On 19 June 2014 the PRA published Policy Statement PS5/14: The PRA Rulebook.
This included new final rules for the PRA Handbook, which were previously the subject of Consultation Paper 2/14. That consultation had “not propos[ed] a material change” to the rules, but rather sought to “reshape” the original PRA Handbook material – mostly inherited from the FSA – into a “clear and concise PRA Rulebook”.
(Although some of the rules have been amended in light of responses to CP2/14, PRA notes that “even where there has been an amendment, the impact will not differ significantly from that of the draft rules”.)
The PRA expects firms to use PS5/14 as guidance to the Fundamental Rules, alongside the PRA’s ‘approach to banking supervision’ and ‘approach to insurance supervision’ documents (which have now been updated to reflect PS5/14 and other recent PRA publications).
What are Fundamental Rules?
The most important change is the replacement of the old FSA Principles for Businesses (PRIN) with new PRA Fundamental Rules; the “other Rulebook changes [in PS5/14] do not make any substantive changes to policy”.
These are high-level rules which set out the PRA’s “expectations” of firms and “act as an expression” of the regulator’s general objective. They apply proportionately to firms, based on firm size and sector.
The PRA expects that “broad scope compliance can be achieved in different ways”, although it warns that firms may face supervisory action in the event of inadequate compliance or breach of the Fundamental Rules. Breaches of the Fundamental Rules will not be enforced retrospectively, although breaches of PRIN prior to the Fundamental Rules coming into force will still be pursued.
What are the Fundamental Rules?
Rule 1: A firm must conduct its business with integrity.
Rule 2: A firm must conduct its business with due skill, care and diligence.
These are the same as PRIN 1 and PRIN 2 respectively.
Rule 3: A firm must act in a prudent manner.
This is a new rule, although one designed to reflect the existing Threshold Conditions and approach documents: the PRA already expects firms to act in a prudent manner. Firms are directed to look at the approach documents for detailed guidance on this rule.
The PRA rejected suggestions that the rule should be qualified by a ‘reasonableness’ test.
Rule 4: A firm must at all times maintain adequate financial resources.
Based on PRIN 4, but with the addition of the words “at all times”. This “does not impose an additional requirement … beyond that which is already required”, however, as PRIN 4 “effectively requires that adequate financial resources must be maintained at all times” anyway. The reason for the change was to bring the wording in line with CRD IV and Solvency II.
Rule 5: A firm must have effective risk strategies and risk management systems.
Rule 6: A firm must organise and control its affairs responsibly and effectively.
Both of these are based on PRIN 3: “a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems”.
This is a change of language, in order to align with the existing detailed rules “which, in general, contain absolute requirements rather than reasonable care”.
In response to queries “whether a higher standard is expected of [Rule 5] than [PRIN 3]”, the PRA replied that there “is no change of expectation” for either Rule 5 or Rule 6, as they “align[…] with existing detailed rules”.
Rule 7: A firm must deal with its regulators in an open and cooperative way and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
This is practically the same as PRIN 11.
Rule 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.
This is a new rule, which has caused particular concern among insurance firms, for whom “the resolution regime is less advanced than for deposit-takers”. Insurers are directed to the PRA insurance approach document for more detailed guidance on resolution planning.
Compliance with this Rule for insurers “will need to be judged in the context of an insurer’s own perception of its resolvability, absent any more detailed rules”, just as the PRA’s discussions with insurers on resolution planning depend on firms’ systemic importance and proximity to failure.
Rule 9: (deleted)
The PRA had originally proposed an additional Rule 9: ‘a firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular’; this was deleted, however, as it was presumed to be superfluous given other Rules elsewhere. (The PRA stresses that the deletion of this Rule does not, however, mean that it views the accuracy of information submitted as unimportant.)