The Bank of England (BoE) and the Prudential Regulation Authority (PRA) have announced a series of supervisory and policy measures designed to help UK businesses and households "bridge across the economic disruption that is likely to be associated with COVID-19". The regulatory actions are designed to maintain financial stability, ensure the safety and soundness of firms and make sure policyholders are protected.
The BoE and the PRA are working closely with the Financial Conduct Authority (FCA), HM Treasury and regulated firms to coordinate its response in the most effective way. We have summarised the key measures and announcements made to date that firms should be aware of. Please see our separate webpages on the measures for the payment services and systems sector, how the Financial Conduct Authority has responded and the measures taken by the European financial regulators in response to COVID-19.
- Treating customers fairly - at the press conference announcing the first set of special measures, on 11 March 2020, Andrew Bailey, Governor of the BoE, stressed that banks must treat their customers fairly: "[o]ne of the FCA's core principles is treating customers fairly. The system is now in a much more resilient state, we expect them to treat customers fairly, that is what must happen. They know that, they are in a position to do that, there should be no excuses. But we at the FCA and Bank of England will be watching this very carefully."
- Financial system resilience – The BoE's financial policy summary record (FPSR) of the March 2020 FPC meetings was published on 24 March 2020. The focus, as expected, was on the financial stability risks facing the market as a result of the economic disruption caused by COVID-19. The FPSR highlighted the measures taken and noted that major UK banks are well placed to "withstand severe market and economic disruption".The BoE, FCA and HM Treasury also sent a joint letter to UK banks expressing their appreciation of the action already taken and highlighting the importance of implementing the various measures. In addition, the BoE and major UK banks released a joint statement assuring the public that they are in a strong position to provide support and highlighting the range of measures for household and business, which give enormous scope to the financial system during these extraordinary times. In a speech published on 9 June 2020, Sir Jon Cunliffe, Deputy Governor for Financial Stability, discussed the financial systems resilience. He noted the banking system has been able to absorb a very sharp financial market shock and considerable resilience remains in the core banking system. In his speech he noted that further COVID-19 developments could cause financial instability to return and a particular focus will be on the usability of the capital and liquidity buffers intended to absorb a tail event shock. On 6 August 2020, the FPSR of the FPC meetings on 29 July and 3 August 2020 was published. The FPC discussed the performance of the UK financial system during the coronavirus pandemic, noting the resilience that has been built up since the 2008 global financial crisis alongside the policy responses from the government and the BoE. The FPC reviewed the outlook for financial stability as the COVID-19 shock evolves, by considering the impact on banks, markets and equity finance for companies.
- Role of the insurance industry - on 22 September 2020, Anna Sweeney, an Executive Director at the BoE, delivered a speech on the role of the insurance industry in supporting the recovery of the wider economy. Her speech highlights that the insurers can support the economy by providing protection for significant financial losses, channelling investment into a wide range of assets, and providing security of retirement income in the form of savings and annuities, thus facilitating stable demand for goods and services.
- Economic trends - in a speech delivered 30 September 2020, Andy Haldane, the Chief Economist at the BoE, stated that the economy has seen greater robustness and resilience than anyone expected. He also stressed that avoiding economic anxiety is crucial to support the on-going recovery as this has important implications on how businesses and policymakers act and communicate.
- Climate change - on 24 September 2020, the House of Commons Environmental Audit Committee presented oral evidence which stressed that, given the short window of opportunity remaining to keep global temperature rises to a manageable level, it would be critical to align the post-crisis recovery stimulus with the UK’s goals on climate change, biodiversity and sustainable development.
- Operational resilience - on 06 October 2020, Nick Strange, a director at the BoE, gave a speech on operational resilience. Firms shall remain prepared for threats that are fast, short-lived and asymmetric, such as cyber threats and key third-party failures.
- Financial Services Compensation Scheme (FSCS) – on 4 August 2020, the PRA published a policy statement setting out the decision to extend coverage under the FSCS for Temporary High Balances (THB) from six months to twelve months from the date of deposit, or the first date the THB becomes legally transferable to the depositor. The extension would be for a limited period and coverage would revert back to six months from Monday 1 February 2021.
- Reduction in Bank Rate and new Term Funding Scheme (TFSME) – at a special meeting on 19 March 2020, The MPC voted to reduce the Bank Rate from 0.25% to 0.1% (a record low) and extended the newly introduced TFSME (which provided additional incentives for SMEs) by increasing the Initial Borrowing Allowance from 5% to 10%. The MPC also voted unanimously to increase the BoE's holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion. The various measures, backed by the issuance of central bank reserves, are intended to support consumer confidence, increase liquidity in the market and incentivise banks and building societies to support SMEs that typically bear the brunt of market contractions. Further, on 2 May 2020, the BoE stated that TFSME participants will in future be able to extend the term of some of the funding accessed via the TFSME to align with the 6-year term of loans made through the BBLS.
