mortgages. Higher risk weights will be applied to exposures where repayment is materially dependent on the cash flows generated by the property securing the exposure - e.g. buy to let.

Therefore there are likely to be changes to risk weighted assets of residential mortgages. According to the proposal, risk weights will range from 70% to 120% where repayment is dependent on the property’s income. Where there isn’t that dependence, risk weights may be in the range of 25% to at least 100%.

It is currently expected that SA-CR will be effective from quarter four of 2019.

SONIA (Sterling Overnight Index Average)

The Bank of England will be consulting on further reform of SONIA in 2016. Some institutions will be providing data on their sterling money market operations (both secured and unsecured) on a daily basis. Where a firm does not submit daily data, an annual return will be required in January. Banks, Building Societies and PRA designated investment firms will be subject to the new requirement.

In addition to the above, the EBA is reviewing the use of internal ratings based models and changes may occur in other areas, including capital requirements for Interest Rate Risk in the Banking Book and in the standardised approach for Operational Risk.

Regulation is set to deliver further change and challenge for the financial services sector.

By Gordon McMaster, Consultant, Whistlebrook.

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