The new PRA rulebook: new rules, but look elsewhere for guidance and policy statements?

The PRA has published "The Rulebook Consultation – CP2/14", which sets out proposals to redraft certain modules of the Prudential Regulation Authority’s (PRA’s) current Handbook in the process of creating a clear and concise PRA Rulebook. 

This is the first in a planned series of consultations aimed at reshaping Handbook material inherited from the Financial Services Authority (FSA) to create a clear and concise PRA Rulebook.  The PRA Rulebook will appear in a new online website in 2015 and, until then, will appear in the current Handbook site in PDF form.  The consultation closes on 21 March 2014.        

This consultation proposes the following:

• PRIN (Principles for Businesses) to be replaced by Fundamental Rules – broader scope, requirement for bank to operate in accordance with the safety and soundness of the firm and for directors’ responsibilities to shareholders to be interpreted in the light of that requirement
• SUP 2 (Information gathering by FSA on own initiative) to be replaced by Information Gathering
• SUP 3 (Auditors) to be replaced by Auditors
• SUP 5 (Reports by Skilled Persons) to be replaced by Use of Skilled Persons
• SUP 6 (Varying and cancelling permissions) and SUP 8 (Waivers) to be replaced by Permissions and Waivers
• SUP 15 (Notifications) to be replaced by Notifications
• FINMAR (Gathering financial stability information) to be replaced by Statement of policy on the exercise of the PRA's financial stability powers – restructured to better reflect how the
  power will be used, including explaining when prior notice will/will not be provided and the right to make representations.
• SUP 13A Annex 1 (Application of the Handbook to incoming EEA firms) to be moved to the PRA website (avoids having to create new instrument for each update).

There will be some changes in what firms are used to finding in the Handbook:

• Rules and directions which PRA intends to retain are placed in Rulebook Parts, and Handbook guidance that PRA proposes to convert into rules will also be placed into the Rulebook instruments
• Guidance which the PRA considers necessary to support firm judgements and to clarify the PRA’s expectations, will be expressed in supervisory statements.
• Handbook guidance that concerns process will be placed on the PRA’s main website - typically application processes (including timing, forms and fees), which the PRA expects firms to comply with, together with expected content and method of determination of application
• Statements of policy (required under FSMA in respect of the exercise of particular powers) will be produced and published as separate documents.

This will potentially mean having to look in more places for relevant materials. 

The Rulebook will be split into banking and insurance sectors, with a further split into directive and non-directive firms, which is intended to help firms to work out what rules apply to them.

The most important Rulebook changes are summarised below.

The new Fundamental Rules (FRs)

The FRs will apply to all PRA-regulated firms (subject to legal restrictions), including mutuals who are unlikely to be impacted in a significantly different way from other firms. 

The FRs are supposed to leave scope for firms to achieve compliance in a way they consider adequate, but if the PRA judges compliance to be inadequate or consider the FRs to be breached, then the PRA will seek recourse to its enforcement powers.  A breach of the FRs could also flag a potential breach of the TCs. Where the FRs and detailed rules are both relevant to alleged misconduct, a decision will be taken by the PRA as to whether to take enforcement in respect of the FRs. 

1: A firm must act with integrity.

2: A firm must act with due skill, care and diligence.

3: A firm must act in a prudent manner.

4: A firm must at all times maintain adequate financial resources.

5: A firm must have in place sound and effective risk strategies and risk management systems (now an absolute requirement - no reasonable care language).

6: A firm must organise and control its affairs responsibly and effectively (now an absolute requirement - no reasonable steps language).

7: A firm must deal with its regulators in an open, cooperative and timely way and must appropriately disclose to the PRA anything relating to the firm of which the PRA would reasonably expect notice.

8: 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.

9: A firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular.

It is important to note that the application of the FRs is significantly broader than that of the current Principles, and aims to capture all behaviour that could affect the firm, rather than merely the conduct of its business.

Information Gathering

The existing rules in SUP 2.3.5 and 2.3.7 Access to Premises and Access to Documents and Personnel will be retained in Substance.

New Information Gathering rule 4.1 expands on FR7 and will require firms, in relation to the discharge of the PRA’s functions under relevant legislation, to:

(i) permit the PRA to have access to documents and personnel that the PRA reasonably requests;

(ii) make itself readily available for meetings with representatives or appointees of the PRA as reasonably requested; and

(iii) answer truthfully, fully and promptly all questions which are reasonably put to it by representatives or appointees of the PRA.

Information Gathering 4.2 will require firms to take reasonable steps to ensure that its employees, agents and appointed representatives, and any other members of its group, and their employees and agents:

(i) subject to section 413 of FSMA, permit any representative or appointee of the PRA to have access to any document that the PRA reasonably requests;

(ii) permit any representative or appointee of the PRA to have access to any personnel that the PRA reasonably requests;

(iii) make itself readily available to meet any representative or appointee of the PRA as the PRA reasonably requests; and

(iv) answer truthfully, fully and promptly all questions reasonably put to it by any representative or appointee of the PRA.

 Information Gathering rule 5.1 will require firms to co-operate with the PRA in providing information at the request of other regulators to enable the PRA to discharge its functions under relevant legislation.

Use of Skilled Persons

PRA proposes to replace rule and guidance material in SUP 5 (Reports by Skilled Persons) with a Rulebook Part, called Use of Skilled Persons, and a supervisory statement, numbered SSX/13.