- Statements on monetary policy – On 28 August 2020, in a speech and an associated paper, Andrew Bailey considered the lessons from using the central bank’s balance sheet as a policy tool in responding to the disruption caused by COVID-19. Mr Bailey made observations regarding the efficiency of the policy responses, in particular, the quantitative easing (purchases of long-term government bonds) by the BoE's MPC. He commented that for both financial stability and monetary policy purposes, the BoE's balance sheet should move in a countercyclical manner.
On 4 September 2020, Michael Saunders, an external member of the MPC, examined the data for GDP, jobs and money in the economy in light of the impact of COVID-19. Mr Saunders suggested that further monetary loosening may be needed in order to support the economy and to prevent a persistent undershoot of the 2% inflation target. On 17 September 2020, the BoE published an open letter from Andrew Bailey to the Rt Hon Rishi Sunak, Chancellor of the Exchequer, to explain why inflation has moved away from target and what action the BoE is taking to bring inflation back to target. The letter states that the COVID-19 shock has had varied impacts on demand and supply in different sectors of the economy, but overall the effects appear to have reinforced the drag on the Consumer Prices Index inflation from lower oil prices. The Monetary Policy Committee will continue to monitor the situation closely and stands ready to adjust monetary policy accordingly to meet its remit.
- UK Countercyclical Capital Buffer (CCyB) - to further support banks supplying credit to the UK economy, the FPC has reduced the UK CCyB rate to 0% for at least 12 months (i.e. until March 2022 at the earliest). The FPC predicts the impact of COVID-19 to be "sharp and large", but temporary. The release of the buffer should therefore bridge the credit gap to shelter businesses through the disruption.
- Systemic Risk Buffer – on 9 April 2020, the PRA announced its decision to maintain ring-fenced banks Systemic Risk Buffer rate as set in December 2019. The rate will be reassessed in December 2021 to take into account the impact of COVID-19 on firms' balance sheets.
- Prudential Regulation Committee (PRC) Supervisory Guidance - in conjunction with the MPC and FPC measures, the PRC has set out its supervisory expectation that banks should not use the extra liquidity and policy actions to increase dividends or other distributions, such as bonuses. Additionally, and in light of the fall in government bond yields, the PRC has called on insurance companies to use the flexibility in Solvency II regulations to support market functioning.
- Annual stress test – the BoE's annual cyclical scenario has been cancelled to allow the major banks to focus on meeting the needs of UK households and businesses. Together with the measures to reduce theCCyB (see above), the regulators expect all elements of a banks’ capital and liquidity buffers to be drawn down as necessary. In furtherance of this objective, the PRA published a set of questions and answers on 20 April 2020 for banks on the use of liquidity and capital buffers.
- IFRS 9 and COVID-19 – the BoE recognises the importance of a forward-looking measure of losses but asks firms provisioning into the expected credit loss to be both reasonable and supportable. The PRA published a 'Dear CEO' letter on 26 March 2020, discussing the measures taken in light of COVID-19 to safeguard the financial stability of markets and firms. The letter provided guidance on (i) consistent and robust IFRS 9 accounting and the regulatory definition of default; (ii) the treatment of borrowers who breach covenants due to COVID-19; and (iii) the regulatory capital treatment of IFRS 9. Following clarification sought by some insurance firms, the PRA published a follow-up note on 23 April 2020 for PRA-regulated insurers. It clarified that the Dear CEO letter does not address insurers' internal assessments of loan creditworthiness and the treatment of unrated assets, but it can nonetheless be considered of wider application. Firms should 'make well-balanced and consistent decisions' and give weight to the established long-term economic trends. Equally, breaches to loan covenants, as a result of COVID-19, do not indicate long-term credit risk and insurers will need to use their own judgement to determine the associated credit risk. In this regard, the PRA also directs firms to their Supervisory Statement (SS) 3/17 ‘Solvency II: Illiquid, unrated assets'. On 22 May 2020, the PRA issued a statement on guidance on the application of regulatory capital and IFRS 9 requirements to payment holidays granted or extended to address the challenges of COVID-19. As the first payment deferrals are coming to an end, the PRA considers that eligibility for, and use of, COVID-19 related payment deferrals or extensions to those deferrals granted in accordance with the FCA’s proposed guidance would not automatically result in a loan: (a) being regarded as having suffered a significant increase in credit risk or being credit-impaired for expected credit loss accounting purposes, or (b) triggering a default under the Capital Requirements Regulation (575/2013) (CRR). The PRA also published a letter on 4 June 2020, from Sam Woods, Deputy Governor and CEO of the PRA, on IFRS 9 and capital requirements with an update to the March guidance to provide further guidance on initial and further payment deferrals. In light of the FCA guidance in relation to mortgage payment deferrals, on 26 August 2020, the PRA published a statement explaining that tailored forbearance arrangements, at the end of the of the COVID-19 specific payment deferrals, are likely to be as good an indicator of SICR, credit impairments or defaults as forbearance was before the pandemic. The PRA further stated that in some cases, where the position is not clear-cut, a judgement will need to be made. The PRA's earlier guidance for making holistic assessments continues to be relevant.
