CP4/24 – Regulated fees and levies: Rates proposals for 2024/25

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Responses are requested by Friday 10 May 2024.

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Responses can be sent by email to: CP4_24@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
PRA Fees Policy Team,
Financial, Planning, Performance & Analysis,
PRA Strategy, Risk & Operations
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out proposals for the Prudential Regulation Authority’s (PRA) fees for 2024/25. The proposals would make amendments to the Fees Part of the PRA Rulebook (Appendix). The proposals include:

• the fee rates to meet the PRA’s 2024/25 Annual Funding Requirement (AFR);
• changes to the internal model application fees, the model maintenance fee and the fee payable for insurance business transfers under Part VII FSMA;
• setting out how the PRA intends to allocate the surplus from the 2023/24 AFR (Chapter 3); and
• the retained penalties for 2023/24 (Chapter 4).

1.2 This CP is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2024/25 fee year.^{footnote [1]}

1.3 The PRA has a statutory duty to consult when changing rules (FSMA section 138J), or new standards instruments (FSMA section 138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so.

1.4 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Summary of proposals

1.5 The PRA’s AFR for 2024/25 is composed solely of the budgeted cost of Ongoing Regulatory Activities (ORA). Further information on this can be found in Chapter 2. The proposed ORA for 2024/25 is £331.3 million, an increase of £22.0 million (7%) on 2023/24. This figure is provisional and may need to be revised when final estimates for the PRA’s costs are available (please see Chapter 2 for further detail).

1.6 The PRA’s proposed Total Funding Requirement (TFR) for 2024/25 is £353.0 million, an increase of £34.0 million (11%) from 2023/24 (£319.0 million). The TFR is composed of the AFR and other fees. To reduce the impact to firms in 2024/25, the PRA has taken two measures, as set out in paragraphs 2.5 and 3.2, to levy firms £341 million of the TFR thereby limiting the increase to firms to 7%.

Implementation

1.7 The PRA proposes that the implementation date for the changes resulting from this CP would be Wednesday 3 July 2024.

Responses and next steps

1.8 This consultation closes on Friday 10 May 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP4_24@bankofengland.co.uk.

1.9 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.10 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

2: The PRA’s proposals

PRA Annual Fees consultation – 2024/25

2.1 This chapter sets out proposals on fee rates to meet the PRA’s TFR for 2024/25. Detailed information on the PRA’s strategy and workplan for the coming year, which will be funded by the TFR, is set out in the PRA Business Plan 2024/25, which is published alongside this CP.

Total Funding Requirement

2.2 The TFR covers the PRA’s total fees and comprises the AFR and ‘other fees’ (see Table 2.A). The PRA’s TFR for 2024/25 is £353.0 million, an increase of £34.0 million from 2023/24 (£319.0 million).

2024/25 Annual Funding Requirement (AFR) and comparison with 2023/24

2.3 The AFR is the budget required by the PRA to advance its statutory objectives. The PRA’s proposed AFR for 2024/25 is £331.3 million and is composed of the budget for the ORA.

2.4 The proposed AFR for 2024/25 is £22.0 million higher than the AFR for 2023/24 of £309.3 million, an increase of 7%. The proposed AFR increase of 7% in 2024/25 follows a 1% reduction in 2023/24, which equates to an increase of 6% across the two years (Table 2.B). The PRA is constraining the increase in its own direct costs in 2024/25 to 2%, which means a real-terms cut to the budget that will be managed by increasing efficiency in the PRA’s supervisory approach, end-to-end policy-making process, and operations. Alongside this, the PRA needs to fund inflation-driven increases in support services provided to the PRA by the Bank and the PRA’s share of tackling obsolescence in the Bank’s technology estate on which the PRA relies.

2.5 To minimise the burden on industry, a reduction has been made to the AFR which reflects the fact that the Bank manages its change activity dynamically, therefore without certainty of where the cost will be attributable. The risk to this approach is if the full budget is spent in 2024/25, the PRA would need to recover the difference from firms in 2025/26 in addition to any other increases to the PRA’s costs for that year.

