United Kingdom: Banking & Finance

The United Kingdom’s (the terms United Kingdom and UK will be used interchangeably throughout this chapter) banking sector is regulated for prudential purposes by the Prudential Regulation Authority (PRA), which is part of the Bank of England, the UK’s central bank, and the Financial Conduct Authority (FCA) for conduct purposes. The Financial Policy Committee (FPC), which operates from within the Bank of England, acts as the macro-prudential regulator for the UK’s financial system.

The Financial Services and Markets Act 2000 (FSMA 2000), as amended, sets out the PRA’s and the FCA’s statutory objectives. The PRA’s principal objective is to promote the safety and soundness of the firms it regulates. On 28 March 2018, the PRA published Supervisory Statement (SS)1/18 ‘International banks: the Prudential Regulation Authority’s approach to branch authorisation and supervision’, which replaces SS10/14 ‘Supervising international banks: the Prudential Regulation Authority’s approach to branch supervision’. SS 1/18 is relevant to all PRA-authorised banks and designated investment firms not incorporated in the UK that form part of a non-UK headquartered group (international banks) and which are operating in the UK through a branch, as well as any such firm looking to apply for PRA authorisation in the future. The new approach came into effect on 29 March 2018. For European Economic Area (EEA) firms currently branching into the UK under ‘passporting’ arrangements and intending to apply for PRA authorisation in order to continue operating in the UK after the UK’s withdrawal from the European Union, this approach will be relevant to authorisations. The PRA will keep the policy under review to assess whether any changes will be required due to changes in the UK financial system or regulatory framework, including those arising once any new arrangements with the European Union take effect after the United Kingdom’s withdrawal from the European Union, which will take place on 31 January 2020.

The PRA has a three pronged approach to regulation and supervision:

• A judgment based approach;
• A forward-looking approach and;
• A focused approach.

The FCA’s strategic objective is to ensure that the relevant markets function well. The FCA’s operational objectives are:

• the consumer protection objective;
• the integrity objective; and
• the competition objective.

The FPC’s primary responsibility is to protect and enhance the resilience of the UK’s financial system. This involves identifying, monitoring and taking action to reduce systemic risks. Its secondary objective is to support the economic policy of the government.

Under FSMA 2000 (as amended), it is a criminal offence for a person to carry on a ‘regulated activity’ in the United Kingdom unless authorised to do so or exempt from the authorisation requirement. Regulated activities are defined in secondary legislation. Deposit taking is a regulated activity that requires authorisation. Other regulated activities that require authorisation include:

• dealing in investments as principal;
• dealing in investments as agent;
• arranging deals in investments;
• managing investments;
• safeguarding and administering investments (i.e., custody); and
• providing investment advice and mortgage lending.

Investments include:

• shares;
• debentures (including sukuk);
• public securities;
• warrants;
• futures;
• options;
• contracts for differences (i.e., swaps); and
• units in collective investment schemes.

Please see the answer to the question above. Each regulated activity must be authorised.

No. Each regulated activity must be authorised.

Yes. The UK FCA has established a regulatory sandbox for innovative propositions that are either regulated business or support regulated business in the UK financial services market, open to authorised firms, unauthorised firms that require authorisation and technology businesses. The sandbox provides the ability to test products and services in a controlled environment, reducing time to market, providing support to identify appropriate consumer protection safeguards and better access to finance. Previously the sandbox operated on a cohort basis, meaning firms could only apply during specific time periods. However, the sandbox is now open for year-round applications.