- Open-ended funds – the BoE announced on 20 March 2020 that the planned survey covering c.300 funds has been delayed, with a subsequent impact on the FCA consultation that would have followed.
- Supervisory engagement with firms and FMIs – non-critical supervisory programmes will be delayed, the PRA's approach to Senior Manager Function applications will be considered to reduce the burden involved, responses to the BoE's and PRA's consultations on operational resilience policy development will be delayed to 1 October 2020 (in line with the FCA, see above), Internal Ratings Based models implementation will be delayed, the first meeting of the Financial Services Regulatory Initiatives Forum will take place as soon as possible in April 2020 to assist co-ordination of the regulatory initiatives, and new legislation will be introduced to enable implementation of Basel 3.1 (which has been delayed, see below). On 4 June 2020, the BoE published a letter to FMIs. When making any distributions to shareholders or decisions on variable remuneration, FMIs must discuss with it with the BoE and pay close attention to the risks and financial and operational demands from COVID-19.
- COVID Corporate Financial Facility (CCFF) – on 18 March 2020, the BoE and HM Treasury announced they will launch a CCFF on 23 March 2020 to provide additional help to firms experiencing a disruption to their cash flows (see our detailed business loan support insight article here and our article on the suitability of the Coronavirus Large Business Interruption Loan Scheme (CLBILS) for your business). On 22 September 2020, the BoE and HM Treasury announced that the CCFF will close for new purchases of commercial paper from eligible issuers with effect from 23 March 2021. This means that the CCFF will make no purchases of commercial paper after 22 March 2021. A further announcement was made on 9 October 2020 on how CCFF issuers’ credit quality will be monitored and reviewed in advance of the closure of the CCFF. From 9 October 2020, the review of the credit quality of eligible issuers in the CCFF will be enhanced. Any eligible issuer wanting to issue new commercial paper into the CCFF will be subject to a review to consider whether that issuance remains in line with the purpose of the facility.
- Contingent Term Repo Facility (CTRF) – the BoE, on 24 March 2020, activated the CTRF, which allows market participants to borrow from the central bank reserves secured against less liquid assets, to "alleviate frictions observed in money markets". On 24 April 2020, the BoE announced that it will continue to offer 3-month and 1-month term CTRF operations on a weekly basis, with the final operation scheduled on 29 May 2020.
- Regulatory treatment of the CBILS and CLBILS – on 27 April 2020, the PRA published a statement on the regulatory treatment of CBILS and CLBILS. The statement considered whether guarantees provided by the Secretary of State for Business, Energy and Industrial Strategy are eligible for recognition as unfunded credit risk mitigation (CRM) under the CRR. The PRA found that the guarantee does not contain features that would render it ineligible but encouraged firms to review the relevant legislation, rules and guidance and where necessary seek independent advice. Lenders are expected to use their judgement when making credit decisions and use the range of information at their disposal. Further, on 26 June 2020, the PRA published an updated statement on the regulatory treatment of CBILS and CLBILS. The PRA provided clarification for firms under the following three scenarios: firms using the standardised approach for exposures to the obligor, firms using the internal ratings based (IRB) approach for exposures to the obligor and the standardised approach for exposures to the guarantor (under permanent partial use or rollout), and firms using the IRB approach for exposures to the obligor and the IRB approach for exposures to the guarantor.
- Treatment of the BBLS - on 4 May 2020, the PRA published a subsequent statement on the CRM eligibility of loans under the BBLS, in which they reiterated their views above. The PRA also discussed the leverage ratio treatment of loans under the BBLS. It offered a modification by consent for banks subject to the UK Leverage Ratio Part of the PRA Rulebook to exclude loans under this scheme from the leverage ratio total exposure measure, if they choose to do so.
