UK: The Changing Environment Of Regulatory Reporting

Last Updated: 9 January 2013
Article by Lindsay Manson and Terrance Turner

The EC has responded to the recommendations of the Basel Committee on banking supervision with the introduction of the CRD IV package.

The implementation of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) (together known as the CRD IV package (CRD IV)) will create a new regulatory reporting environment. CRD IV is the EC's response to the standards recommended by the Basel Committee on banking supervision, known as Basel III. The CRR includes changes to the Pillar 1 and Pillar 3 requirements which will be directly applicable to firms in the UK and will not be incorporated into the FSA handbook. Implementation will therefore take place via the introduction of a single European rule book for financial services. Those changes affecting Pillar 2 will, however, need to be incorporated into the FSA handbook. The CRD IV package also includes proposals on corporate governance and remuneration.

CRD IV will apply not just to credit institutions but to all investment firms that are currently subject to the CRD. While there are expected to be some proportionality considerations for smaller investment firms, full scope firms will be impacted by the full suite of reporting requirements to the extent they have the relevant exposures.

Objectives

The objectives (as stated on the FSA website) of the CRD IV proposals are as follows.

  • Enhancing the quality of capital by:

–– increasing the quality and quantity of bank capital

–– emphasis on core tier 1

–– allowing deductions directly from core tier 1

–– simplifying capital structure (lesser tiers and removing

gearing).

  • Strengthening capital requirements for counterparty credit risk resulting in higher Pillar I requirements.
  • Introducing a leverage ratio as a backstop to risk-based capital.
  • Introducing new capital buffers – capital conservation and countercyclical.
  • Implementing liquidity regime – net stable funding ratio and liquidity coverage ratio.
  • Introduction of harmonised capital ratios reporting (common reporting or COREP).
  • Better disclosure (reconciliation of the balance sheet to regulatory disclosure).

Key changes

Capital

The Basel III framework sets out a need for focus on higher quality of capital, and therefore there will be a revised definition of capital under CRD IV. This will mean a change in the treatment of deductions, in particular in relation to investments in other financial institutions and deferred tax assets.

The concept of tier 3 capital will be abolished. There will be two tiers of capital – going concern capital (tier 1) and gone concern capital (tier 2). Going concern capital allows an institution to continue activities and prevent insolvency, gone concern capital ensures creditors can be repaid in the event of the institution's failure. Within tier 1 capital there will be a split between common equity tier 1 (CET1) and additional tier 1, with a requirement that CET1 capital be the predominant element of tier 1 capital. There will also be requirements to hold additional capital buffers, which will be phased in.

The capital requirements for a limited license investment firm continue to be calculated by reference to fixed overheads and reference to various credit and market risks (albeit that fixed overheads are yet to be defined in the regulation).

While the overall capital requirement may not necessarily increase immediately, there will be a requirement to hold more in the form of equity via CET1 capital. There will be a number of capital ratios which will determine the type of capital a firm may hold in order to meet its requirement.

There is currently no reference to partnership capital within the definition of CET1 capital although it is anticipated this will be addressed.

Credit risk calculations

There is no equivalent of the simplified, standardised approach under CRD IV.

Corporate governance

The Basel Committee and EU Commission concluded that, in many cases, the risk oversight by boards was inadequate and that boards were not involved enough in risk strategy. The new directive will therefore include binding regulations to ensure strengthening of the corporate governance framework (including increasing the effectiveness of risk oversight by boards, improving the status of the risk management function and ensuring the monitoring by supervisors of risk governance). There are a number of new requirements, including that all firms are to have a risk committee, although the FSA will have the power to waive this requirement on the grounds of proportionality.

COREP

Under CRD IV, COREP will become the prudential reporting framework for all firms currently regulated under BIPRU. The full set of templates for reporting is available on the European Banking Authority's (EBA) website. The expected changes to current FSA reporting under the new reporting system, according to the consultation paper released by the EBA, are detailed in the table. The COREP framework for reporting overlaps with the current reporting requirements under FSA003, and this will be reported quarterly. The FSA will have the power to collect additional data more frequently, and therefore some monthly reporting on capital to the FSA may remain. Whether the FSA003 would remain in its current form is unclear.

eXtensible Business Reporting Language

Under CRD IV the EBA intend to introduce European wide eXtensible Business Reporting Language (XBRL) taxonomies which will then be used to collect all regulatory data reported under CRD IV. The timeframe for this will be driven by the EBA. The FSA is currently considering the use of XBRL for reporting for firms outside the scope of CRD IV, but this will not be implemented before a consultation has taken place.

Timetable for implementation

In the original EC proposal in July 2011, the date for implementation was 1 January 2013. As this legislation has yet to be adopted by the EU it appears that this date is not practical. While no alternative date has been given, the FSA has released a statement that they are "proceeding with the necessary preparatory work to be ready to begin collecting data under Common Reporting for the period beginning 1 July 2013, should the legislation and related standards be finalised by this date."

Data items replaced by CRD IV at Jan 2013*

Data items under discussion

Data items unaffected by COREP

FSA001 Balance sheet**

FSA002 Income statement**

FSA015 – Sectoral analysis

FSA016 – Solo consolidation

FSA017 – Interest rate gap

FSA018 – UKIGs large exposures

FSA028 – Non-EEA sub-groups

FSA001 – Balance sheet**

FSA002 – Income statement**

FSA003 – Capital adequacy

FSA004 – Credit risk

FSA005 – Market risk

FSA006 – Market risk (supp.)

FSA007 – Operational risk

FSA008 – Large exposures

FRA045 – IRB portfolio data

FSA046 – Securitisation

FSA058 – Securitisation

FSA014 – Forecast data

FSA019 – Pillar 2 questions

Non CRD: FSA029 – 042

Liquidity: FSA011, 047-055

Payment services:

FSA056/057

MLAR

RMAR

Complaints

*Some data elements from replaced items may be retained.

**May be replaced for some firms if/when UK adopts FINREP.

Source: FSA website.

Next steps

It is clear that for all firms currently regulated under the existing CRD these changes will make an impact. While there is some scope for proportionality to be considered for limited license firms in the new regime, all firms should be considering the impact of these changes now. The consultation paper released by the EBA, CP50, should be read by all firms.

Our regulatory team will continue to monitor the developments and expected implementation dates. Should you wish to discuss how the new requirements may affect you please contact us.

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