FCA Provides 'Flexibility' To Firms On Capital Buffers

Law360, London (March 26, 2020, 3:35 PM GMT) -- The Financial Conduct Authority said on Thursday that it will “provide flexibility” to regulated banks and insurers to ensure they can use cash stockpiled in their capital buffers to continue operating during the disruption caused by COVID-19.

The City watchdog said it will allow the finance companies that it regulates to dip into their reserves, ensuring they can continue lending to boost the economy. The FCA said it is taking a flexible approach so that U.K. banks, insurers and asset managers can continue to function during the pandemic.

“We intend to provide flexibility to regulated firms,” the FCA said in a statement on Thursday. “Capital and liquidity buffers are there to be used in times of stress. Firms who have been set buffers can use them to support the continuation of the firm’s activities.”

Lenders are required to hold cash as a bulwark against market stress under the so-called Basel III regulatory framework on bank capital. The rules are among measures taken since the financial crisis to allow banks to absorb losses without collapsing.

The FCA said on Thursday that financial services companies should plan ahead to ensure they are managing their resources well.

Lenders should also ensure they can leave the market without causing disruption, taking steps to reduce harm to consumers and the wider sector, if they are struggling during the coronavirus outbreak, the regulator said.

Law firm Ashurst LLP said that although the FCA’s statement “appears helpful, its meaning is opaque.”

“The FCA clearly wants to show flexibility regarding, for example, capital, but if you have an issue you must contact them … which will beyond challenging and not possible in some instances,” Jake Green, regulation partner at Ashurst, said.

And Keith Richards, chief executive of a professional body, the Personal Finance Society, said the FCA could do more to “unburden firms in the coming months.” This could include “applying a lighter touch” to rules, Richards said, including the Senior Manager and Certification Regime and the updated Markets in Financial Instruments Directive, known as MiFID II.

Central banks have released lenders from the need to pour more money into their capital buffers to allow them to pump this into the economy.

The Central Bank of Ireland said earlier this  month that it has reduced the so-called countercyclical capital buffer that banks have been required to hold in preparation for economic shocks from a rate of 1% to 0%. This will temporarily remove the capital requirement by no later than April 2.

And the Bank of England decided to temporarily remove the countercyclical capital buffer for banks for at least 12 months to release £190 million ($224 million) into the economy. Europe has also followed suit.

The authorities have said that buffers are designed to be dropped when banks face economic risks so that households and businesses have access to cash.

--Editing by Ed Harris.

For a reprint of this article, please contact reprints@law360.com.

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