In CP2/14, published earlier this year, the PRA consulted upon the creation of a Rulebook to replace the parts of the former Financial Services Authority Handbook which relate to prudential matters. The new Rulebook will contain all the prudential requirements for firms – including INSPRU and GENPRU as well as replacement ‘Fundamental Rules’ (FRs) to replace the familiar Principles for Businesses (the Principles). The PRA has now published PS5/14 which includes the final set of FRs, with some amendments following consultation. According to the PRA, the FRs are drafted to be a clearer expression of the PRA’s expectations and more closely reflect the underlying detailed rules than the Principles.
The FRs apply to all PRA-authorised firms, however, the Principles will still apply under the Financial Conduct Authority’s (FCA) supervision. Although some of the wording is the same, insurers and other dual-regulated firms will be subject to separate requirements for each regulator. Whereas the PRA applied only four of the Principles, firms must now have regard to eight FRs (as well as 11 FCA Principles):
- a firm must conduct its business with integrity;
- a firm must conduct its business with due skill, care and diligence;
- a firm must act in a prudent manner;
- a firm must at all times maintain adequate financial resources;
- a firm must have effective risk strategies and risk management systems;
- a firm must organise and control its affairs responsibly and effectively;
- a firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice; and
- a firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.
Some respondents to the consultation criticised differences between the wording of the FRs and the Principles. The PRA has noted this and amended FRs 1 and 2 so they are consistent with the FCA Principles 1 and 2. FRs 5 and 7 have been revised following consultation: the inclusion of ‘sound’ in FR5 has been removed as the PRA considers this to be an unnecessary addition; and FR7 now omits the word ‘timely’ as this is deemed to be an implicit requirement of firms’ dealings with regulators.
The draft FR9 (a firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular) has been deleted altogether as the PRA believes this requirement is adequately covered by FSMA and other FRs.
FRs 3, 4, 6 and 8 remain unchanged following the consultation. FR3 is a new requirement reflecting the Threshold Conditions and PRA approach documents, which should be read in conjunction with this rule. As firms are already expected to act in a prudent manner, the PRA does not intend to issue additional guidance or qualification of the meaning of ‘prudent’. Respondents had questioned what FR3 added to the requirements already covered by FRs 2 and 4 and noted that the vague nature of the term is open to interpretation. There is no explicit requirement in the Principles for firms to exercise prudence implying, probably unintentionally, that firms are not required to act in a prudent manner under the FCA regime, however, neither regulator is likely to accept such an interpretation.
FR4 retains the inclusion of ‘at all times’ to bring it in line with the requirements on firms in the Capital Requirements Directive (CRD IV) and proposed Solvency II requirements. It does not impose any additional requirements on firms and merely ensures the FR wording is aligned with the underlying detailed rules. Similarly, FR6 aligns with existing detailed rules and is unchanged following consultation. Feedback noted that ‘must’ imposes a significantly higher standard than the Principle 3 wording of ‘must take reasonable care’, however, the PRA states that there is no change of expectation under FR6.
For insurers, the most significant change is the introduction of a new resolution requirement under FR8. Although this is unchanged following consultation, the PRA responds to insurers’ requests for further clarity on the application of this rule. Unlike the rules for deposit-takers, the resolution regime for insurers is less advanced and the PRA’s expectations of insurers with regard to resolution is set out in the approach document. The PRA has made no detailed rules concerning the provision of resolution information as yet and insurers’ discussions with the regulator on resolution plans will vary according to systemic importance and proximity to failure, among other factors. The PRA appreciates that, in the absence of detailed rules, compliance with FR8 will need to be judged in the context of an insurer’s own perception of its resolvability. The PRA will consult as and when requirements for insurer resolution are developed in the future. In addition to the FRs, the PRA provides feedback on proposals to replace rules and guidance on:
- information gathering found in Chapter 2 of the Supervision Manual (SUP);
- auditors, found in SUP Chapter 3;
- reports by Skilled Persons in Chapter 5 of SUP; and
- notifications in Chapter 15 of SUP.
PS5/14 includes the following PRA Rulebook instruments, which were passed by the PRA Board on June 13 and came into force on June 19, 2014:
- Fundamental Rules Instrument 2014;
- Information Gathering Instrument 2014;
- Auditors Instrument 2014;
- Lloyd’s (Auditors and Actuaries) Instrument 2014;
- Permissions and Waivers Instrument 2014;
- Use of skilled persons Instrument 2014;
- Notifications Instrument 2014; and
- Handbook (Rulebook Consequentials) Instrument (No 1) 2014.
The PRA is rewriting the PRA Handbook over the coming years to create a PRA Rulebook containing rules and directions made by the PRA which apply only to PRA-authorised firms. For now, firms should consult both the Handbook and Rulebook, links to which are available on the PRA webpage.
View PS5/14: The PRA Rulebook. 19 June 2014