This site uses cookies to provide you with a more responsive and personalised service. By using this site you agree to our use of cookies. Please read our cookie notice for more information on the cookies we use and how to delete or block them.
The full functionality of our site is not supported on your browser version, or you may have 'compatibility mode' selected. Please turn off compatibility mode, upgrade your browser to at least Internet Explorer 9, or try using another browser such as Google Chrome or Mozilla Firefox.

PRA and FCA consult on CRD IV

  • PRA Image
  • FCA Image

02 Aug 2013

The Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) have published proposals on implementing the new EU Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR), collectively known as CRD IV. Among other things, the proposals include requirements for UK banks, building societies and large investment firms to set quotas for the number of women on boards. Comments on the FCA consultation are invited until 30 September 2013 and comments on the PRA consultation are invited until 2 October 2013.

CRD IV is the EU package of rules and regulations which implements Basel III, the international regulatory framework for banks. The package is binding on all EU member states. It aims to address the problems that caused the financial crisis by increasing the level and quality of capital held by banks, enhancing risk coverage, expanding disclosure requirements and reducing procyclicality. CRD IV provides a basis for EU liquidity standards and introduces leverage disclosure requirements.    

The Capital Requirements Regulation is directly applicable in all member states whilst the Capital Requirements Directive must be incorporated within UK law, by means which would include through the rules and regulations of the PRA and FCA. 

One provision in the CRD in relation to the role of the nomination committee will affect how companies approach boardroom diversity and the disclosures they make.  It states: 

The nomination committee shall decide on a target for the representation of the underrepresented gender in the management body and prepare a policy on how to increase the number of the underrepresented gender in the management body in order to meet that target. The target, policy and its implementation shall be made public.

In their consultation document ‘Strengthening Capital Standards: implementing CRD IV’ (link to PRA website), the PRA has stated that these proposals will be included within their regulation and once incorporated into UK law will therefore require firms to set and publish quotas in order to promote gender diversity.  This will represent a change from current requirements in the UK where, although companies are encouraged to adopt diversity targets this is not a legal requirement.  The FCA has also indicated that it will implement these proposals in their consultation ‘CRD IV for Investment Firms’

Aside from the requirements in relation to diversity, the CRD contains a number of other specific provisions relating to the “management body”, risk management and remuneration which the PRA will implement although it highlights that some of these will not have a significant impact.  

Management Body 

The CRD introduces a new requirement relating to the management body who it defines as those which “are empowered to set the institution’s strategy, objectives and overall direction”.  This requires that the chairman and chief executive officer must be independent, however this is not a new requirement to UK companies as this is not seen as good governance. 

Risk management

The PRA intends to implement the CRD requirements in relation to risk management.  The main requirements are that: 

  • The management body should approve and periodically review the strategies and policies for taking up, managing, monitoring and mitigating the risks the institution is or might be exposed to, including those posed by the macroeconomic environment in which it operates in relation to the status of the business cycle.
  • The management body should devote sufficient time to consideration of risk issues
  • Large organisations should establish a risk committee composed of members of the management body who do not perform any executive function in the institution concerned.
  • The management body should retain overall responsibility for risks and have access to all relevant information to be able to perform their role.
  • Organisations should have a risk management function which is independent from the operational functions and which shall have sufficient authority, stature, resources and access to the management body. 

Remuneration 

The CRD provisions in relation to remuneration, introduce, among other things limits on bonuses, where a base line level will be set and can only be amended with shareholder approval.  The provisions also stipulate that the board should review the general principles of its remuneration policy and, at least annually, review compliance with that policy.  The FCA and PRA will consult at a later date how best to take these provisions forward. 

In addition, a number of reporting and disclosure requirements are required by the CRR to which the PRA is introducing rules for.  These include the requirements to disclose certain regulatory information publicly and a new rule for financial institutions to disclose their return on assets among their key indicators in their annual reports.  Additionally the CRR and CRD require companies within their scope to report on a country by country basis.  This will require a change in the law which HM Treasury will consult on in the autumn.

Click for:

Correction list for hyphenation

These words serve as exceptions. Once entered, they are only hyphenated at the specified hyphenation points. Each word should be on a separate line.