ESAs guidelines and recommendations on CRD IV - Financial Conduct Authority

ESAs guidelines and recommendations

Legal entity identifiers (LEIs)

With its relevant recommendation the EBA has supported the adoption of the Legal Entity Identification (LEI) system, aimed at achieving a unique, worldwide identification of parties to financial transactions. The LEI system is not globally operational yet, but the EBA has already recommended that competent authorities use LEIs when providing supervisory information to the EBA, and that firms use LEIs in their respective templates under supervisory reporting.

We expect all relevant firms to obtain their LEIs from their Local Operating Unit and submit them to us by 31 December 2014 at the latest. Please contact us at LEI.queries@fca.org.uk for any related issues.

Discounting deferred variable remuneration

When finalising our approach to CRD IV remuneration policy, we confirmed our intention to exercise the relevant CRD IV discretion allowing the application of a discount rate up to a maximum of 25% of variable remuneration. All IFPRU firms should refer to the relevant EBA guidelines when applying a discount rate to deferred variable remuneration. We will use these guidelines in our supervisory practices when checking/ensuring compliance, as appropriate.

High Earners and Remuneration Benchmarking

The EBA has issued guidelines on the data collection for high earners which amends the reporting template, requiring more detailed information on remuneration practices, including additional data on business areas and the breakdown of remuneration. All CRD IV IFPRU solo-regulated firms are required to submit information on their high earners (staff with total remuneration of €1 million or more in the financial year) in the High Earners Report template for the 2014 performance year onwards.

The Benchmarking Report, required under EBA guidelines on remuneration benchmarking, is only applicable to CRD IV IFPRU solo-regulated firms with total assets of £50 billion or more. The FCA has no solo-regulated firms in this category at present; dual-regulated firms should submit their data to the PRA.

Further information on the Remuneration data reporting process

Foreign currency lending to unhedged borrowers

In publishing its guidelines on the above issue the EBA draws more attention to the risk inherent in retail and SME lending, where there is a mismatch between the currency of the loan and the underlying income streams of the borrower, and there is no financial hedge in place (FX lending).

The guidelines require that supervisors review FX lending risk as part of the Supervisory Review and Evaluation Process (SREP), with the ability to impose additional capital requirements under Pillar 2 where appropriate.

We expect all IFPRU firms to identify in their Internal Capital Adequacy Assessment Process (ICAAP) whether any FX lending they undertake either exceeds the materiality thresholds specified in the guidelines, or they believe it to be material from their own perspective. If that is the case, they should ensure that the risk is monitored and adequately managed, and that appropriate capital resources are held against it.

Disclosure of information on (un)encumbered assets

The EBA has issued Guidelines on the disclosure of encumbered and unencumbered assets. These are addressed to competent authorities and institutions subject to Pillar 3 disclosure requirements in Part Eight of the Capital Requirements Regulation (CRR).

As part of Pillar 3 disclosure requirements, all IFPRU investment firms should start disclosing specified templates and narrative information on (un)encumbered assets from 2015 onwards. In general, the information subject to disclosure will be readily available to firms, since the same data (in more granular form) is subject to supervisory reporting under CRR Article 100.

All IFPRU firms should refer to the text of the Guidelines and consider our notes for compliance.

Significant credit risk transfer in securitisation

The EBA has issued Guidelines on Significant Credit Risk Transfer relating to Articles 243 and 244 of Regulation 575/2013 (GL). These are applied to IFPRU investment firms, which are originators in securitisation wishing to achieve possible reduction in risk-weighted assets through recognition of significant risk transfer.

Articles 243 and 244 of the Capital Requirements Regulation (CRR) state that significant risk transfer can be achieved by meeting either quantitative or qualitative criteria in CRR Articles 243(2)/244(2) or 243(4)/244(4), respectively. Firms will need to demonstrate their compliance with these CRR Articles and GL Title IV, while providing necessary information (including, completed GL Annex 1) for the FCA to make the assessment specified in GL Titles I to III.

Regardless of which method is chosen, firms will also need to demonstrate their compliance with general conditions in CRR Articles 243(5)/244(5).

Supervisory Review and Evaluation Process (SREP)

The EBA has issued Guidelines on SREP, which apply from 1 January 2016. These guidelines are addressed to competent authorities and institutions in order to ensure consistent application of the Pillar 2 supervisory review and evaluation processes adopted. These arise as a consequence of CRDIV Article 107(3).

Financial Conglomerate Supervisory Cooperation

The EBA, ESMA and EIOPA have jointly issued Guidelines on supervisory coordination arrangements for financial conglomerates, which apply from 23 February 2015. These are addressed to competent authorities in accordance with Article 11 of the Financial Conglomerates Directive (2002/87/EC) as a consequence of Article 116 of the CRDIV. These guidelines aim to clarify and enhance cooperation between the competent authorities on a cross-border and cross-sectoral basis and to supplement the functioning of sectoral colleges and to enhance the level playing field in the financial market and reduce administrative burdens for firms and supervisory authorities.

Equivalence of confidentiality regimes

The EBA issued a Recommendation on the equivalence of confidentiality regimes on 2 April 2015. The FCA confirmed on 29 May 2015 that it complies with this recommendation.

When the FCA considers a Memorandum of Understanding with other Supervisory Authorities, in order to exchange information when supervising cross border groups, one consideration is to take account of the confidentiality regimes which apply in these other jurisdictions. This EBA recommendation sets out the EBA’s conclusions from its own analysis of confidentiality regimes that exist in certain non-EEA jurisdictions and makes recommendations to Competent Authorities as to their compatibility with the EU regime. The FCA has amended its processes and policy to take account of the EBA’s recommendation when managing existing and setting up new cross-border supervisory MoU’s.

Materiality, proprietary, confidentiality and frequency of disclosures

The EBA Guidelines on materiality, proprietary, confidentiality and on disclosure frequency were formally published on 14 April 2015. The FCA confirmed on 15 June 2015 it will comply with these Guidelines with effect from 14 October 2015 (being the required six month after formal publication) and has changed its supervisory process to take account of these Guidelines.

These Guidelines explain the meaning and the use of the terms Materiality, Proprietary and Confidentiality used when IFPRU Firms determine their Pillar 3 Disclosures. The Guidelines also clarify the circumstances where it would expect IFPRU Firms to make Pillar 3 Disclosures more frequently than annually. Therefore, it is for IFPRU Firms to take account of these Guidelines and for the FCA in its supervisory capacity to oversee IFPRU Firm’s compliant Pillar 3 Disclosures. Pillar 3 Disclosures made by IFPRU Firms (either at solo or consolidated level) under the provisions of Part 8 of EU CRR on and after 14 October 2015 will be supervised in accordance with these Guidelines.