At present, the UK has no specific cryptocurrency laws, cryptocurrencies are not considered legal tender and exchanges have registration requirements. Gains or losses on cryptocurrencies are, however, subject to capital gains tax. On 13 March 2019 the Basel Committee on Banking Supervision (“the Committee”) published Its statement on crypto assets expressing the view that the continued growth of crypto-asset trading platforms and new financial products related to crypto-assets has the potential to raise financial stability concerns and increase risks faced by banks. While crypto-assets (not to be confused with the digital currencies of central banks) are at times referred to as “crypto-currencies’, the Committee is of the view that such assets do not reliably provide the standard functions of money and are unsafe to rely on as a medium of exchange or store of value. Crypto assets are not legal tender, and are not backed by any government or public authority. The Committee’s statement was intended to set out its prudential expectations relevant to the exposures of banks to crypto-assets and related services, particularly for those jurisdictions that do not prohibit such exposures and services.

The Committee concluded that crypto-assets have exhibited a high degree of volatility and are considered an immature asset class given the lack of standardization and constant evolution, They present a number of risks for banks, including liquidity risk: credit risk: market risk: operational risk (including fraud and cyber risks): money laundering and terrorist financing risk: and legal and reputation risks. Accordingly, the Committee expects that if a bank is authorised and decides to acquire crypto-asset exposures or provide related services, the following should be ado ted at a minimum:

• Due diligence: Before acquiring exposures to crypto-assets or providing related services, a bank should conduct comprehensive analyses of the risks noted above. The bank should ensure that it has the relevant and requisite technical expertise to adequately assess the risks stemming from crypto assets.
• Governance and risk management: The bank should have a clear and robust risk management framework that is appropriate for the risks of its crypto-asset exposures and related services. Given the anonymity and limited regulatory oversight of many crvpto assets, a bank’s risk management framework for crypto-assets should be fully integrated into the overall risk management processes, including those related to anti money laundering and combating the financing of terrorism and the evasion of sanctions, and heightened fraud monitoring. Given the risk associated with such exposures and services, banks are expected to implement risk management processes that are consistent with the high degree of risk of crypto assets. Its relevant senior management functions are expected to be involved in overseeing the risk assessment framework. Board and senior management should be provided with timely and relevant information related to the bank’s crypto-asset risk profile. An assessment of the risks described above related to direct and indirect crypto-asset exposures and other services should be incorporated into the bank’s internal capital and liquidity adequacy assessment processes
• Disclosure: A bank should publicly disclose any material crypto-asset exposures or related services as part of its regular financial disclosures and specify the accounting treatment for such exposures, consistent with domestic laws and regulations.
• Supervisory dialogue: The bank should inform its supervisory authority of actual and planned crypto-asset exposure or activity in a timely manner and provide assurance that it has fully assessed the permissibility of the activity and the risks associated with the intended exposures and services, and how it has mitigated these risks.

The Committee will continue to monitor developments in crypto assets, including direct and indirect exposures of banks to such assets. The Committee will in due course clan the prudential treatment of such exposures to appropriately reflect the high degree of risk of crypto assets. The Committee is coordinating its work with other global standard setting bodies and the Financial Stability Board. (FSB).

In June 2019 Facebook confirmed its intended launch of a global cryptocurrency known as Libra in 2020. As a consequence of intensive regulatory scrutiny, on 15 Jul 2019, Facebook announced that Libra will not launch until all regulatory concerns have been met and Libra has the appropriate approvals.

On 31 May 2019. the FSB published a report on crypto assets which was delivered to the G20 Finance Ministers and Central Bank Governors at their meeting in Fukuoka, Japan on 8-9 June 2019. The report recommended that the G20 keep the topic of regulatory approaches to crvpto assets and potential gaps, including the question of whether more coordination is needed, under review.

Since January 2020, businesses that use crypto assets have been subject to increasingly stringent anti-money laundering obligations under the Money Laundering Regulations 2017. They must also now register with the FCA.

N/A.

Part 4A of FSMA sets out the main requirements.

Applications, by way of detailed forms, must be made to the PRA, and include a permission table that sets out Part 4A Permissions by function. Although the PRA manages a single administrative process, the FCA also assesses the applicant firm from a conduct perspective. Authorisation is granted only if and when both regulators are satisfied.

