2019 – The Regulatory Year in Review - Lombard Risk

2019 – The Regulatory Year in Review By Andrew Kesbey, Global Head of Regulatory Product

As 2019 passes it seems fitting to look back on the past 12 months and, in particular, at the industry activities that have been of interest to our Regulatory Reporting community.

It goes without saying that one topic has been dominant in all aspects of life in recent years and the last 12 months seem to have involved a Brexit version of the Okey-Cokey – in out,  in out, not to mention a fair bit of shaking it all about.

The regulators worked to try to anticipate the unforeseeable with papers issued, on what seemed like a monthly basis, advising mitigating actions in preparation for a no deal Brexit. Although, in the light of the recent election result, Brexit is now all but certain, the spectre of no deal seems to have vanished.

There were, of course, many other activities of note in 2019, so join me in this retrospective or, if you will, reg-trospective (apologies) of some of the significant events of the past year.

The two areas of particular focus for regulatory reporting were, of course, the introduction of PRA 110 in the summer followed by the phasing in of the EBA’s new Data Point Model 2.9 starting at the very end of the year.

In the meantime though in January the first, but by no means last, Dear CFO letter was issued by Victoria Saporta of the PRA who urged that Banks adopt the ‘Recommendations on a comprehensive set of IFRS 9 Expected Credit Loss disclosures’ published by Taskforce on Disclosures about Expected Credit Loss. At the same time, her letter acknowledged that the effort required in adopting these measures would mean that some firms may take two or three years to fully implement them.

In February, Elke König, chair of the Single Resolution Board, spoke to the Banking & Payments Federation Ireland, on her organisation’s role in balancing stability against agility in the banking industry, emphasising the importance of allowing banks to fail as a normal part of the free market and ending the concept of being ‘too big to fail’

The SRB’s guidance  with regard to making bank’s resolvable was aimed at the avoidance of the previously seen domino effects following banking failures with measures designed to dampen the systemic impact of such incidents.

Elke outlined some of the new elements added into the 2018 MREL policy, notably Location of eligible resources; Subordination; Setting of MREL at individual level.

A little off topic but nonetheless interesting, the EBA published its Consumer Trends Report for 2018-19 noting that mortgages continued to increase in both volume and value representing 77% of loans to households, continuing a 5-year trend. Also, during this period Consumer credit remained stable while deposits saw a slight decrease.

The most significant topics identified as being to the detriment of consumers were the lack of transparency and disclosure of information on fees and charges, poor creditworthiness assessments, and the complexity of financial products.

Also issued by the EBA, the end of 2018 Risk Dashboard seemed to offer some tentatively optimistic conclusions: Tier 1 capital remaining high; reduction in non-performing loans; ROE increase and a small decrease in Leverage Ratio.

The Bank of England detailed in March the key elements of the 2019 stress test for the UK banking system the results of which would be published in December.

The PRA, in a flurry of activity, issued updates to its Supervisory Statements on IRB models (specifically related to the definition of default in CRR 575/2013) as well as ICAAP and SREP. In addition, it published consultation papers requesting feedback on its Pillar 2 Capital (PRA buffer) and Liquidity (including the upcoming PRA110) proposals.

The ECB’s Annual Report on Supervisory Activities in March identified Credit Risk and internal processes (ICAAP and ILAAP) as the Bank’s priorities alongside, unsurprisingly, preparation for Brexit. The report described the post-Brexit co-operation framework in progress between EU and UK authorities.

In April the FCA published their business plans for 2019/2020, setting out their key priorities for the next year. In addition to the four ongoing initiatives (Culture and Governance; Client Engagement Practices; Operational Resilience; Financial Crime) the plan outlines a number of longer term priorities including the future of regulation

Andrew Bailey addressed this latter point, in a speech entitled The Future of Financial Conduct Regulation at Bloomberg, outlining his vision for a future framework for regulation using the concept of four lenses: Public Interest;  Overarching Purpose of Regulation; The wake of Brexit; Clarity of Principles.

Also in April, a month during which Extinction Rebellion occupied several central London sites, Mark Carney in a speech at Innovate Finance Global Summit, outlined how the Bank of England was collaborating with other central banks and supervisory entities to improve climate risk management in the financial community as a whole. He even stated that work had started on the development of climate scenarios that could be used in stress tests in the future.