2.6 The impact of external market conditions, as at 29 February 2024, on the PRA’s pension costs for 2024/25 has yet to be fully confirmed. The figure for the ORA is therefore provisional and may need to be revised when final cost estimates are available.

Allocation of 2024/25 Ongoing Regulatory Activities (ORA) to fee blocks

2.6 The proposed allocation of the ORA across the seven PRA-authorised fee blocks, including the minimum fee block, is set out in Table 2.B. Firms are allocated to PRA fee blocks based on the regulated activities for which they hold permissions, with firms paying a periodic fee for each fee block into which they fall. The proposed allocation to fee blocks is based on the anticipated work to be performed by the PRA within each area and reflects the PRA’s risk-based approach. The fee block allocations are unchanged from 2023/24.

2.7 Within each fee block, the costs to be recovered from individual firms are based on the size of their business. The aim is to ensure that those firms that could potentially cause the greatest harm to the stability of the UK financial system are the main contributors to the PRA’s AFR. As for previous years, cost recovery within the A1 fee block is weighted further towards higher impact firms.

2.8 Any firm authorised to carry out any of the regulated activities covered by the ‘A’ fee blocks is also subject to the A0 minimum fee (except for the A6 fee block, which consists of the Society of Lloyd’s and its subsidiaries only) and is invoiced on an individual basis.

Online fees calculator

2.9 The Financial Conduct Authority (FCA) provides a facility on its website to enable firms to calculate their periodic fees for the forthcoming year based on the proposed PRA consultative rates (Appendix). The fee calculator for 2024/25 fees is expected to be available to firms from Thursday 11 April 2024.

Other fees

2.10 Other fees include implementation fees, the model maintenance fees, special project fees for restructuring (SPF) and regulatory transaction fees. These fees vary from one year to another and can lead to greater volatility in periodic fees. Additional context on the PRA’s approach to other fees can be found in (SS3/16 – Fees: PRA approach and application).

2.11 For 2024/25, the PRA expects to raise £9.1 million in other fees, unchanged from 2023/24.

Internal model application fees and the model maintenance fee

2.12 The model application fees and model maintenance fees were reviewed as part of last year’s fees consultation. For the 2024/25 fee year, the PRA is proposing to increase these fees in line with CPI inflation since March 2023.

2.13 The vast majority of firms holding internal model permissions and firms applying for model permissions come from entities paying fees in the highest application bands, so the PRA does not consider increasing these charges to be a barrier to entry.

Insurance business transfers under Part VII FSMA

2.14 The regulatory transaction fee for an insurance firm seeking consent for an insurance business transfer scheme under Part VII of FSMA has not been changed since March 2019. For the 2024/25 fee year, the PRA is proposing to increase this fee in line with CPI inflation since March 2019.

Special project fees for restructuring (SPF)

2.15 The SPF hourly rates represent the approximate cost to the PRA of the resources and time spent on the SPF, and so are a combination of the cost of the resource used and the share of the overhead or corporate service costs (eg technology, premises) incurred.

2.16 The PRA has not changed the SPF hourly rates since they were increased in the 2022/23 fee year, using data from the period ending 31 December 2021. For the 2024/25 fee year, the PRA proposes to increase the rates in line with CPI inflation since December 2021.

3: Surplus for 2023/24 AFR

3.1 In the PRA’s 2023/24 fee year, there was a surplus of £6.0 million. This is a draft, unaudited figure and therefore will be subject to change, with the final figure to be confirmed when the final policy is published. This surplus consists of additional income received in the year in the form of Retained Financial Penalties and because actual costs were lower than budget.

Surplus on AFR

3.2 Alongside the measures set out in paragraph 2.5, the PRA is retaining this surplus and would apply it against the TFR for 2024/25 to help offset the impact of increased fees payable by firms in this financial year.

4: Financial penalty scheme and application of retained penalties for 2023/24

4.1 The legislative framework for financial penalties is set out in FSMA. Under FSMA, the PRA must:

• pay any fines and other financial penalties received as a result of regulatory enforcement activity to HM Treasury (HMT) after deducting certain enforcement costs (these costs are referred to as ‘retained penalties’);
• publish and operate a financial penalty scheme to ensure that retained penalties are applied for the benefit of PRA-authorised firms; and
• ensure that any firm that has had a penalty imposed does not share in the distribution of retained penalties for the relevant fee year.

