The Capital Requirements Regulations 2006

Regulations 22 and 23

SCHEDULE 1 Recognition of ECAIs

PART 1 Methodology

Objectivity

1.  The Authority must verify that an ECAI’s assessment methodology is rigorous, systematic, continuous and subject to validation based on historical experience.

Independence

2.  The Authority must verify that an ECAI’s assessment methodology is free from external political influences or constraints, and from economic pressures that may influence a credit assessment.

3.  The Authority must assess the independence of an ECAI’s assessment methodology according to factors such as the following—

(a) ownership and organisation structure of the ECAI;

(b) financial resources of the ECAI;

(c) staffing and expertise of the ECAI;

(d) corporate governance of the ECAI.

Ongoing review

4.  The Authority must verify that an ECAI’s credit assessments—

(a) are subject to ongoing review, taking place after all significant events and at least annually; and

(b) are responsive to changes in the financial conditions.

5.  The Authority must verify that the assessment methodology for each market segment is established according to standards such as the following—

(a) that backtesting has been established for at least one year;

(b) that the Authority monitors the regularity of the review process by the ECAI;

(c) that the Authority is able to receive from the ECAI information as to the extent of the ECAI’s contacts with the senior management of the entities which it rates.

6.  The Authority must take such steps as it considers necessary to ensure that it is promptly informed by an ECAI of any material changes in the methodology that the ECAI uses for assigning credit assessments.

Transparency and disclosure

7.  The Authority must take such steps as it considers necessary to ensure that the principles of the methodology employed by an ECAI for the formulation of its credit assessments are publicly available so as to enable all potential users to decide whether they are derived in a reasonable way.

PART 2 Credit assessments

Credibility and market acceptance

8.  The Authority must verify that the individual credit assessments of each ECAI are recognised in the market as credible and reliable by the users of such credit assessments.

9.  The Authority must assess credibility according to factors such as the following—

(a) market share of the ECAI;

(b) revenues generated by the ECAI;

(c) financial resources of the ECAI;

(d) whether there is any pricing on the basis of the rating;

(e) whether at least two credit institutions use the individual credit assessments of the ECAI for—

(i) bond issuing, or

(ii) assessing credit risks.

Transparency and Disclosure

10.  The Authority must verify that individual credit assessments are—

(a) accessible on equivalent terms to all credit institutions and investment firms having a legitimate interest in those individual credit assessments, and

(b) available to non-domestic parties on equivalent terms as to domestic credit institutions and investment firms having a legitimate interest in those individual credit assessments.

Regulation 22

SCHEDULE 2 Mapping

1.—(1) In order to differentiate between the relative degrees of risk expressed by each credit assessment, the Authority must consider quantitative factors such as the long-term default rate associated with all items assigned the same credit assessment.

(2) For recently established ECAIs and for those that have compiled only a short record of default data, the Authority must ask the ECAI what it believes to be the long-term default rate associated with all items assigned the same credit assessment.

2.  In order to differentiate between the relative degrees of risk expressed by each credit assessment, the Authority must consider qualitative factors such as—

(a) the pool of issuers that the ECAI covers;

(b) the range of credit assessments that the ECAI assigns;

(c) each credit assessment meaning;

(d) the ECAI’s definition of default.

3.  The Authority must compare default rates experienced for each credit assessment of an ECAI and compare them with a benchmark built on the basis of default rates experienced by other ECAIs on a population of issuers which the Authority believes to present an equivalent level of credit risk.

4.  Where the Authority believes that the default rates experienced for the credit assessment of an ECAI are materially and systematically higher than the benchmark, the Authority must assign a higher credit quality step in the credit quality assessment scale to the ECAI’s credit assessment.

5.  Where the Authority has increased the associated risk weight for a credit assessment of an ECAI, if the ECAI demonstrates that the default rates experienced for its credit assessment are no longer materially and systematically higher than the benchmark, the Authority may decide to restore the original credit quality step in the credit quality assessment scale for the ECAI’s credit assessment.