In addition to the basic application forms, an applicant must provide:

• Business plan including details of the rationale for the business.
• Ownership of the bank.
• Business strategy.
• Financial resources.
• Non-financial resources.
• Management structure.
• Responsibilities.
• Controls and governance arrangements.
• Significant additional detail about the bank’s: policies; capital; liquidity; financial projections; IT systems and processes; compliance; internal audit; outsourcing arrangements; senior managers; and owners and influencers.

Any prospective bank planning to apply for a deposit-taking permission should arrange a pre-application discussion with the PRA. The PRA and FCA are also expected to be in communication with the applicant throughout the process.

Firms other than deposit taking institutions (which in practice includes some investment banks) usually apply only to the FCA, as the PRA’s jurisdiction is limited to deposit-taking banks and certain designated investment firms classified by the PRA as being of systemic importance.

The PRA and the FCA must make their decision within six months of receipt of the completed application but can deem an application incomplete and require further information, which defers the start of the six-month period. In practice, the licensing process may take up to a year to complete.

If the regulators grant permission, each can impose such requirements or limitations on that permission as it considers appropriate.

An applicant for a banking licence must pay a non-refundable application fee, which varies according to the type of banking business to be carried on. Once authorised, UK banks must pay an annual licensing fee to the PRA or FCA, based on a number of factors, including annual income and types of banking business.

Prior to the UK’s exit from the EU, if an entity was already authorised as a bank elsewhere in the European Economic Area (EEA) it could ‘passport’ into the UK directly, without applying for authorization from UK regulators. Post Brexit transitional arrangements are now in place. From January 2021, EU law ceased to apply in the UK and the ‘passporting’ of financial services between the UK and the EU is no longer applicable. The terms of the UK’s relationship with the EU continues to be negotiated. Anyone wishing to engage in cross-border activities should seek advice on the specific facts of each case.

International banks headquartered outside the EEA may operate in the UK through a branch, a subsidiary or both but they need to go through the new bank authorisation process for either approach.

The PRA requires a deposit-taker to be either a body corporate or a partnership. UK-headquartered banks are generally UK public limited companies or private limited companies.

The organisation of a bank should be established by the board, which also has ultimate responsibility for organisational structure. Organisational systems should be proportionate to the nature, scale and complexity of a bank’s business. A bank must have:

• Decision-making procedures and an organisational structure that clearly specifies and documents reporting lines and allocates functions and responsibilities.
• Adequate internal control mechanisms to secure compliance with decisions and procedures at all levels of the bank.
• Effective internal reporting and communication of information at all levels.
• Appropriate and effective whistleblowing arrangements.

Banks should segregate the duties of individuals and departments so as to reduce opportunities for financial crime or contravention of regulatory requirements and standards (for example front-office and back-office duties should be segregated to prevent a single individual initiating, processing and controlling transactions). Responsibility should also be segregated in a manner that supports the bank’s compliance obligations on conflicts of interest, remuneration structures and prevention of market abuse.

Corporate governance determines the allocation of authority and responsibilities by which the business and affairs of a bank are carried out by its board and senior management, including how they:

• set the bank’s strategy and objectives;
• select and oversee personnel;
• operate the bank’s business on a day-to-day basis;
• protect the interests of depositors, meet shareholder obligations, and take into account the interests of other recognised stakeholders;
• align corporate culture, corporate activities and behaviour with the expectation that the bank will operate in a safe and sound manner, with integrity and in compliance with applicable laws and regulations; and
• establish control functions.

Yes. The PRA has issued a supervisory statement setting out the expectations for firms in relation to the following:

• proportionality;
• material risk takers (MRTs);
• application of clawback to variable remuneration;
• governing body/remuneration committees;
• risk management and control functions;
• remuneration and capital;
• risk adjustment (including long-term incentive plans);
• personal investment strategies;
• remuneration structures (including guaranteed variable remuneration, buy-outs and retention awards);
• deferral; and
• breaches of the remuneration rules.

