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5th April 2016

Capital Planning & the Countercyclical Buffer Rate: Regulator’s Approach

The FCA issued a statement yesterday to lay out their proposed approach to the Countercyclical buffer rate for the UK and provided an illustrative example of calculation for Investment Firms.

Comments are welcomed upon the regulator’s proposed approach and should be sent to the FCA by 29th April 2016.

What did the FCA’s Statement Cover?

The regulator’s statement was in relation to their proposed approach on the interaction between the FCA’s Capital Planning Buffer (CPB) and the Capital Buffers required under CRD IV.

As informed last week, the Financial Planning Committee (FPC) at the Bank of England has now increased the countercyclical buffer rate for the UK to 0.5% of risk-weighted assets (RWA) that will become effective from 29th March 2017.

What does this mean for Investment Firms?

In the FCA’s statement, they remind investment firms who are regulated by them and subject to CRD IV that they “must calculate a combined buffer from January 2016”, this being when the new capital buffer rates took effect.

Whilst the Combined Buffer is made up of a number of components, only two are relevant to investment firms – these being the Countercyclical Buffer and the Capital Conservation Buffer as no investment firm that is prudentially regulated by the FCA is subject to the Global Systemically Important Institutions Buffer or the Systemic Risk Buffer.

Which Investment Firms will be affected?

In general, investment firms with Part IV permission to carry on the regulated activity of dealing in investments as principal will be affected. These will invariably be IFPRU 730K Firms, but will not be applicable to medium and small-sized investment firms with exemption under IFPRU 10.7.

Capital Planning Buffer and the Combined Buffer

In cases where firms have previously been informed by the FCA that they should hold a Capital Planning Buffer (CPB), the regulator considers “that the amount of the CPB can be offset by the amount of the combined buffer calculated by the firm – i.e. the firm should hold the higher of the CPB or the Combined Buffer”

The reason for this is to avoid the double-counting of risks where the CPB established is based on the impact of a severe, yet plausible, stress scenario. To assist firms, the FCA also provided an illustrative example of the calculation involved to determine a firm’s requirements.

In addition, the FCA reminded firms that that should their capital not meet the required level for the combined buffer, it would need to restrict distributions according to their calculated Maximum Distributable Amount and provide the regulator with a capital conservation plan no later than five business days after identifying the dearth, as required in IFPRU 10.5.

FCA’s Capital Planning Buffer & the UK Countercyclical Buffer Rate