UK Prudential Regulation Authority Proposes Adjustments to Pillar 2A Capital Framework

The Prudential Regulation Authority is consulting on proposals to change its Supervisory Statement "The Internal Capital Adequacy Assessment Process (ICAAP) and the Supervisory Review and Evaluation Process (SREP)" and its Statement of Policy "The PRA's methodologies for setting Pillar 2 capital". The PRA's proposals are intended to bring greater clarity, consistency and transparency to the PRA's capital-setting approach and to promote a greater level of transparency and disclosure.

Currently, the PRA provides guidance to each firm on the amount and quality of Pillar 2A capital it should maintain at all times, in addition to the firm's requirements under Pillar 1, in order to meet the overall financial adequacy rule. Pillar 2A capital protects firms that are either not captured or not fully captured under Pillar 1. Pillar 1 and Pillar 2A are sometimes referred to collectively as Individual Capital Guidance, or ICG. Whilst a number of firms disclose publicly their ICG, most firms do not.

The PRA proposes setting Pillar 2A as a Requirement under the Financial Services and Markets Act 2000 rather than as guidance, and introducing the term "Total Capital Requirement", or TCR, which would cover Pillar 1 plus Pillar 2A. This change will be reflected in a revised version of the relevant Supervisory Statement. The Supervisory Statement will also be revised to provide further clarity on when and how the Pillar 2A capital requirement may be set by the PRA at an individual (i.e. solo) level.

The PRA will also be amending its Statement of Policy to set a general expectation that firms should disclose the TCR which applies to them at the highest level of consolidation in the UK. The PRA's disclosure expectations will therefore differ according to whether the firm concerned is part of a UK consolidation group or not and whether the PRA is home or host regulator.

Comments on the consultation proposals are invited by October 12, 2017. The PRA intends that the proposals take effect from January 1, 2018.

View the Consultation Paper (PRA CP 12/17).