Meanwhile the PRA highlighted the significance of the United Nations 2030 Agenda for Sustainable Development and 17 Sustainable Development Goals.

What were once principally fringe issues seem to be moving into the mainstream with increasing speed.

May was a quiet month but the PRA issued the Systemic Risk Buffer rates for ring-fenced banks and large building societies.

In June the PRA published its final policy on amendments to the PRA110 template and instructions – with the new template applicable from 1st Jan 2020, as well as its Annual Report 2018-19.

Huw van Steenis’ Future of Finance paper, a year in the making, was published. This was a wide ranging discussion of areas that might shape and be shaped by the UK’s financial system over the next decade taking in such subjects as  Innovation, Digital Regulation, Global Standards and Climate Change along with recommendations as to the Bank’s responses to each – well worth a read.

Also of interest, the passing of LIBOR after 2021 was the subject of discussion by the likes of Andrew Hauser and Dave Ramsden at the Bank of England including the sustainability and robustness of SONIA.

In July Dual reporting of PRA110 and FSA047/048 was live.

July also saw the EBA publish its Amendments to the ITS on supervisory reporting with regard to FINREP. Specifically, those institutions with an NPL ratio of 5% or above having to provide more granular information to allow regulator analysis of non-performing exposures and forbearance. Additionally, more details on operating and administrative expenses are required.

Internal Models featured in a number of discussions, papers, ITSs including the ECB publishing its final words of guidance with chapters focusing on credit risk, market risk and counterparty credit risk following the conclusion of the public consultation in 2018.

The FCA announced that initial work had started on a project to replace the Gabriel submission/collection platform. Users were invited to contribute feedback to this process which will result in a solution that supports the ongoing Digital Regulatory Reporting initiative which is currently in Pilot Phase II.

In August the government issued its guidance on banking, insurance and other financial services in the event of a No Deal Brexit – copies of which are doubtless propping up wonky tables countrywide as I write this.

A little tangential but extremely interesting, the Bank of England’s ‘Machine learning explainability in finance: an application to default risk analysis’ paper addressed the Black Box algorithm problems in many Machine Learning predictive techniques. Not one for the mathematically faint hearted but the subjects of transparency and accountability in the areas of AI/ML (much like the issues surrounding responsibility relating to self-driving cars) will only grow in importance.

The PRA followed up its CP 19/18 on the EBA Taxonomy 2.9 with a Policy Statement detailing the changes made to the reporting requirements in the areas of Ring Fenced Banks, Capital+ and NPL templates, while the EBA published a new release of its reporting framework 2.9, including validation, DPM data dictionary and XBRL taxonomies.

September’s Policy Statement PS17/19 from the PRA on the Branch Return contained a couple of minor amendments and, to most people’s relief, confirmation that the submission would remain in Excel rather than moving to XBRL.

Clarifications were published on reporting and definitions to MREL while FCA and PRA announced updates to MLAR reporting (effective Oct 2020).

The PRA’s Dear CEO letter in October was titled ‘Reliability of regulatory returns’ and mentioned the design and execution of governance and process around regulatory reporting as key items of their ongoing focus, as well as the subject of reports by skilled persons to be commissioned.

EBA launched a public consultation on Framework 3.0 – Changes to Own Funds, Credit Risk, Counterparty Credit Risk, Large Exposures, Leverage Ratio, NSFR and FINREP which are planned effective Mid-2021.

In December the first impact of the EBA’s Data Point Model 2.9 were felt with Resolution Reporting and Supervisory Benchmarking coming into effect ahead of more comprehensive changes in 2020.

The end of the month saw the publication of Policy Statement 27/19 and consequent update of the Supervisory Statement| SS34/15 – Guidelines for completing regulatory reports with regard to amendments to both the Capital+ and Ring Fenced Bodies returns.

….and finally, the Bank of England published the results of the 2019 Stress Tests concluding that the UK Banking System is resilient to simultaneous UK and global recessions exceeding the severity of the global financial crisis. Banks are better capitalised than pre-crisis (CET1 ratios being three times greater now) and hold sizable liquid asset buffers concluding the year on a tentatively upbeat note.