Prudential Regulation Authority Rulebook

1

In December 2012, the Financial Services Authority (FSA) and Bank of England consulted, on behalf of the Prudential Regulation Authority (PRA), on the draft statement of policy on the power of direction. This power was established by the Financial Services (FS) Act 2012 which, in amending the Financial Services and Markets Act 2000 (FSMA), provides a new framework for financial regulation in the United Kingdom.

2

This document includes feedback on queries raised in consultation responses and publishes the final statement of policy on the PRA’s use of the power to direct qualifying parent undertakings. No material changes were made following consultation.

3

Going forward, the PRA will keep the scope and use of its powers over qualifying parent undertakings under review.

4

Eight responses were received: four from trade bodies (covering banks, building societies, insurers and other wholesale financial market participants), three from entities within the insurance industry; and there was one response from a law firm.

5

All responses to the draft statement of policy focused on the use of the power of direction and sought further clarification on aspects of the proposed use of this power. The following is the PRA’s response to the queries received in response to the consultation.

6

All of the respondents commented on this being representative of an extension of the PRA’s powers beyond those held by the FSA. They highlighted that the PRA would already have substantial powers under FSMA and sought to understand what to expect of the PRA in its exercise of this extension to its powers.

7

In October 2012, draft ‘Approach’ documents, one for banks and investment firms, and the other for insurers were published. These documents set out how the PRA intends to exercise it functions in order to advance its objectives. These Approach documents provide general guidance on the PRA’s approach in relation to the exercise of its functions, including the use of this power of direction.

8

There is no requirement that the power of direction must be used only as a last resort and in some instances, the exploration of other regulatory measures may be impracticable or inappropriate. However, in order to satisfy the general condition set out at s192C of FSMA, the PRA must issue directions only in order to advance its objectives. In deciding whether to issue a direction, the PRA is required to have regard for the desirability of using its powers over the group’s regulated entities rather than the holding company and the proportion of benefit to burden which is likely to result from the use of the power of direction.

9

The power of direction is to be applied where the general condition or alternatively the consolidated supervision condition is met as set out in FSMA. With regard to internal decision-making, the PRA is required to apply the regulatory principles set out at s3C of FSMA (as amended by the FS Act 2012) in its decision-making.

10

Respondents expressed concern that it was not clear that entities would be in a position to appeal against the use of the power of direction. Sections 192E ss(5)(d) to (12) and s192G of FSMA (as amended by the FS Act 2012), set out requirements relating to representations to the PRA and references to the Tribunal with which the PRA must comply when it uses its power of direction. In particular, a person who objects to the PRA’s use of the power of direction may refer the matter to the Tribunal. In addition, a direction made by the PRA must set out a period for the addressee to make representations and include details of the right to refer the matter to the Tribunal.

11

The PRA expects that groups and their parent companies will seek to comply with the regulatory measures in place. The PRA considers it unlikely that a group would undergo a significant restructure or relocate its parent company simply because the PRA is able to exercise a power of direction over the holding company. In any event, if the PRA became concerned that actions were being taken for the purpose of regulatory arbitrage, it is empowered to act to counter this.

12

The PRA will exercise the power only in order to advance one or more of its objectives, as set out in s192C of FSMA. For dual-regulated firms, the FCA will also exercise the power in order to advance its operational objectives. Section 192F of FSMA requires cross consultation between the PRA and the FCA prior to notice of the issue of a direction being given to the subject of the direction. This will provide an opportunity for consistency which is particular to the exercise of the power of direction, over and above the more general requirements for the regulators to consult with each other.