The FSA issued the first Remuneration Code in August 2009. This Code regulates the position of Capital Requirements Regulation (CRR) firms from a conduct perspective. The PRA’s Remuneration Code also addresses remuneration policies for prudential purposes. The requirements of the Codes are supplemented by a variety of guidance, including from the UK Regulators and the European Banking Authority (in particular its guidelines issued on 2 July 2021). These Guidelines were effective from 31 December 2021. Following Brexit, the 2021 Guidelines do not specifically apply to the UK but it is expected that the UK Regulators will updated their guidance in accordance with them. The general principles of the Codes is that firms must ensure that their remuneration policies and practices are consistent with and promote sound and effective risk management.

The UK plays an active role in shaping global banking regulatory standards at the Basel Committee for Banking Supervision. The majority of the Basel III framework has been implemented and is in force but there are certain aspects, including in relation to changes to the definition of exposure and minimum capital requirements for market risk, that will come into force only in 2022.

Yes, the UK through the PRA Rules now has a requirement that a regulated firm must hold sufficient tier 1 capital to maintain, at all times, a minimum leverage ratio of 3.25%.

The rules apply to every firm that is a UK bank or a building society that, on the firm’s last accounting reference date, had retail deposits equal to or greater than £50 billion either on: (1) an individual basis; (2) if the firm is a parent institution in a Member State, on the basis of its consolidated situation; or (3) if the firm is controlled by a parent financial holding company in a Member State or by a parent mixed financial holding company in a Member State and the PRA is responsible for supervision of that holding company on a consolidated basis under Article 111 of the CRD, on the basis of the consolidated situation of that holding company.

The UK has implemented the LCR regime and is aligned with the CRR requirement that banks should have enough high quality liquid assets in their liquidity buffer to cover the difference between the expected cash outflows and the expected capped cash inflows over a 30-day stressed period and accordingly with effect from 1 January 2018, the ratio requirement that banks have to meet is 100%.

The NSFR regime is not yet in force in the UK as final EU legislation is awaited. It is expected that when implemented, the NSFR regime will require banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities. Expressed as a percentage and set at a minimum level of 100%, it indicates that an institution holds sufficient stable funding to meet its funding needs during a one-year period under both normal and stressed conditions. As allowed under EU rules, preferential treatment will be possible in certain exceptional cases.

It is expected that the UK Government will implement reforms in relation to NSFR pursuant to the framework set out in the Financial Services Bill.

Yes – generally English banks are subject to the same corporate law disclosure requirements as other English company. The need for interim reporting will apply to public companies that are subject to the disclosure rules of a stock exchange and typically on the London market will require semi-annual reporting if there is no US market aspect.

Yes. Consolidated supervision in the UK is derived from the requirements set by the Basel Committee on Banking Supervision. It enables prudential supervision of a bank to look to the strength of the bank’s group and not just the entity itself. Following the CRR regime, calculations are required of group capital requirements and resources and reporting is made at both group and entity level.

Part 12 of FSMA 2000 (as amended) implements the requirements of the EU’s Acquisitions Directive (2007/44/EC) into English law. A person intending to acquire or increase ‘control’ over the shares or voting power of a UK-authorised bank or its parent undertaking above 10 per cent, 20 per cent, 30 per cent or 50 per cent must notify and obtain consent from the PRA prior to acquiring or increasing control. Failure to do so is a criminal offence. The PRA must consult the FCA before reaching a decision on whether to approve a proposed change of control.

Change of control forms are detailed and require disclosure of information about the ultimate beneficial owner of the proposed acquisition.

A person wishing to decrease control of the shares or voting power in a UK-authorised bank or its parent undertaking below 50 per cent, 30 per cent, 20 per cent or 10 per cent, must notify the regulator of the intention to do so. Failure to notify is an offence. There is no requirement for regulatory consent to the reduction of control.