- LIBOR transition - in a statement made on 25 March 2020, the FCA, BoE and Working Group on Sterling Risk-Free Reference Rates (RFRWG) discussed the impact of COVID-19 on the transition from LIBOR to SONIA. The current assumption is that LIBOR will still be phased out by the end of 2021 and in a subsequent joint statement published on 29 April 2020 this was reiterated. To ensure stability in the credit markets during the transition, the RFRWG recommends that by the end of Q3 2020 lenders should be able to offer non-LIBOR products, by the beginning of Q4 2020 any LIBOR-referencing loan products should have clear conversion contractual arrangements and all new LIBOR-referencing products that expire after 2021 should cease. Additionally, the FCA, BoE and RFRWG will continue to assess the impact of COVID-19 and provide further updates in due course. On 10 June 2020, the PRA updated its webpage providing an update on LIBOR transition with regard to the joint letter sent to the RFRWG on 16 January 2020. The PRA noted that a number of the Working Group milestones included in the letter have been revised due to COVID-19.
- Dividends, share buybacks and bonuses – the PRA also released a statement on 31 March 2020, in which it welcomed the decision of the seven largest systemically important UK deposit-takers to suspend dividends and share buybacks until the end of 2020, and to cancel payments of any outstanding 2019 dividends in response to a request from the PRA.The PRA also expects the banks to not pay any cash bonuses to senior staff as a precautionary step in the current economic climate. On the same day, the PRA also wrote to UK insurers reminding them of their responsibility to carefully consider whether any distributions to shareholders or staff bonuses are prudent and consistent with their risk appetite and their importance in supporting the real economy. Correspondingly, on 8 April 2020, the PRA announced that some insurance companies have decided to pause dividends. These measures are in line with the recommendations of the European Systemic Risk Board (ESRB) on the restriction of distributions during COVID-19. On 28 July 2020, the PRA published a statement providing an update on dividend payments and shares buybacks. As the PRA regards distributions as an important and necessary part of the functioning of the banking system, it will undertake its assessment of firms’ distribution plans beyond the end of 2020 in Q4 2020.
- Matching Adjustment – on 7 July 2020, the PRA published a statement to insurers on the application of the matching adjustment (MA) during the coronavirus pandemic. While the PRA considers that the MA has functioned as intended, to ensure consistency in firms' interpretation of the PRA's policy it has provided some clarifications. The key areas discussed in the statement include: management of the MA portfolio, eligibility, MA calculation and reflection of the MA in solvency capital requirement.
- Regulatory reporting and disclosure amendments – on 23 March 2020, following on from recommendations by the European Insurance and Occupational Pensions Authority (EIOPA) (see our separate alert here), the PRA released a statement outlining the acceptable delays to regulatory reporting for UK insurers. In the statement, the PRA listed the acceptable delays to aspects of harmonised regulatory reporting and the PRA-owned regulatory reporting for the year-end after 31 December 2019 but before 1 April 2020. Further, on 2 April 2020, the PRA published a statement to outline its approach to regulatory reporting and Pillar 3 disclosures following the European Banking Authority's (EBA) statement on the same. The PRA listed the acceptable delays to CRR and BRRD reporting (which does not include information on liquidity coverage ratio, liquidity monitoring metrics and institutions' liability structure) and to PRA-owned regulatory reporting, where the original remittance deadlines fall on or before 31 May 2020. The PRA also provided guidance on using the old version of the Branch Return Template, funding plans of credit institutions, possible additional ad-hoc reporting on key prudential metrics and their flexibility in the publication timeline of firms' Pillar 3 disclosures. On 7 May 2020, the PRA correspondingly published a statement, consistent with the BoE's approach to stress testing, setting all Pillar 2A requirements as a nominal amount, instead of a percentage of total Risk Weighted Assets to alleviate unwarranted pressure. On 26 June 2020, the PRA published a statement updating their position in relation to regulatory reporting and disclosure amendments. As firms have adjusted to working during COVID-19, the PRA will expect on time submission for future regulatory reporting. The PRA will be flexible in its expectations of firms’ publication timeline for Pillar 3 disclosures that a firm would normally expect to make on or before Sunday 31 May 2020. On 28 July 2020, the PRA published a further statement on EBA Guidelines on reporting and disclosure of exposures subject to measures applied in response to COVID-19. The statement sets out how the EBA disclosure requirements are going to be implemented in the UK and how firms should submit their disclosures.