4.2 The PRA’s financial penalty scheme provides for retained penalties to be returned to fee payers in the following fee year through a reduction to the AFR reducing the periodic fees payable by firms in the six fee blocks for 2024/25. There is no allocation to the A0 minimum fee block, as it does not bear any share of enforcement costs.

Application of retained penalties for 2023/24

4.3 In 2023/24, enforcement activity by the PRA resulted in fines and penalties of £4.2 million, of which £1.9 million is included into the calculation of the £6.0 million retained surplus from 2023/24. The remainder is remitted to HMT.

5: PRA objectives analysis

5.1 The PRA considers the proposals to be compatible with the PRA’s statutory objectives under FSMA:

• to promote the safety and soundness of PRA-authorised firms;
• in the context of insurance, to contribute to policyholder protection;
• as a secondary objective, to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying out regulated activities; and
• also as a secondary objective, to facilitate the international competitiveness of the UK and its medium to long term growth.

5.2 The PRA considers that the proposed PRA Fees Amendment (No 1) Instrument 2024 will enable the PRA to fund the regulatory activities required to advance its statutory objectives during 2024/25.

5.3 The proposed fees levels are expected to advance the PRA’s secondary competition objective because fees for ORA are allocated in a proportionate manner across all PRA-authorised firms, while fees for specific projects and transactions are targeted only to those predominantly larger firms which generate these specific regulatory activities or, in the case of fees for new authorisation applications, continue to be subsidised by incumbent firms. For these reasons, the PRA considers the proposals to be compatible with the requirement for the PRA to act in a way that advances this objective. Through the use of model application and maintenance/change fees, the PRA also seeks to ensure a balance, with its fees being appropriately targeted while not representing a barrier to the adoption and use of models by smaller firms.

5.4 The PRA expects the proposals to advance the secondary objective of competitiveness and growth. Given the international nature of some financial services, a transparent and proportionate fee regime helps to support the stability and competitiveness of the UK’s financial markets. The PRA also considers the importance of the financial services sector contributing to sustainable economic growth. By ensuring the proposals consider the size and nature of firms, the PRA fees will not act as a barrier to the growth of the financial services sector.

‘Have regards’ analysis

5.5 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. The following factors, to which the PRA is required to have regard, were significant to the PRA’s analysis of the proposals:

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): By allocating fees in a proportionate way through the use of fee blocks that take into account the size and nature of the PRA-authorised community, the PRA has had regard to this principle.
• The desirability of sustainable growth in the economy of the UK in the medium or long term (FSMA regulatory principles): The PRA has had regard to this principle by giving separate consideration to the interests of minimum fee payers and firms not affected by certain PRA activities.
• The principle that the PRA should exercise its functions transparently (FSMA regulatory principles and Legislative and Regulatory Reform Act of 2006): The PRA has had regard to this principle by clearly setting out the basis on which the proposed fees are calculated and providing advance notice of the proposed changes to its fees and charges.
• Recognition of different business models (FSMA regulatory principles) and innovation (HMT recommendation letters): The proposals contained within this CP consider the differences in the business models employed by firms and support innovation by ensuring that they do not result in barriers to new entrants.

5.6 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this set of proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for this set of proposals.

Cost benefit analysis

5.7 The PRA is exempt from having to carry out a cost benefit analysis on its draft fee rates.

Impact on mutuals

5.8 Within each fee block, the proposed costs to be recovered from individual firms are based on the size of their business. The PRA proposes to continue to discount the periodic fees payable by non-Directive general insurance firms, many of which are mutuals, by 11%. In addition, all life insurance non-Directive firms are excluded from periodic fees. The PRA does not consider the impact of the proposed fee rates on mutual societies to be significant. These continue to be lower than the minimum fee that applies to all other firms, and considerably lower than the cost to the PRA of supervising these firms.

Equality and diversity

5.9 The PRA considers that the proposals do not give rise to equality and diversity implications.