The PRA has 60 business days from receipt of the application to approve the acquisition or increase of control (with or without conditions), or to object. This period may be interrupted once by up to 20 business days in cases where the PRA requires further information.

The Acquisitions Directive was supplemented with Level 3 Guidelines published by the Committee of European Banking Supervisors, the Committee of European Insurance and Occupational Pensions Supervisors and the Committee of European Securities Regulators (together, the Level 3 Committees). The Level 3 Guidelines updated on 1 October 2017 contain guidance on general concepts such as the meaning of the term ‘acting in concert’ and the process for determining acquisitions of indirect holdings.

When considering whether or not to grant approval, the PRA considers the suitability of the person, having regard to their likely influence over the bank. This will involve considering the following statutory items:

• the reputation of the section 178 notice-giver;
• the reputation and experience of any person who will direct the business of the UK authorised person as a result of the proposed acquisition;
• the financial soundness of the section 178 notice-giver, in particular in relation to the type of business that the UK authorised person pursues or envisages pursuing;
• whether the UK authorised person will be able to comply with its prudential requirements (including the threshold conditions in relation to all of the regulated activities for which it has or will have permission);
• if the UK authorised person is to become part of a group as a result of the acquisition, whether that group has a structure which makes it possible to—
  1. exercise effective supervision;
  2. exchange information among regulators; and
  3. determine the allocation of responsibility among regulators; and
• whether there are reasonable grounds to suspect that in connection with the proposed acquisition money laundering or terrorist financing is being or has been committed or attempted; or the risk of such activity could increase.

No.

Certain parts of UK regulation (for example in relation to TLAC) deal specifically with globally systemically important banks which are subject to enhanced supervisory and recovery and resolution planning requirements.

This will depend on the nature of the breach but sanctions range from reprimands to fines to suspension of loss of a banking licence. There are also criminal sanctions for certain violations (e.g. in relation to change of control).

The current resolution regime is set out in the UK’s Banking Act 2009 which provides for resolution and recovery measures and has been amended to reflect the requirements of BRRD. The PRA rules require banks to maintain recovery plans and resolution packs to enable institutions and the PRA better to plan effectively for recovery or resolution in the future. The Banking Act 2009 introduced a special resolution regime with new insolvency procedures of bank insolvency, bank administration and also empowers the institutions to transfer the bank to a third party or to take it into temporary public ownership. As part of the new powers granted to the Bank of England under the Banking Act 2009, the Bank of England has bail-in powers to write down and covert capital into full equity.

The UK government does not insure bank deposits. The UK offers protection of deposits up to £85,000 per person per firm, administered by the Financial Services Compensation Scheme (FSCS). This body is responsible for ensuring that compensation is paid to insured depositors and other eligible claimants to cover amounts due from failed banks and in other appropriate cases. The FSCS is free to consumers. Banks are required to develop and maintain a method of identifying all depositors who would be eligible if the bank in question were to fail. The FSCS is independent from, but accountable to, both the FCA and the PRA.

The FCA also has extensive rules on client asset protection which apply to firms holding client assets. These rules require client assets to be segregated and reconciled within set time periods.

Yes. Bail-in involves shareholders of a failing institution being divested of their shares, and creditors of the institution having their claims cancelled or reduced to the extent necessary to restore the institution to financial viability. The shares can then be transferred to affected creditors, as appropriate, to provide compensation. Alternatively, where a suitable purchaser is identified, the shares may be transferred to them, with the creditors instead receiving, where appropriate, compensation in some other form.

Certain arrangements are subject to safeguard provisions to protect netting and set-off.