Regulation 29(1)

SCHEDULE 3 Consequential amendments to the Act

1.  In section 405 of the Act (directions in relation to third country decisions), subsection (5)(b) is repealed.

2.—(1) Schedule 3 to the Act (EEA passport rights) is amended as folows.

(2) For paragraph 2(1) substitute—

“2.   ”The banking consolidation directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

(3) In paragraph 5, for paragraphs (b) and (c)(2) substitute—

“(b) a credit institution (as defined in Article 4.1 of the banking consolidation directive) which is authorised (within the meaning of Article 4.2) by its home state regulator,

(c) a financial institution (as defined in Article 4.5 of the banking consolidation directive) which is a subsidiary of the kind mentioned in Article 24 and which fulfils the conditions in that Article;”.

(4) In paragraph 24(1)(b), for “Article 19” substitute “Article 24”.

3.  In paragraph 8(6) of Schedule 11A(3) to the Act (transferable securities), for “Article 1.1(a)” substitute “Article 4(1)(a)”.

Regulation 29(2)

SCHEDULE 4 Consequential amendments to other primary legislation

Amendment of the Consumer Credit Act 1974

1.  In subsection (1C) of section 25 of the Consumer Credit Act 1974(4) (licensee to be a fit person), for “Annex 1 to the banking consolidation directive (2000/12/EC)” substitute “Annex 1 to Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

Amendment of the Companies Act 1985

2.—(1) The Companies Act 1985(5) is amended as follows.

(2) In subsection (2)(b) of section 209 (interests to be disregarded), for “article 1(1)(a)” substitute “Article 4(1)(a)”.

(3) In the definition of “credit institution” in each of subsection (1) of section 262 (minor definitions)(6) and subsection (3) of section 699A (credit and financial institutions to which the Bank Branches Directive (89/117/EEC)(7) applies), for “article 1(1)(a) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Building Societies Act 1986

3.  In section 119 of the Building Societies Act 1986(8) (interpretation), for subsection (2B) substitute—

“(2B) In this Act “the Banking Consolidation Directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

Amendment of the Bank of England Act 1998

4.  In section 17 of the Bank of England Act 1998(9) (power to obtain information), for subsection (7C) substitute—

“(7C) ”Financial holding company” has the meaning given by Article 4(19) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

Amendment of the Criminal Justice Act 1993

5.  Section 70 of the Criminal Justice Act 1993(10) (penalties under implementation regimes) is amended as follows—

(a) in subsection (2)(a), for “Article 29 of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 43 of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”;

(b) in subsection (2)(b), for “Articles 52, 55 and 56” substitute “Articles 127(2) and (3), 137 and 139 to 142”.

Amendment of the Terrorism Act 2000

6.—(1) The Terrorism Act 2000(11) is amended as follows.

(2) In Part 1 of Schedule 3A (regulated sector and supervisory authorities), for paragraph 3(3) substitute—

“(3) The “Banking Consolidation Directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

(3) In paragraph 6(1)(g) of Schedule 6 (financial information)(12), for “Directive 2000/12/EC of the European Parliament and of the Council” substitute “Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Proceeds of Crime Act 2002

7.  In Part 1 of Schedule 9 to the Proceeds of Crime Act 2002(13) (regulated sector and supervisory authorities), for paragraph 3(3) substitute—

“(3) The “Banking Consolidation Directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions.”.

Regulation 29 (3)

SCHEDULE 5 Consequential amendments to the Financial Conglomerates and Other Financial Groups Regulations 2004

1.—(1) The Financial Conglomerates and Other Financial Groups Regulations 2004(14) are amended as follows.

