The regulator is taking immediate supervisory and policy measures to help support banks, insurers, and financial market infrastructures.

By Rob Moulton and Charlotte Collins

The Bank of England and the Prudential Regulation Authority (PRA) have announced a number of measures aimed at alleviating operational burdens on PRA-regulated firms, and Bank-regulated financial market infrastructures (FMIs), in the wake of the COVID-19 outbreak. These measures are intended to provide flexibility to help firms and FMIs focus on maintaining their safety and soundness and delivering the critical functions they provide to the economy.

This follows the earlier announcement by the FCA providing information on its expectations regarding regulated firms’ response to the coronavirus.

Key measures that the Bank and the PRA are taking include:

Changes to the supervisory approach

In order to allow supervisory engagement to focus on the most important matters relating to financial stability, the safety and soundness of firms, and protection of policyholders, the PRA will modify its usual supervisory approach.

Bank and PRA supervisors will review their work plans so that non-critical data requests, on-site visits, and deadlines can be postponed, where appropriate. This includes pausing the Section 166 reviews relating to the reliability of banks’ regulatory returns that were announced in October 2019.

The PRA will also review its approach to considering and processing Senior Management Function applications, with a view to reducing the burden involved during current events.

Postponement of policy work

The PRA plans to postpone non-critical work for the time being. Immediate changes include:

  • Postponement of the joint Bank/FCA survey into open-ended funds.
  • Extending the deadlines for responses to the current consultations on “Building Operational Resilience: Impact tolerances for important business services” and “Outsourcing and third party risk management” to 1 October 2020, in line with the FCA’s approach.
  • Implementation of changes to the credit risk modelling framework for banks using the internal ratings based approach will be delayed by one year to 1 January 2022. The move to hybrid internal ratings based models will also be delayed until 1 January 2022. Firms using the standardised approach to credit risk will benefit from a delay to changes they need to make relating to the definition of default.
  • The PRA will be coordinating internationally to ensure that UK implementation of Basel 3.1 will happen alongside other major jurisdictions, given that the existing implementation timetable may now prove challenging.

The PRA will keep the regulatory change agenda under review to determine which further elements may need to be postponed. It also plans to bring forward the first meeting of its Financial Services Regulatory Initiatives Forum, which was established to help regulators identify and manage peaks in operational demands on firms and FMIs resulting from regulatory initiatives, and to ensure that firms and FMIs have an early and clear understanding of the regulatory change agenda. Following that meeting, the PRA intends to publish a Regulatory Initiative Grid to ensure that a coordinated future work plan is available for firms to consult as early as possible in light of COVID-19.

Cancellation of stress testing

The Bank has decided to cancel the 2020 stress test for the eight major UK banks and building societies, to help lenders focus on meeting the needs of UK households and businesses via the continuing provision of credit. The Financial Policy Committee and the Prudential Regulation Committee expect that all elements of banks’ capital and liquidity buffers can be drawn down as necessary to support the economy through this shock.

Approach to accounting standards

The PRA reminds firms that it can consider whether their provisioning under applicable accounting standards is flowing through into their regulatory capital position in an appropriate way. The PRA therefore emphasises that forward-looking information used to incorporate the impact of COVID-19 on borrowers into the expected credit loss estimate needs to be both reasonable and supportable for the purposes of IFRS 9. In the event that firms believe such forecasts can be made, the PRA expects firms to reflect the temporary nature of the shock, and fully take into account the significant economic support measures already announced by global fiscal and monetary authorities.

The Bank states that it expects to provide further guidance to firms regarding its approach shortly, with a view to assisting firms to adopt consistent approaches.