Gibraltar Transposes Capital Requirements Directive

by Phillip Morton, Investors Offshore.com

10 May 2011

The Gibraltar Financial Services Commission has announced the adoption of the Financial Services (Capital Adequacy of Credit Institutions) (Amendment) Regulations 2010, and has noted a number of salient changes which will primarily affect entities involved in cross-border banking and investment firms.

Primarily, the Regulations implement, in part, Directive 2009/111/EC of the European Parliament and of the Council, which in turn amends Directives 2006/48/EC, 2006/49/EC and 2007/64/EC as regards banks affiliated to central institutions, certain own funds items, large exposures, supervisory arrangements and crisis management. These requirements are collectively referred to as “CRD2”. In addition, the Regulations also impose new requirements on the Financial Services Commission as Gibraltar's regulator of financial services business.

The Capital Requirements Directive sets out the EU framework for the prudential supervision of credit institutions and certain investment firms, by setting minimum rules on capital requirements, in line with internationally agreed standards, known as Basel II. The CRD also provides a framework for supervision by national supervisors and establishes an information disclosure regime. CRD2 contains a package of reforms, which aim to improve the quality of capital, the management of large exposures, the improvement of supervisory arrangements, with a focus on firms providing cross-border services.

The changes to the supervisory framework are intended to reduce the likelihood and impact of any further global financial crises and the associated economic and social costs. Improving the coordination of supervisory activity is intended to also bring a general reduction in the compliance burden on firms.

The Financial Services Commission has urged concerned stakeholders to review the changes brought in by the amended regulations. Summarising the changes, although not exhaustively, the Commission listed the following:

• The definition of unconsolidated own funds of Credit Institutions is amended via Section 7 of the Financial Services (Capital Adequacy of Credit Institutions) Regulations 2007 (FSCACI).
• The newly introduced sections 12A and 12B in the FSCACI relate to the inclusion of certain instruments as own funds.
• Under the amended Article 110, reflected in section 63 of the FSCACI, Credit Institutions and Investment Firms will now need to report the information contained therein regarding large exposures, even if such are exempted. These will need to be reported in the quarterly supervisory return.
• There are significant changes to the treatment of exposures and exemptions applicable under regulations 64568 of the FSCACI. Credit Institutions and Investment firms should become familiar with the changes in requirements that are reflected in the legislation and the amended Guidance Notes which will be published in due course, and should ensure that these are adequately reported in the quarterly Supervisory Return. For those exposures which are not directly exempted by the amended legislation, Credit Institutions and Investment Firms will be required to complete an exemption request forms are to be made available on the FSC website in due course.
• Changes to Article 106(3), reflected in section 57(4) of the FSCACI, will also require that banks analyse the possible concentrations and report significant findings to the FSC.
• There is a new Article 122a, reflected as Regulation 78A of the FSCACI Regulations, on Securitisation.
• In relation to the Credit Risk Standardised approach, under section 1.8.2. of Part 2 of Schedule 8 of the FSCACI Regulations, changes have been effected to the conditions that must be met in order for life insurance policies pledged to the lending Credit Institution to be recognised.
• Changes to Regulation 70 of the FSCACI amend the treatment of exposures to a client where this is guaranteed by a third party, or secured by collateral issued by a third party.
• Article 154, reflected in Schedule 1 Section 30(3) of the FSCACI regulations, which provides for transitional provisions of own funds, has also been amended. Credit institutions are required to review these changes in order to ensure that they are not affected.
• There are changes made to Annex V on the “Technical Criteria concerning the Organisation and Treatment of Risks”, which is reflected as Schedule 5 of the FSCACI regulations. Whilst there are some changes to Securitisation Risk, the majority of the changes have been effected to the Liquidity Risk requirements. Credit Institutions have been encouraged to review their liquidity policies to ensure that these satisfy the technical criteria, as per the revised requirements;
• Annex XII, reflected as Part 2 of Schedule 12 of the FSCACI Regulations, on Technical Criteria for Disclosure, has also been amended.

The Gibraltar government, in the latest regulations, has also transposed Article 112a of 2009/111/EC, released by the Commission to update the provision of Directive 2006/48/EC on securitisation. In addition, Gibraltar has adopted some provisions of Directive 2010/76/EU, which amends Directives 2006/48/EC and 2006/49/EC, which relate to capital requirements for the trading book and for resecuritisations. Specifically, points 3, 4, 16 and 17 of Article 1 and points 1, 2(c), 3 and 5(b)(iii) of Annex I of Directive 2010/76/EU have now been transposed into local legislation. This legislation will also affect the supervision of remuneration policies, which will be covered by FSC guidance in due course.

Lastly, the FSC has noted a forthcoming change due to come about from January 1, 2012, aimed at establishing a common reporting format on capital buffers, which will also be discussed in Guidance from the Commission, and will be implemented through the issuance of amended supervisory returns, the FSC said.

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