IFPRU 4.2 Standardised approach

Where the FCA has published evidence showing that a well-developed and long-established residential property market is present in that territory with loss rates which do not exceed the limits in article 125(3) of the EU CRR (Exposures fully and completely secured by mortgages on residential property), a firm does not need to meet the condition in article 125(2)(b) of the EU CRR in order to consider an exposure, or any part of an exposure, as fully and completely secured for the purposes of article 125(1) of the EU CRR.

The FCA confirms that, in relation to the concessionary treatment set out in article 119(5) of the EU CRR, there are no financial institutions currently authorised and supervised by it (other than those to which the EU CRR applies directly) that are subject to prudential requirements that it considers to be comparable in terms of robustness to those applied to institutions under the EU CRR.

[Note: article 119(5) of the

EU CRR]

Where an exposure is denominated in a currency other than the euro, the FCA expects a firm to use appropriate and consistent exchange rates to determine compliance with relevant thresholds in the EU CRR. Accordingly, a firm should calculate the euro equivalent value of the exposure for the purposes of establishing compliance with the aggregate monetary limit of €1 million for retail exposures using a set of exchange rates the firm considers to be appropriate. The FCA expects a firm's choice of exchange rate to have no obvious bias and to be derived on the basis of a consistent approach (see article 123(c) of the EU CRR).

The FCA considers an Ijara mortgage to be an example of an exposure to a tenant under a property leasing transaction concerning residential property under which the firm is the lessor and the tenant has an option to purchase. Accordingly, the FCA expects exposures to Ijara mortgages to be subject to all of the requirements that apply to exposures secured by mortgages on residential property, including in respect of periodic property revaluation (see articles 124 and 125 of the EU CRR).

The FCA expects a firm with exposure to a lifetime mortgage to inform the FCA of the difference in the own funds requirements on those exposures under the EU CRR and the credit risk capital requirement that would have applied under BIPRU 3.4.56A R.The FCA will use this information in its consideration of relevant risks in its supervisory assessment of the firm (see articles 124, 125 and 208 of the EU CRR).

When determining the portion of a past due item that is secured, the FCA expects the secured portion of an exposure covered by a mortgage indemnity product that is eligible for credit risk mitigation purposes under Part Three, Title II, Chapter 4 of the EU CRR (Credit risk mitigation) to qualify as an eligible guarantee (see article 129(2) of the EU CRR).

When determining whether exposures in the form of units or shares in a CIU are associated with particularly high risk, the FCA expects the following features would be likely to give rise to such risk:

1. (1)

   an absence of external credit assessment of such CIU from an ECAI recognised under article 132(2) of the EU CRR (Items representing securitisation positions) and where such CIU has specific features (such as high levels of leverage or lack of transparency) that prevent it from meeting the eligibility criteria in article 132(3) of the EU CRR (Items associated with particular high risk); or

2. (2)

   a substantial element of the CIU's property is made up of items that would be subject to a risk weight of more than 100%, or the mandate of a CIU would permit it to invest in a substantial amount of such items.

The FCA expects a firm's assessment of whether types of exposure referred to in article 128(3) of the EU CRR are associated with particularly high risk to include consideration of exposures arising out of a venture capital business (whether the firm itself carries on the venture capital business or not) . The FCA considers "venture capital business" to include the business of carrying on any of the following:

1. (1)

   advising on investments, managing investments, arranging (bringing about) deals in investments in or making arrangements with a view to transactions in investments in venture capital investments;

2. (2)

   advising on investments or managing investments in relation to portfolios, or establishing, operating or winding up a collective investment scheme, where the portfolios or collective investment schemes (apart from funds awaiting investment) invest only in venture capital investments;

3. (3)

   any custody activities provided in connection with the activities in (1) or (2); and

4. (4)

   any related ancillary activities.

Until such time as the European Commission adopts implementing technical standards drafted by the European Supervisory Authorities Joint Committee to specify for all ECAIs the relevant credit assessments of the ECAI that correspond to credit quality steps, the FCA expects a firm to continue to have regard to the table mapping the credit assessments of certain ECAIs to credit quality steps produced in accordance with regulation 22(3) of the Capital Requirements Regulations 2006. For mapping of the credit quality step to the credit assessments of eligible ECAIs, refer to: http://www.fca.org.uk.