(2) In regulation 1(2) (interpretation)—

(a) for the definition of “the Banking Advisory Committee” substitute—

““the European Banking Committee” means the Committee established pursuant to a Commission Decision of 5 November 2003 establishing the European Banking Committee (No. 2004/10/EC).”;

(b) in the definition of “the capital adequacy directive”, for “Council Directive 93/6/EC of 15^th March 1993” substitute “Directive 2006/49/EC of the European Parliament and of the Council of 14 June 2006”;

(c) in paragraph (b) of the definition of “directive requirement”, for “Article 56a” substitute “Article 143” and for “Article 7(2)” substitute “Article 2 and 37(1)”; and

(d) in the definition of “regulated entity”—

(i) in sub-paragraph (a), for “Article 1(1)” substitute “Article 4(1)”;

(ii) in sub-paragraph (d), for “including the undertakings referred to in Article 2(4)” substitute “including the undertakings referred to in Article 3(1)(b)”.

(3) In regulation 9 (supervision of third-country groups)—

(a) in paragraph (1), for “Article 56a” substitute “Article 143” and for “Article 52” substitute “Articles 71, 72 and 73(1) and (3)”;

(b) in paragraph (1)(b), for “the Banking Advisory Committee” substitute “the European Banking Committee” and for “the second paragraph of Article 56a” substitute “the first sub-paragraph of Article 143(2)”;

(c) in paragraph (2), for “the fifth paragraph of Article 56a” substitute “Article 143(3)”; and

(d) in paragraphs (3)(a) and (b), wherever it appears, for “Article 53” substitute “Articles 125 or 126”.

(4) In regulation 10 (supervision of third-country groups subject to the capital adequacy directive)—

(a) for paragraph (1)(a) substitute—

“(a) the Authority is, for the purposes of Article 143 of the banking consolidation directive, as applied by Articles 2(1) and 37(1) of the capital adequacy directive (supervision) verifying whether a credit institution or an investment firm in a third-country group is subject to supervision by a third-country competent authority which is equivalent to that governed by the principles laid down in Articles 2(1) and 37(1) of the capital adequacy directive; or”;

(b) in paragraph (1)(b), for “Article 56a” substitute “Article 143” and for “Article 7(3)” wherever it appears substitute “Articles 2(2) and 37(1)”;

(c) in paragraph (2)(b), for “the Banking Advisory Committee” substitute “the European Banking Committee” and for “the second paragraph of Article 56a” substitute “Article 143(2)”;

(d) in paragraph (3), for “the fifth paragraph of Article 56a” substitute “Article 143(3)” and for “Article 7” substitute “Articles 2 and 37(1)”; and

(e) in paragraph (4)(a) and (b), for “Article 53” wherever it appears substitute “Articles 125 or 126” and for “Article 7” wherever it appears substitute “Articles 2 and 37(1)”.

(5) In regulation 15(1)(b), for “Articles 54, 55a or 56” substitute “Articles 133, 134, 136, 138, 141, 142 or 143” and for “article 7(2) or (3)” substitute “Article 2(1) or (2) and 37(1)”.

Regulation 29(4)

SCHEDULE 6 Consequential amendments to other secondary legislation

Amendment of the Cash Ratio Deposits (Eligible Liabilities) Order 1998

1.  In article 2(3) of the Cash Ratio Deposits (Eligible Liabilities) Order 1998(15), for “Directive 2000/12/EC of the European Parliament and of the Council (as last amended by Directive 2002/87/EC of the European Parliament and of the Council)” substitute “Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions”.

Amendment of the Cross-Border Credit Transfers Regulations 1999

2.  In the definition of “credit institution” in regulation 2(1) of the Cross-Border Credit Transfers Regulations 1999(16), for “Article 1(1)(a) of Directive 2000/12/EC of the European Parliament and of the Council” substitute “Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions”.

Amendment of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999

3.  For the definition of “credit institution” in regulation 2(1) of the Financial Markets and Insolvency (Settlement Finality) Regulations 1999(17) substitute—

““credit institution” means a credit institution as defined in Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions, including the bodies set out in the list in Article 2;”.

