In its supervisory approach documents that were published last year, the PRA stated that it would begin to streamline the Handbook that it had inherited from the FSA in order to align its content closer to its statutory objectives and the new Threshold Conditions.
In January, the PRA issued the first in a planned series of consultations that are aimed at reshaping the Handbook and creating a more concise Rulebook. Consultation Paper 2/14: The PRA Rulebook presented proposals that are designed to change the Principles for Businesses, FINMAR and certain chapters of SUP for PRA authorised firms.
In particular, the PRA proposes to replace the Principles for Businesses (the Principles) with Fundamental Rules (FRs) which will apply to all PRA regulated firms irrespective of size and business carried on. As the Principles are currently shared with the FCA, the PRA proposes that the FRs will only relate to prudential matters. Like the Principles, the FRs will be overarching requirements and be high level. The PRA proposes that there will be 9 FRs:
- A firm must act with integrity. Obviously this is a shortened version of Principle 1 (A firm must conduct its business with integrity) but replacing the words “conduct of business” to “act” covers the PRA’s desire to capture all behaviour that could affect a firm.
- A firm must act with due skill, care and diligence. Again, another shortened version of a Principle (Principle 2, A firm must conduct its business with due skill, care and diligence). Like Principle 2, this is wider than internal arrangements and covers the everyday course of activities conducted by a firm.
- A firm must act in a prudent manner. This is new and means that a firm must demonstrate sound judgement and exercise caution. The PRA states that this does not prevent a firm entering into speculative investments. But that such a firm will be required to take due account of all the risks and possible consequences for it before entering into such arrangements.
- A firm must at all times maintain adequate financial resources. This is similar to Principle 4 (A firm must maintain adequate financial resources) but with the inclusion of “at all times” which is in line with the CRD IV and proposed Solvency II requirements.
- A firm must have in place sound and effective risk strategies and risk management systems. The wording of part of this rule is taken from Principle 3 (A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). Firms will need to accurately identify and understand the risks inherent in their businesses and ensure that there are robust structures for managing and reporting on these risks.
- A firm must organise and control its affairs responsibly and effectively. The wording for this new rule is taken from Principle 3 and is focussed on good governance. Noticeably the words “take reasonable steps” have not been used meaning that it is an absolute requirement. Strict responsibility is placed on a firm to ensure that its staff are suitable for their roles. The PRA states that this rule will be strengthened by new rules in the PRA’s Senior Management Regime which arise from the changes made by the Financial Services (Banking Reform) Act 2013.
- A firm must deal with its regulators in an open, co-operative and timely way and must appropriately disclose to the PRA anything relating to the firm of which the PRA would reasonably expect notice. This is similar to Principle 11 although the word “timely” has been inserted so that disclosure should be made within a reasonable time.
- 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. This rule is new and reflects the importance now placed on resolution planning. Obviously to support this rule there is already a UK resolution regime in place for banks and PRA regulated investment firms although no such regime applies to insurers.
- A firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular. This is a new rule which has an overlap with the criminal offence contained in section 398 of the Financial Services and Markets Act 2000. In such circumstances, it gives the PRA the option to proceed with either a criminal action and / or an enforcement action.
The consultation is the beginning of a longer process which may significantly reduce the length of the current PRA Handbook. However, a reduction in paper does not mean an easier ride for PRA regulated firms. Like the Principles, the FRs are widely drafted and can cover situations where there are no rules. In addition, firms need to be mindful of the PRA approach documents which said that the PRA expects firms not merely to meet the letter of its requirements but maintain sight of the overriding principle of their safety and soundness and act accordingly. The PRA expects support for this objective to be embedded in every firm’s culture.