The Rulebook Part will retain two of the SUP 5 rules and will contain four new rules based on SUP 5 guidance provisions. The majority of the guidance from SUP 5 has formed the basis of the supervisory statement.

Two of the rules in the new Part are in substance the same as SUP 5.5.1 and 5.5.5 which set out contract requirements between the firm and the skilled person. The four new rules proposed reflect provisions currently contained in guidance (SUP 5.5.2, 5.5.7, 5.5.8 and 5.5.12) and have been made into rules to ensure they make explicit what the PRA considered implicit before and so ensure the effective use of skilled persons. These rules will require firms to:

(i) provide the PRA with information about the estimated and final cost of the skilled person report;

(ii) ensure the contract with the skilled person permits the skilled person to provide the PRA, if requested to do so, with interim and draft reports, source data, documents and working papers as well as specific information about the planning and progress of a report;

(iii) provide the PRA with a copy of the draft contract between the skilled person and firm before the contract is executed; and

(iv) ensure that a skilled person delivers a report or collects or updates information in accordance with the terms of the skilled person’s appointment.

Notifications

In general, the PRA proposes to retain all the rules currently in SUP 15. The PRA does, however, propose the following new rules which are adaptions of SUP 15 guidance provisions:

(i) Notifications 2.2 (see old SUP 15.3.2G)  and 2.3 (see old SUP 15.3.2G) require a firm to give proper consideration of events, with detail on what this means within the rule itself, that would require a firm to notify the PRA in compliance with Notifications 2.1 (immediate notification of serious and significant events that could detrimentally impact the firm and PRA objectives). 

(ii) Notifications 2.3 provides detail on how firms should determine whether a possible future event requires prompt disclosure to the PRA.

(iii) Notifications 2.4 sets out various scenarios where the PRA expects notification (previously SUP 15.3.8G - proposed as a rule to reflect the potential significance on a firm’s safety and soundness).

(iv) Notifications 2.5 to 2.7 (see SUP 15.3.9-10G) provide detail on the content, form and type of notification. Making the requirements mandatory intends to encourage a behavioural shift away from unconsidered notification of certain events to full notification in a uniform manner.

(v) Notification 2.12 (formerly SUP 15.3.16G) requires firms to provide detail of matters disclosed in compliance to Notifications 2.11 and an estimate of the likely financial consequences. Conversion from guidance to rule is intended to encourage the provision of meaningful information.

(vi) Notifications 6.2 (SUP 15.6.3G) recognises that a firm may not be able to provide all relevant information (in compliance with Notification 6.1) and requires the firm to tell the PRA of the scope of the information provided to assist PRA in its assessment of the situation disclosed.

(vii) Notifications 9.1 (SUP 15.9.3G) requires a firm to consider the requirements in Notification 9.2 on a continuing basis, and in particular when the group prepares its financial statements and on the occurrence of an event affecting the consolidation group. This reflects the importance the PRA places on notification of group events, especially those relating to financial conglomerates. 

Auditors

Of the rules in the new Part, sixteen will in substance remain the same as existing rules (SUP 3.1.1R, 3.3.2R, 3.3.7R, 3.3.10R, 3.4.2R, 3.4.5R, 3.4.7R, 3.5.2R, 3.5.3R, 3.6.1R, 3.8.2R, 3.8.4R, 3.8.5R, 3.8.6R, 3.8.11R and 3.8.12R).  Two SUP rules (SUP 3.1.3R and 3.1.5R) will be combined into another rule (SUP 3.1.1R) for completeness and to clarify the scope of application of the rules.

Two new rules are being proposed, which convert current SUP 3 guidance provisions into rules:

(i) Auditors 5.2 will ensure that relevant third parties(appointed representatives, suppliers under a material outsourcing arrangement or tied agents) appointed by the firm provide auditors with the rights of access to the firms’ books and records and an entitlement to information and explanations.

(ii) Auditors 6.1 will require firms to notify the PRA if they expects or knows their auditor will qualify its audit report or include any emphasis of matter.

The Insurance market direction in SUP 3.1.13D, which applies to both auditors and actuaries, will be carried across to a new Rulebook Part.

In addition to these new rules, firms will need to refer to the PRA’s Supervisory Statement (LSS 7/13): "The relationship between the external auditor and the supervisor: a code of practice (‘the PRA Code’)" which sets out principles to guide interactions between supervisors and external auditors.

Permissions and waivers

The PRA proposes to replace SUP 6 (Applications to vary and cancel Part 4A permission and to impose, vary or cancel requirements) and SUP 8 (Waiver and modification of rules) with this new Rulebook Part.

Process-related guidance material from SUP 6 and SUP 8 will be incorporated into the PRA’s Authorisation website - the rational is that firms will be able to access all the material relevant to an application in a uniform layout, with easy access to relevant forms and fees in one place.

The Permissions and Waivers Part will retains a number of directions currently in SUP 6 and SUP 8.(3), and several new rules are proposed:

(i) Permissions and Waivers 2.5 will require a firm which has made an application for a cancellation of its permission to demonstrate that it has ceased or will cease carrying on all regulated activities.

(ii) Permissions and Waivers 5.1 will require a firm or person who submits an application to make changes to information or alter circumstances to immediately notify the PRA of any significant change to the information provided.

(iii) Permissions and Waivers 5.2 requires a firm or person who has applied for, or has been granted a waiver, to notify the PRA if it becomes aware of any matter which could affect the continuing relevance or appropriateness of the application of the waiver.