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Brexit: Capital Requirements Regulations

24th September 2018

Brexit planning: HM Treasury publishes Guidance on Capital Requirements Regulations

Last month HM Treasury published a draft version of the Capital Requirements (EU Exit) Regulations 2018 alongside explanatory information.

The purpose of these draft Regulations, or statutory instrument,  is to make amendments to a number of aspects of the existing prudential regulation that is in place for financial institutions, namely the Capital Requirements Directive (CRD IV) and the Capital Requirement Regulations (CRR).

This statutory instrument specifically introduces changes related to:

• Group consolidation
• EU27 exposures
• Macro-prudential measures
• Equivalence; and
• Information sharing

Background on current Prudential Regulation:

The existing prudential policy regime for banks, building societies and investment firms consists of the EU’s Capital Requirements Regulation (CRR) (EU Regulation No. 575/2013), the Capital Requirements Directive (CRD IV) and a range of technical standards and non-binding guidelines. This prudential regulation requires financial institutions to have adequate risk controls in place and to hold sufficient capital.

The EU’s CRR and CRD IV were published in June 2013 and most of the rules contained within have been applied across EU member states since January 2014. CRR is currently a directly applicable EU regulation, whilst CRD IV has been implemented via integration within UK law.

Preparations for Brexit:

The statutory instrument that has now been published is part of the wider work the Government is undertaking in preparation of the UK’s exit from the EU, and will affect those banks, building societies and investment firms already regulated in the UK under the CRR and CRD IV. The amendments aim to ensure that the capital requirements will continue to operate effectively in the UK following Brexit.

“This statutory instrument […] is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this statutory instrument would not take effect on 29 March 2019 if, as expected, we enter an implementation period.”

Next Steps:

The UK’s financial regulators, the FCA and PRA, will be updating their Handook/Rulebook (as well as relevant binding technical standards) to reflect the changes introduced through the statutory instrument plus to address any inadequacies due to leaving the EU. Both regulators have confirmed their intention to consult upon these changes this Autumn.

HM Treasury also have plans to lay this statutory instrument before Parliament this Autumn.

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