Shearman & Sterling LLP | Financial Regulatory Developments Focus | UK Financial Stability Report Published
Financial Regulatory Developments Focus
  • UK Financial Stability Report Published
    The Financial Policy Committee of the Bank of England has published the latest UK Financial Stability Report. The FPC notes that the UK banking system is resilient and that UK banks are stronger than they were 10 years ago. The results of the stress test show that no bank needs to improve its capital position. However, as a result of the stress test, the FPC has decided to raise the UK countercyclical buffer rate from 0.5% to 1% from November 28, 2018. In addition, the Prudential Regulation Committee will set capital buffers for individual banks. The FPC will reconsider the countercyclical buffer rate during the first half of 2018.

    The FPC continues to assess the risks posed by Brexit and concludes that Brexit presents a material risk to the provision of financial services to customers in both the UK and the EU. Three main risks are discussed: risks associated with bringing EU legislation into UK law through the Great Repeal Bill, risks to the continuity of outstanding cross-border contracts and risks presented by barriers to cross-border financial services provision.

    The FPC considers that the extent and nature of the changes to be brought in through the Great Repeal Bill will depend on the terms of the UK's withdrawal agreement and there is a tight timeframe in which it all needs to be achieved. In addition to the Great Repeal Bill, secondary legislation is needed, and the regulators will need to change their rulebooks. Firms will also need to make changes to comply with the amended legal framework.

    The FPC views UK and EU legislation as necessary to ensure the continuity of existing cross-border insurance and derivatives contracts. HM Treasury is considering all of the options for mitigating the risks to the continuity of these, and other financial contracts.

    The FPC states that the provision of cross-border financial services may be impacted by restrictions on transferring personal data between the UK and the EU. Firms could insert new clauses in contracts to permit such data transfer; however, the FPC notes that there may not be time to do this and that such clauses would be subject to legal challenge. Therefore, the FPC agrees with the Government's position paper on the exchange and protection of personal data which proposes that the UK and the EU should recognize each other's data protection frameworks as "adequate" to provide legal certainty.

    Furthermore, the FPC states that, in the event of a "no deal" Brexit, EU incorporated banks currently operating in the UK through a branch will need authorization to continue to do so after Brexit. The Prudential Regulation Authority intends to set out its approach to those authorizations before the end of the year.

    In addition, the FPC observes that there are material risks to the provision of clearing services in the EEA by UK CCPs if access to cross-border clearing services is not maintained. Migrating clearing services would be complex and difficult to achieve. The FPC notes that the BoE is working with CCPs and their clearing members to develop their contingency planning.

    View the Financial Stability Report. 

    View the results of the 2017 stress test.