There are a range of excluded liabilities including:

• liabilities representing protected deposits
• any liability, so far as it is secured
• liabilities that the bank has by virtue of holding client assets
• liabilities with an original maturity of less than 7 days owed by the bank to a credit institution or investment firm
• liabilities arising from participation in designated settlement systems and owed to such systems or to operators of, or participants in, such systems
• liabilities owed to central counterparties recognised by the European Securities and Markets Authority in accordance with Article 25 of Regulation (EU) 648/2012 (EMIR) of the European Parliament and the Council of 4 July 2012 on OTC derivatives, central counterparties and trade depositaries
• liabilities owed to an employee or former employee in relation to salary or other remuneration, except variable remuneration
• liabilities owed to an employee or former employee in relation to rights under a pension scheme, except rights to discretionary benefits
• liabilities owed to creditors arising from the provision to the bank of goods or services (other than financial services) that are critical to the daily functioning of its operations

A “protected deposit” is defined in section 48C as one which is covered by the FSCS, or equivalent deposit guarantee scheme, up to the coverage limit of that scheme.

The UK is currently subject to the EU’s TLAC rules in the CRR II Regulation which have been in force since 1 January 2019 in relation to globally systemically important banks.

Cybersecurity continues to be one of the top legal and regulatory trends in the United Kingdom as is the development of an appropriate and effective regulatory framework for crypto assets and digital banking. Developments in artificial intelligence, algorithmic solutions, green finance and climate change are likely to require an appropriate legal and regulatory framework in due course.

In the PRA’s Approach to Banking Supervision, published in October 2018, Sam Woods, the Chief Executive Officer (CEO) of the PRA said:

. . . having successfully implemented a ring-fence to separate retail banking from global trading, we will now police the fence as an integral part of our supervisory approach. We will ensure there is continued compliance with restrictions on activities performed by the ring-fenced banks and independence from the rest of the group. In particular, we will closely monitor governance arrangements, seeking evidence that they can identify conflicts of interest and are able to make decisions on their own. Second, in a context of firms’ increasing reliance on digital systems and platforms and the risk of cyber-attacks, operational resilience is on track to become as embedded in our supervisory approach as financial resilience. In this area, we are primarily focused on the continuity of the business services that a firm’s customers and the wider economy rely upon. We will prioritise our interventions proportionally based on safety and soundness and any potential financial stability implications of potential operational disruptions. Third, having fully embedded the Senior Managers Regime for banks (and soon also for insurers), individual accountability has become a key tool through which we deliver our supervisory approach. We expect firms to identify the most senior individuals responsible for key areas and activities, including the delivery of supervisory priorities, and to document their responsibilities. We can and will take supervisory or enforcement action if our red lines are crossed. Fourth, we are working with the aim of ensuring that the transition to the UK’s new relationship with the EU is as smooth as possible in financial services in order to minimise risks to our objectives, through mechanisms such as the Temporary Permissions Regime, which will allow us to bridge incoming EU27 firms for three years while they seek an authorisation to continue business in the UK. Our approach to advancing our objectives will remain the same as the UK withdraws from the EU. Our main focus is on trying to ensure that the transition to our new relationship with the EU is as smooth and orderly as possible in order to minimise risks to our objectives.

The UK government established the Crypto assets Taskforce in early 2018 with the objective of:

• ascertaining the risks and benefits of the application of distributed ledger technology in financial services; and
• the impact of crypto assets.

The Taskforce published its final report in July 2018. There have been calls by the Treasury for the FCA to regulate cryptocurrencies. On 20 December 2018, the House of Commons Treasury Committee published its eighth special report of session 2017 to 2019 in which it set out the UK government’s and the FCA’s response to the House of Commons Treasury Committee report on crypto assets.

The FCA’s Business Plan 2021/22 outlined that it would be working with H.M.’s Treasury to develop policy and regulations on crypto assets, following the Treasury’s call for evidence in 2020 as part of its Payments Landscape Review. It is clear that the direction is that there is going to be a much more interventionist approach by the FCA in the short term, while increased regulation and expanding the FCA’s scope in the medium to long term.

