Strengthening Capital Standards: CRD IV set in stone (13/39)

31st December 2013

Following our Regulatory Bulletin of Strengthening Capital Standards: FCA is consulting on the CRD IV (13/24), the Financial Conduct Authority (FCA) has published its Policy Statement regarding the implementation of Capital Requirements Directive (CRD) IV, which will become effective from the 1st January 2014. In the Paper, the FCA has confirmed several key proposals under the CRD IV.

Capital buffers

Firms that are exempted to comply with the Capital Conservation Buffer (CCB) and the Countercyclical Buffer (CCyB) include all the IFPRU limited licence firms and Small and Medium Sized Enterprises (SMEs)[1] that are full scope and limited activity IFPRU firms.

For other firms, the FCA does not intend to accelerate the five year transition timetable for the implementation of Capital Conservation Buffer (CCB) and Countercyclical Buffer (CCyB), both of which equal to zero before 2016.

Where a firm fails to meet the Combined Buffer (CB), there are restrictions on the amount of distributions (i.e. dividends, repayment of capital etc.) it will be able to make. The firm is therefore required to calculate the Maximum Distributable Amount (MDA) and notify the FCA of its MDA within five working days. The firms must give a minimum of one months’ notice to the FCA for creating obligations or making prohibited payments or distributions.

Stress testing

The FCA confirms that all investment firms subject to CRD IV should carry out, at least annually, stress tests that are appropriate to the nature, size and complexity of the firm’s business. “Significant IFPRU firms”[2] should carry out a comprehensive stress and scenario analyses and reverse stress testing and report the results of the stress tests to the FCA annually. Other firms should only carry out reverse stress testing and do not need to report the stress tests results unless required by the FCA.

Reporting

Common Reporting (COREP) and Financial Reporting (FINREP) will take place via GABRIEL. Firms will receive COREP/FINREP scheduling notices at a module level. These modules are technically known as “entry points” and there are different entry points for solo and consolidated reporting. The modules and the relevant Articles in Capital Requirements Regulation (CRR) are:

  • COREP
    • Own Funds and Leverage – under CRR article 99 and article 430
    • Large Exposures (LE) – under CRR article 394
    • Liquidity Coverage Ratio (LCR) – under CRR article 415
    • Net Stable Funding Ratio (NSFR) – under CRR article 415
  • FINREP – under CRR article 99
    • A single entry point

The COREP liquidity reporting will apply on an individual basis to “significant IFPRU firms” and apply on a consolidated basis to groups that contain “significant IFPRU firms”.

Publicly traded companies and credit institutions that prepare their consolidated accounts in conformity with the international accounting standards adopted in accordance with the Regulation (EC) No 1606/2002, are subject to the FINREP reporting. A new notification rule under IFPRU 1.1A requires firms satisfying the FINREP criteria to notify the FCA that they are a FINREP reporting firm. It also requires firms to notify the FCA when the firm is no longer a FINREP reporting firm.

BIPRU firms

The FCA confirms the BIPRU firms would not be able to carry out MiFID activities beyond:

  • MiFID activity (1) reception and transmission of client orders;
  • MiFID activity (2) execution of client orders;
  • MiFID activity (4) portfolio management; and
  • MiFID activity (5) investment advice.

Current CRD rules will be retained for BIPRU firms, in terms of Pillar 2, Pillar 3 and systems and control requirements in SYSC, including the Remuneration Code, but without the new CRD IV material such as limits on bonuses.

Remuneration

The most significant policy changes on remuneration in CRD IV are the limits to the variable component of remuneration. These are:

  • The basic ratio between the variable and fixed components of total remuneration that can be paid to a staff member subject to the remuneration provisions that is capped at 1:1; and
  • The basic ratio can be increased to 2:1 subject to the approval of shareholders, owners or members of the institution. This approval requires the support of at least 66% of the shares or equivalent ownership rights represented, provided that at least 50% of the total shares or equivalent ownership rights are represented. If the latter condition is not met, at least 75% of the shares or ownership rights represented must support the proposition.

For the purposes of the above limits, a firm is allowed to apply a discount rate to a maximum of 25% of total variable remuneration if it is paid in instruments deferred for a period of not less than five years.

The alternative investment fund managers under CRD IV

With regard to the alternative investment fund managers, both Collective Portfolio Management (CPM) and Collective Portfolio Management Investment (CPMI) firms need to check the new definitions of initial capital, own funds, and the fixed overheads under the CRD IV. Moreover, if a CPMI firm is carrying out safe-keeping and administration in relation to shares or units of collective investment undertakings in respect of its MIFID investment business, it will also be an IFPRU firm. CPMI firms undertaking MIFID activities, such as investment advice or the reception and transmission of orders, will fall under obligations of a BIPRU firm without triggering CRD IV requirements.

The FCA also confirms the existing Pillar 2 regime will be copied from GENPRU and BIPRU in to the new IFPRU module, as no material changes were made to the application of Pillar 2 under CRD IV.

The full FCA Policy Statement can be found here. As always if you have queries please contact any member of CPA compliance team.

 


[1] enterprises which employ fewer than 250 persons and which have an annual turnover not exceeding EUR 50 million, and/or an annual balance sheet total not exceeding EUR 43 million.

[2] an IFPRU firm exceeding any of the following thresholds: total assets £530 million; total liabilities £380 million; annual fees and commission income £160 million; client money £425 million; or client assets £7.8 billion.

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