- CRR Amending Regulation – on 30 June 2020, the PRA published a statement on the amendments to the CRR applying directly to PRA-regulated firms in response to COVID-19. The statements sets out the PRA's views on the transitional arrangements for capital impact of IFRS 9 Expected Credit Loss accounting, acceleration of certain CRR II measures, and a temporary prudential filter on certain unrealised gains and losses.
- Value at Risk (VAR) back-testing – on 27 August 2020, the PRA published a statement setting out its decision to terminate its temporary approach to VAR back-testing exceptions from Wednesday 30 September 2020. The exceptions, which applied from 30 March 2020, temporarily allowed firms to offset increases due to new exceptions through a commensurate reduction in risks-not-in-VAR (RNIV) capital requirements. In light of the amendments to the CRR, the PRA has decided to terminate its temporary approach from 30 September 2020.
- Fixed rate lending guidelines – in a 'Dear CEO' letter published on 11 August 2020 (dated 31 July 2020), the PRA agreed to suspend the relevant guidance levels on fixed rate lending limits in the Building Societies Sourcebook for an initial period of six months, running from Saturday 1 August 2020 to Sunday 31 January 2021. The PRA's only proviso is to limit any self-administered extension to 10% above the lower of the Sourcebook benchmark or the Building Society’s current limit, and it still expect boards to undertake the appropriate risk assessment.
- Basel 3.1 standards – the PRA released a joint statement with HM Treasury appreciating the decision by the Group of Central Bank Governors to delay the implementation of Basel 3.1 standards by one year, allowing banks to focus on the immediate operational and financial issues caused by COVID-19.
- Electronic signatures – on 2 June 2020, the PRA published a statement confirming that firms may use electronic signatures, as opposed to wet-ink signatures, in relation to the submission of forms and other regulatory documents but only in the absence of any specific legal provisions to the contrary.
- Resolution measures – the PRA published a series of further measures on 7 May 2020 in response to the COVID-19 pandemic. The changes are a part of the PRA's shift in approach as explained in the PRA's statement from 7 May 2020 on reprioritising work in light of the COVID-19 pandemic to alleviate the operational burden on firms. The following areas of the PRA's work have been re-prioritised: climate change risk mitigation, resuming full supervisory engagement on LIBOR from 1 June 2020, including data reporting at the end of Q2, postponing the next Insurance Stress Test to 2022 and not publishing the results of last year's test (IST2019), and that firms are not expected to update their Stressed VAR 12-month period. On 7 May 2020, the PRA published a joint statement with the BoE announcing the following changes to resolution measures. The PRA delayed the first Resolvability Assessment Framework cycle by one year and published a direction for modification by consent that modifies rules in the Resolution Assessment Part of the PRA Rulebook. The PRA webpage sets out the process for firms that choose to take up the modification by consent. They also extended by a year the timings for major UK banks and building societies to submit their first reports on preparations for resolution (until October 2021) and to publicly disclose a summary of the reports (until June 2022). Similarly, the compliance deadline for the BoE's Statement of Policy on valuation capabilities to support resolvability has been extended by three months to 1 April 2021. The BoE has also provided an update for firms on the Minimum Requirement for Own Funds and Eligible Liabilities.
- PRA 2020/21 business plan – the PRA published its 2020/21 business plan on 9 April 2020, which addresses the impact of COVID-19 and the PRA's plans for the coming year. In particular, as a result of COVID-19, the PRA has cancelled the 2020 annual cyclical scenario stress tests, delayed the publication of the 2019 biennial exploratory scenario result, is working with individual firms to postpone less critical elements and extended consultations periods where suitable.
- Money Markets Committee meeting – the BoE published the minutes of the Money Markets Committee meeting held on 2 June 2020. The topics discussed at the committee's meeting include, the current market conditions, operational effectiveness during COVID-19, impacts of COVID-19 on local authority finance and contingency arrangements for amending the RTGS (real-time gross settlement) day.
- Agency Network briefing events – the BoE held an Agency Network briefing event on 20 April 2020, given by Deputy Governor for Monetary Policy, Ben Broadbent, and Chief Economist, Andy Haldane, to provide an update on the actions the BoE has taken to help firms and households. A subsequent briefing event was held on 12 May 2020, given by Mr Broadbent, Mr Haldane and Executive Director for UK Deposit Takers Supervision, Sarah Breeden, to provide an update on the recently published Monetary Policy Report and interim Financial Stability Report (FSR). On 7 August 2020, the BoE held a briefing event in which it discussed the recently published MPR and FSR and its projections of the impact of COVID-19 on the economy.
Bank of England - Our response to Coronavirus (COVID-19)
Prudential Regulation Authority - Our response to Coronavirus (COVID-19): regulatory measures for PRA firms
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