On 6 October 2020, the FCA announced that it was banning the sale, marketing and distribution of crypto-derivatives (ie, contracts for difference, options and futures) and exchange traded notes that reference unregulated transferrable crypto assets by firms acting in or from the UK. In a statement announcing the ban, the FCA said that it:

considers these products to be ill-suited for retail consumers due to the harm they pose. These products cannot be reliably valued by retail consumers because of the:

• inherent nature of the underlying assets, which means they have no reliable basis for valuation
• prevalence of market abuse and financial crime in the secondary market (eg cyber theft)
• extreme volatility in crypto asset price movements
• inadequate understanding of crypto assets by retail consumers
• lack of legitimate investment need for retail consumers to invest in these products

These features mean retail consumers might suffer harm from sudden and unexpected losses if they invest in these products.

Unregulated transferable crypto assets are tokens that are not ‘specified investments’ or e-money, and can be traded, which includes well-known tokens such as Bitcoin, Ether or Ripple. Specified investments are types of investment which are specified in legislation. Firms that carry out particular types of regulated activity in relation to those investments must be authorised by the FCA.

The ban came into force on 6 January 2021.

Crypto asset firms operating in the UK are obliged to file annual financial crime reports. Crypto asset firms in the UK must be registered with the FCA before beginning to conduct business. This means adhering to the required standards under the Money Laundering Regulations and other relevant laws and regulations.

The New Payments Architecture (NPA) was introduced in June 2018 by the UK’s Payment Systems Regulator (PSR) as a new conceptual model for the shared retail payment infrastructure in the United Kingdom,. It was expected to process £6.7 trillion of Bankers Automated Clearing Services (Bacs), faster payments and, potentially, cheque payments per year from 2021. Its aim was to ensure that payments made through this system are safe while encouraging innovation in banking and payments services.

The NPA aims to simplify the rules, standards and processes that banks must follow to use the systems. The New Payment System Operator announced a further consultation in 2019 on plans for the migration of payment volumes currently cleared through Bacs and potentially, subject to a suitable business case being identified, the migration in future of payments being processed using the Image Clearing System for cheques.

The practical implications of implementing the ring-fencing regime for banks separating core banking services from wholesale and investment banking services from 1 January 2019 is likely to require further regulatory fine tuning in due course.

On 29 July 2021, it was announced that the scope of the NPA will be reduced.. It had been hoped that the NPA would simplify the rules, standards and processes that banks must follow to use the systems. However, the PSR decided that another of its creations, PayUK, would “phase the development of the NPAby narrowing the scope of the NPA’s central infrastructure services (CIS) contract”.

Payment service providers have raised concerns over the successful integration of the NPA following the July announcement. By the end of the year, the PSR intends to provide a statement on policy and the regulatory framework for the NPA.

The global, regional and national capital and prudential regimes for banks continue to evolve with relevant reforms set out in the EU Capital Requirements Directive V (CRD V) (adopted by the European Commission in November 2016) amending the Capital Requirements Regulation (EU) No. 575/2013 (CRR) and the Capital Requirements Directive 2013/36/EU (CRD IV). The reforms include the introduction of Basel III measures into EU law, such as the leverage ratio and the net stable funding ratio, the implementation of the total loss-absorbing capacity standard and revisions intended to improve lending to SMEs and to infrastructure. A new package of capital adequacy measures (known as Basel IV) was agreed by the Basel Committee on Banking Supervision in December 2017.

From 1 January 2019, the Securitisation Regulation (EU) No. 2017/2402 and CRR Amendment Regulation (EU) No. 2017/2401 apply within the European Union.

EU law applying in the UK at the end of the Brexit transitional agreement (31 December 2020) was automatically on-shored into UK law from 1 January 2021. In future, the influence of EU law on the UK’s regulatory landscape going forward remains to be seen should not be over emphasised. The UK is a global leader in regulation in its own right and has led the way on various regulatory initiatives. The UK played an integral role in the development of EU regulatory standards and policy during its membership of the EU. Going forward, it is likely that the UK will continue to play an active role in shaping global banking regulatory standards at the Basel Committee for Banking Supervision, at the G20 and IOSCO.

