Regulatory capital management

Firms subject to capital adequacy / solvency requirements are obliged to monitor and assess the level of regulatory capital which must be maintained on a continuing basis. Legislative requirements such as the CRD and Solvency II are driving significant changes in how firms’ regulatory capital is determined, focusing on introducing more risk sensitivity into hitherto very prescriptive regimes. Firms are being encouraged to introduce a holistic approach to capital allocation, incorporating a risk management framework that addresses all risk types, and not just those against which regulatory capital is mandated.

Against this backdrop increasing emphasis is also being placed on the role of stress and scenario testing, with ensuing implications for solvency levels within an organisation. In an environment where capital is a valuable and scarce resource managing these complex interlinkages is a considerable task.

How can PwC assist you?

Our team can provide the following support services in assisting firms comply with their capital adequacy/solvency and related regulatory reporting obligations:

  • Capital advice

    We have a team of prudential capital specialists who can work with firms to determine the appropriate regulatory capital treatment for complex transactions and structures.

     

  • Integrated risk and capital frameworks

    We have considerable experience in assisting firms with their Pillar 2 requirements, including all aspects of establishing a risk management system, and crucially linking this to a cohesive capital management framework. This includes working with firms to establish when capital should be employed as an appropriate risk mitigant and how to introduce mechanisms linking capital and solvency levels to on-going risk management activities (including stress testing).

     

  • Regulatory reporting and disclosure

    Increasingly firms are looking for assurance over their regulatory reporting control infrastructure and the accuracy of the returns themselves. We have significant experience reviewing the effectiveness of the controls surrounding the regulatory reporting framework. Our work here can also be extended to include an assessment of the accuracy and completeness of regulatory reports, taking the form of an Internal Audit if required.

    Under Pillar 3 of the CRD and Solvency II, regulators are imposing detailed disclosure requirements on regulated firms, thereby increasing the transparency, and comparability, of firms’ risk and capital profiles. We have worked with a number of firms guiding them through Pillar 3 implementation, including managing the overlap with IFRS 7, the production and review of disclosures and the composition of disclosure policy statements.

     

  • Capital modelling

    As regulators have been moving to increased risk sensitivity of capital requirements, this has been accompanied by the recognition of internal models for solvency purposes. Our wider risk and regulatory team is made up of technical professionals who can work with firms in implementing regulatory capital models, including managing the transition to more advanced approaches while also satisfying the associate regulatory criteria. Similarly we can work with firms to implement an Economic Capital Framework, which many firms are now looking to as a means of delivering a more effective capital management solution, while also satisfying regulators demands for an integrated capital and risk framework.

     

  • Group capital requirements

    For regulated firms comprising part of a group, consolidated supervision requirements must be adhered to. We can assist firms with all aspects of consolidated capital requirements, including assessing the capital impact of changes in group structure. This will enable firms to fully assess the broader capital and regulatory impact of practical business decisions driving how, and where, a financial services group structures its operations. It is similarly a critical component of assessing the feasibility of potential merger and acquisition activity by a financial services entity

     

Why choose PwC?

We have worked with a number of firms with implementing the appropriate capital adequacy framework and providing assurance reviews on the completeness and accuracy around the required level of capital to be held. Our experience extends to banks, insurance companies, investment firms and fund management companies.

We can provide professional advice on the interpretation of capital regulatory requirements; we have a dedicated team of specialists in relation to capital adequacy requirements who have extensive knowledge and insights into industry practices.