You saw it here first. At 10:00 yesterday we published the news that the PRA had delayed the implementation of CP 13/18 until at least the end of December 2019. The impact was dramatic, with a certain firm’s share price leaping by nearly 30% at one point.
Mr Market still doesn’t understand, if you ask me.
There were two main proposals in the CP. One, that firms were significantly underestimating the value of the embedded guarantee. Two, that firms would have to recognise this value within three years of the original implementation date, 31 December 2018.
The mainstream media still doesn’t get the first point. E.g. this report says that
The regulatory changes are designed to usher in more stringent capital requirements around the calculation of the future value of homes in equity release mortgages.
My emphasis. But there is no change to capital requirement, which the CP is silent about. The problem is capital available: firms have not been valuing the guarantee correctly, addressing which will fundamentally alter the value of their balance sheet. If I underestimated the amount of money in the bank, and we can’t afford a new kitchen as a result, this is not because the price of kitchens has gone up. It’s just that I thought we had enough money, but we don’t. Nothing to do with the price of kitchens.
Moreover, if the PRA is correct about the valuation, that is no reason for the share price to go up. Firms simply have another year or to change their balance sheet. Market value is, or should be, about expectation, not possession.
Regarding the second point, the position is much less clear. The PRA says
The PRA is currently giving careful consideration to the consultation responses and the impact, if any, of the updated implementation date to the proposed phase-in period.
My emphasis. This is perfectly consistent with the proposed phase-in end date, i.e. 3 years from 31 December 2018, remaining unchanged. Or it could mean that the phase-in period is unchanged, but the phase-in end date shifts one year from 31 December 2021 to 31 December 2022.
Nor is it clear whether the proposals are going to change. The wording “giving careful consideration to the consultation responses” suggests this is more than just about timing and dates, but perhaps to do with geometric Brownian motion or some other esoteric subject.
Who can say? We don’t even know whether the PRA will publish anything at the end of the year, or whether there will be a prolonged period of uncertainty and market disruption. It only says ‘The PRA will publish final policy and supervisory statements in due course.’
The fact is that the share price is all over the place, and the PRA is hardly ‘promoting the good of the people of the United Kingdom by maintaining monetary and financial stability’. As one of the angry people commented on a forum yesterday
the PRA are acting irresponsibly. They are causing extreme volatility and capital issues for companies that were legitimately playing by their rules. People are losing or making large amounts due to their incompetence.
Yup. If Ms Market doesn’t understand, it’s because the PRA haven’t explained it very well.