The assessment and mitigation of climate risk continue to be at the forefront of the global regulatory agenda. In December 2019, the new President of the ECB, Christine Lagarde, said that the ECB would incorporate climate-related risks, into both its models of economic forecasts and in its capacity as the watchdog of the Eurozone’s financial system.

On 19 December 2019, Mark Carney, the Governor of the Bank of England, made it clear that the Bank of England was working towards making the United Kingdom a global leader in sustainable finance. The Bank of England’s 2019 survey on the banking sector found that almost three-quarters of global banks (representing about US$11 trillion of assets) are starting to treat climate risks like any other risk.

On 21 April 2021 the industry-led, UN-Convened Net-Zero Banking Alliance (NZBA) was launched with 43 founding banks. To date there are now over 90 banks on board. This Alliance aims to accelerate and support the implementation of decarbonisation strategies and provide an internationally coherent framework and guideline in which banks can operate. It plays a key role in banks making the global transition of the real economy to net-zero emissions.

In November 2021, the United Kingdom hosted the 26th UN Climate Change Conference (COP26) in Glasgow. This took place five years after 195 governments agreed to enact policies to limit a global temperature rise to below two degrees centigrade above pre- industrial levels in Paris (known as the Paris Agreement).

At Cop26, the NZBA joined with the Glasgow Financial Alliance for Net Zero (GFANZ). Mark Carney stated that this provided “the essential plumbing…to move climate change from the fringes to the forefront” of banking and financial regulation. Panellists at Cop26 highlighted the tension between banks and regulators and the need to consolidate approaches and reduce fragmentation, while still needing to experiment as the financial system learns to seek best-practice on how climate change can be reflected in the capital framework.

Mark Carney spearheaded the establishment of the Task Force on Climate-related Financial Disclosures (TCFD) which is the international taskforce chaired by Michael Bloomberg. This model is based on putting figures on the exposures within a disclosure model asking about risk management and governance and strategy, for example what climate change means in real terms for the organisation and its business model. This is at the heart of the PRA’s expectations but it still remains that a ‘comply or explain’ model is used. On 27 October 2021, the FRC published its end of year bulletin, which referred to compliance with TCFD recommendations. It seems likely that TCFD-type disclosure will be introduced into UK legislation in regards to climate concerns.

On 28 October 2021, the FCA, PRA, Pensions Regulator and FRC issued a joint statement on the publication of their climate change adaptation reports. These include stating the opportunities from the transition to a net zero economy are being identified and proactively managed in the financial sector. The FCA report confirms their continued interest in net zero commitments and the PRA report indicates that they plan further updates on regulatory approaches in 2022.

In December 2019, the Bank of England published its new framework to stress test the largest UK banks and insurers for climate risks. Firms will be asked to model their exposures to three climate scenarios:

• the catastrophic business as usual scenario where no further climate action is taken;
• a scenario where early policy action delivers an orderly transition to the targets set in the Paris Agreement; and
• a scenario where a policy action leads to a disorderly and disruptive transition.

This pioneering climate stress test will differ from the Bank of England’s usual stress testing in a number of ways. For example, firms will be required to freeze their current balance sheets and investigate how their borrowers might cope with different scenarios. Instead of the usual five years, the time frame will be several decades. Firms will need to model not just the macroeconomic consequences of the three scenarios but also the physical impacts of climate change and whether borrowers are ready to meet the changing economics required to meet the shift to net-zero carbon emissions. On 8 June 2021, the Bank of England published the Climate Biennial Exploratory Scenario which will explore the resilience of the UK financial system to physical and transition risks associated with different climate pathways.

The possibility of a less than entirely satisfactory post-Brexit agreement with the EU (which, hopefully, will not materialise!).