Amendment of the Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000

4.  In paragraph 1(1) of the Schedule to the Competition Act 1998 (Small Agreements and Conduct of Minor Significance) Regulations 2000(18)—

(a) in the definition of “credit institution”, for “Article 1(1)(a) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”;

(b) in the definition of “financial institution”, for “Article 1 of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(5) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Competition Act 1998 (Determination of Turnover for Penalties) Order 2000

5.  In paragraph 1 of the Schedule to the Competition Act 1998 (Determination of Turnover for Penalties) Order 2000(19)—

(a) in the definition of “credit institution”, for “Article 1(1)(a) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”;

(b) in the definition of “financial institution”, for “Article 1 of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(5) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001

6.—(1) The Financial Services and Markets Act 2000 (Regulated Activities) Order 2001(20) is amended as follows.

(2) In article 9C(2)(21), for “Article 1(1)(a)” substitute “Article 4(1)(a)”.

(3) In paragraph (g)(iii) of Schedule 3, for “Directive 93/6/EEC” substitute “Directive 2006/49/EC”.

Amendment of the Financial Services and Markets Act 2000 (Compensation Scheme: Electing Participants) Regulations 2001

7.  In the definition of “credit institution” in regulation 1(2) of the Financial Services and Markets Act 2000 (Compensation Scheme: Electing Participants) Regulations 2001(22), for “Article 1” substitute “Article 4(1)”.

Amendment of the Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001

8.—(1) The Financial Services and Markets Act 2000 (Disclosure of Confidential Information) Regulations 2001(23) are amended as follows.

(2) In the definition of “directive restrictions” in regulation 2 for “article 30 of the banking consolidation directive” substitute “Section 2 of Chapter 1 of Title V of the banking consolidation directive”.

(3) In regulation 9(2)(b), for “article 30.3” substitute “article 46”.

(4) In regulation 9(3)(b)(ii), for “article 29” substitute “article 43”.

Amendment of the Financial Services and Markets Act 2000 (EEA Passport Rights) Regulations 2001

9.—(1) The Financial Services and Markets Act 2000 (EEA Passport Rights) Regulations 2001(24) are amended as follows.

(2) In regulation 2(3)(d), for “the solvency ratio of the firm (calculated in accordance with the banking consolidation directive)” substitute “the sum of the capital requirements under Article 75 of the banking consolidation directive”.

(3) For regulation 2(4)(d) substitute—

“(d) the sum of the capital requirements under Article 75 of the banking consolidation directive of the firm’s parent undertaking.”.

Amendment of the Financial Services and Markets Act 2000 (Gibraltar) Order 2001

10.  In article 4(4) of the Financial Services and Markets Act 2000 (Gibraltar) Order 2001(25), for “Article 19” substitute “Article 24”.

Amendment of the Financial Services and Markets Act 2000 (Confidential Information) (Bank of England) (Consequential Provisions) Order 2001

11.  In each of articles 4(2) and 6(4) of the Financial Services and Markets Act 2000 (Confidential Information) (Bank of England) (Consequential Provisions) Order 2001(26), for “Article 29” substitute “Article 43”.

Amendment of the Uncertified Securities Regulations 2001

12.  In paragraph 1(1)(b) of Schedule 2 to the Uncertified Securities Regulations 2001(27), for “Directive 2000/12/EC of the European Parliament and of the Council” substitute “Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions”.

Amendment of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002

13.  In article 9 of the Financial Services and Markets Act 2000 (Regulated Activities) (Amendment) Order 2002(28)—

(a) for “Article 1” in paragraph (4) substitute “Article 4(2)”; and

(b) for “Article 1(1)(a)” in paragraph (9) substitute “Article 4(1)(a)”.

Amendment of the Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003

14.  In the definition of “credit institution” in paragraph 1 of the Schedule to the Enterprise Act 2002 (Merger Fees and Determination of Turnover) Order 2003(29), for “Article 1 of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(1) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Money Laundering Regulations 2003

15.  For the definition of “Banking Consolidation Directive” in regulation 2 of the Money Laundering Regulations 2003(30) substitute—

““the Banking Consolidation Directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions;”.

