The implementation of ring-fencing: legal structure, governance and the continuity of services and facilities – PS10/15

The PRA has published Policy Statement 10/15: The implementation of ring-fencing: legal structure, governance and the continuity of services and facilities (PS10/15). PS10/15 provides feedback on the responses received to the first PRA consultation on implementing ring-fencing (Consultation Paper 19/14: The implementation of ring-fencing: consultation on legal structure, governance and the continuity of services and facilities (CP19/14)).

In PS10/15 the PRA states that it does not consider that the responses to the consultation necessitate major changes to the proposed overall approach to implementing ring-fencing. However, the PRA has made certain amendments to the draft rules and supervisory statements published in CP19/14, mainly to add clarity and certainty, as requested by a number of respondents.

The PRA makes a number of points in PS10/15 following feedback to its consultation. Such points include:

the PRA does not intend to set out the types of subsidiaries which can and cannot be owned by a ring-fenced bank (RFB). This should be discussed on a case-by-case basis by firms and their supervisors;
the Financial Services and Markets Act 2000 (Excluded Activities and Prohibitions) Order 2014 permits an RFB to incur financial institution exposures to other group members, as long as these are not prohibited under rules made by the PRA or the FCA under the Financial Services and Markets Act 2000 (the Act) and the exposures arise as a result of a commercial transaction conducted on arm’s-length terms or a holding of shares or other securities issued by a subsidiary undertaking of the RFB;
the PRA emphasises that where an RFB forms part of a wider group it will remain a subsidiary, and therefore the parent company will still be expected to exercise adequate oversight of the RFB in an appropriate manner consistent with good governance practice. However, parent company actions should not cause an RFB to act in a way that is inconsistent with the ring-fencing obligations;
the requirement for an RFB to be able to take decisions independently does not mean that an RFB’s policies are required to be at odds with those of the wider group. The PRA would typically expect to see RFBs adopt group policies, with the RFB board and management reviewing these against the ring-fencing obligations and objectives, and making additions or adopting more restrictive policies in line with those obligations and objectives only where necessary. Co-ordination of business planning and strategy across the group, including the RFB, is to be expected given the need of the parent board to retain consolidated oversight and the need of the RFB to be confident of shareholder support for its business plan and strategy;
the PRA has not made substantive changes to the board membership rules or the rules for senior managers responsible for the risk management function and internal audit function;
that statutory tests determine whether the PRA may grant a firm waiver or modification of the ring-fencing rules. These set out that rules may be waived or modified if the firm’s compliance with the rules would be unduly burdensome or would not achieve the purposes for which the rules were made, and where the granting of a waiver or modification would not adversely affect the advancement of any of the PRA’s objectives. The PRA will require firms to demonstrate in their applications how the arrangements they plan to have in place, if the waiver or modification is granted, will ensure that neither the advancement of the group ring-fencing purposes, set out in section 142H of the Act, nor the PRA’s wider objectives are adversely affected. An applicant will be required to demonstrate to the PRA how its proposed governance arrangements will compensate for any potential weakening of the regime and how they will ensure the purposes of the regime are still being advanced. The governance proposals are interrelated and should be considered as a package;
where an employee provides services to both the RFB and another group entity only remuneration policies, practices and procedures relating to services provided to the RFB must satisfy the new rules. The PRA expects that where employees provide services to multiple group entities such activities would be conducted on an arm’s-length basis (the PRA’s policy on arm’s-length requirements will form part of a subsequent PRA consultation); and
the PRA has introduced the defined term ‘permitted supplier’ to describe those entities within the group from which the RFB is allowed to receive services or access facilities (i.e. group services entities and entities within the RFB sub-group).

The PRA intends to publish a further consultation in 2015, and to publish final versions of the rules and supervisory statements consulted on in the first and second ring-fencing consultations during the first half of 2016.

The PRA also encourages firms to continue discussing their plans for their legal and operating structures with their supervisors.

The rules and supervisory statements set out in PS10/15 should be considered as ‘near-final’. The FCA states that it is possible that, following the forthcoming ring-fencing-related consultation, the PRA may need to make further changes.

View The implementation of ring-fencing: legal structure, governance and the continuity of services and facilities – PS10/15, 27 May 2015

United Kingdom (and EU regulation)