Financial Services Regulatory Update

The Prudential Regulation Authority has issued PS 5/14. This represents a new PRA Rulebook with Fundamental Rules, effective immediately from 19 June 2014.

With this move, subtle differences emerge between the Principles for Business (which the Financial Conduct Authority retains) and the PRA's Fundamental Rules. Dual-regulated firms will need to keep those differences in mind when considering how they comply with their conduct and prudential requirements.

The PRA makes it clear that it expects firms, senior management and boards to understand the new Fundamental Rules and the detail in the PRA Rulebook as part of the drive to create a culture where PRA regulated businesses are run in a responsible manner. The Fundamental Rules are a high-level representation of the PRA's expectations of firms.

Firms must make their own decisions as to how the Fundamental Rules apply to their businesses. The PRA believes the Fundamental Rules are flexible enough to take into account differences in the range of firms over which the PRA exercises prudential supervision and will use its supervisory powers if it considers that a firm's approach does not meet its standards. The Fundamental Rules will not have retrospective effect but the PRA reserves the right to act against firms in breach of the Principles for Business before this time.

The Fundamental Rules form part of the PRA's regulatory armour, along with its Approach documents, statutory Threshold Conditions and the PRA Rulebook. The PRA also published new Approach documents on the 19 June 2014 – more information and copies of the Approach documents for banks and insurers can be found on the PRA pages on the Bank of England website.

PS 5/14 also covers a number of additional items to introduce new Rulebook parts addressing areas such as information gathering, skilled persons, auditors, Lloyd's and notifications. Dual-regulated firms also need to be aware of their obligations in these revised provisions.

Fundamental Rules

  1. A firm must conduct its business with integrity.
  2. A firm must conduct its business 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 effective risk strategies and risk management systems.
  6. A firm must organise and control its affairs responsibly and effectively.
  7. A firm must deal with its regulators in an open and co-operative way and must disclose to the PRA appropriately 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 minimum disruption of critical services.