Amendment of the Conduct of Employment Agencies and Employment Businesses Regulations 2003

16.  In the definition of “credit institution” in regulation 25(1) of the Conduct of Employment Agencies and Employment Businesses Regulations 2003(31), for “article 1(1)(a) of Directive 2000/12/EC of the European Parliament and of the Council” substitute “Article 4(1)(a) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

Amendment of the Credit Institutions (Reorganisation and Winding Up) Regulations 2004

17.—(1) The Credit Institutions (Reorganisation and Winding Up) Regulations 2004(32) are amended as follows.

(2) In regulation 2(1)—

(a) for the definition of “banking consolidation directive” substitute—

““banking consolidation directive” means Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006 relating to the taking up and pursuit of the business of credit institutions;”;

(b) in the definition of “branch”, for “Article 1(3)” substitute “Article 4(3)”;

(c) in the definition of “EEA credit institution”, for “Article 1(1) and (3) and subject to the conditions in Article 2(3)” substitute “Article 4(1) and (3) and subject to the exclusion of the undertakings referred to in Article 2”; and

(d) in the definition of “EEA regulator”, for “Article 1(4)” substitute “Article 4(4)”.

(3) In the definition of “relevant EEA State” in regulation 5(6), for “Article 4” substitute “Article 6”.

Amendment of the Building Societies Act 1986 (Modification of the Lending Limit and Funding Limit Calculations) Order 2004

18.  In the definition of “credit institution” in article 2(1) of the Building Societies Act 1986 (Modification of the Lending Limit and Funding Limit Calculations) Order 2004(33), for “article 1(1) of Directive 2000/12/EC of the European Parliament and of the Council of 20 March 2000” substitute “Article 4(1) of Directive 2006/48/EC of the European Parliament and of the Council of 14 June 2006”.

(1)

Paragraph 2 was substituted by the Banking Consolidation Directive (Consequential Amendments) Regulations 2000, S.I. 2000/2952.

(2)

Paragraph 5(b) was substituted by S.I. 2000/2952.

(3)

Schedule 11A was inserted by S.I. 2005/1433.

(4)

1974 c.39; subsection 1C was amended by S.I. 2001/3649.

(5)

1985 c.5; subsection 2 was amended by S.I. 2001/3649.

(6)

section 262 was amended by S.I. 2000/2952 and S.I. 2002/765.

(7)

section 699A was inserted by S.I. 1992/3179 and amended by S.I. 2000/2952 and S.I. 2002/765.

(8)

1986 c.53; subsection (2B) was inserted by S.I. 1996/1669 and amended by S.I. 2002/2952 and S.I. 2004/1862.

(9)

1998 c.11; subsection (7C) was inserted by S.I. 2001/3649 and amended by S.I. 2004/1862.

(10)

1993 c.36; section 70 was amended by S.I. 2000/2952.

(11)

2000 c.11; Schedule 3A was inserted by the Anti-terrorism Crime and Security Act 2001 c.24.

(12)

Paragraph 6(1)(g) of Schedule 6 was amended by S.I. 2000/2952.

(13)

2002 c.29; Schedule 9 was substituted by S.I. 2003/3074.

(14)

S.I. 2004/1862.

(15)

S.I. 1998/1130; as amended by S.I. 2000/2952 and S.I. 2004/1862.

(16)

S.I. 1999/1876.

(17)

S.I. 1999/2979; as amended by S.I. 2000/2952 and S.I. 2002/765.

(18)

S.I. 2000/262; as amended by S.I. 2000/2952 and S.I. 2002/765.

(19)

S.I. 2000/309; as amended by S.I. 2000/2952 and S.I. 2002/765.

(20)

S.I. 2001/544.

(21)

Article 9C2 was inserted by S.I. 2002/682.

(22)

S.I. 2001/1783.

(23)

S.I. 2001/2188.

(24)

S.I. 2001/2511; as amended by S.I. 2002/765.

(25)

S.I. 2001/3084.

(26)

S.I. 2001/3648.

(27)

S.I. 2001/3755.

(28)

S.I. 2002/682.

(29)

S.I. 2003/1370.

(30)

S.I. 2003/3075.

(31)

S.I. 2003/3319.

(32)

S.I. 2004/1045.

(33)

S.I. 2004/3200.