BoE and FSA have published documents setting out how the PRA intends to regulate under the amended Financial Services and Markets Act 2000 (FSMA) (Approach Documents). PRA will have a statutory objective to promote the safety and soundness of firms. FSMA requires it to seek to avoid adverse effects on financial stability. PRA says it is not its role to ensure no firm fails, but to ensure that no failure results in significant disruption to the supply of critical financial services. PRA will:
- regulate based on new threshold conditions specific to PRA-regulated firms. PRA will expect firms to meet the requirements, which will include holding an appropriate amount and quality of capital and liquidity, having appropriate resources for measuring, monitoring and managing risk, for firms to be fit and proper and also for firms to conduct their business prudently. PRA will also expect firms to consider the overriding principle of safety and soundness;
- use an approach to supervision that relies significantly on judgment and will be forward looking. It will aim to intervene at an early stage, and this may be based on risks that could “plausibly” arise in the future. PRA says it aims to foster trust on both sides by expecting firms to raise issues with it at an early stage, in response to which PRA will react proportionately;
- focus on issues and firms that pose the greatest risk to the stability of the UK financial system. The riskiest firms will command the most intense and frequent supervision;
- furnish its teams with experienced staff to minimise the risk of its judgments being proved wrong in hindsight;
- ensure its decision making is rigorous and well documented; and
- cooperate fully with the FCA and international regulators.
PRA expects to supervise around 1,000 deposit takers, of which 350 are banks, as well as systemically important investment firms. It will also regulate around 1,000 insurers, most of which provide general insurance and one in ten of which are involved in the London Market. It will place these firms in five categories. Broadly, category 1 will contain the largest deposit takers and insurers, the type and complexity of whose business gives the protential to cause significant disruption to the UK financial system or, in the case of insurers, the interests of a substantial number of policyholders. Category 5 firms will have almost no potential individually to cause disruption. PRA will tell firms what category they are in, and its assessments will take account of external risks as well as the extent to which substitution of services could mitigate the impact of firm failure.
The Approach Documents set out PRA’s expectations of senior management of firms, in terms of risk mitigation policies, management and governance, including instilling the right culture in firms. It expects boards to have the right mixture of skills, and to ensure senior managers and other staff are competent for their positions. It also explains PRA’s approach to approved persons of PRA-regulated firms.
The documents also cover PRA’s expectations on:
- risk management and controls;
- capital and liquidity (for banks) and financial resources (for insurers); and
Finally, they set out how PRA intends to supervise, using its new “Proactive Intervention Framework”, and look at how it will authorise new applicants for authorisation. (Source: The PRA’s Approach to Banking Supervision and The PRA’s Approach to Insurance Supervision)