CP3/24 – The Prudential Regulation Authority’s approach to rule permissions and waivers

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Responses are requested by Tuesday 30 April 2024.

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Responses can be sent by email to: CP3_24@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
John Cunningham
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposal for a new statement of policy (SoP) that will set out the PRA’s approach to rule permissions made under section 138BA of the Financial Services and Markets Act (FSMA) 2023.

1.2 The PRA’s primary objectives of firm safety and soundness, and policyholder protection would be advanced by setting out the PRA’s approach and expectations in relation to s138BA of FSMA for rule permissions in the proposed SoP. This would provide clarity and transparency on how the PRA will assess applications under s138BA of FSMA, which in turn would lower the cost and increase the speed of s138BA rule permissions.

1.3 The PRA’s secondary objectives to facilitate effective competition, and competitiveness and growth would be advanced by making the PRA’s approach clearer and more transparent, making it easier and less costly for firms to do business in the UK.

1.4 This CP is relevant to all persons^{footnote [1]} subject to PRA rules.

1.5 The PRA has a statutory duty to consult when introducing new rules or changing rules (FSMA s138J), or new standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. The PRA therefore considers that it is appropriate to consult on this new SoP.

1.6 The PRA has not consulted any statutory panels as part of this CP.

1.7 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.

1.8 ‘Have regard’ considerations which were significant in the PRA’s analysis included:

• promoting competitiveness and government strategic priorities (HMT recommendation letter);
• the principle that the PRA should exercise its functions transparently (FSMA regulatory principle);
• the use of the resources of the PRA in the most efficient and economic way (FSMA Regulatory principle); and
• Legislative and Regulatory Reform Act 2006 (LRRA) principles.

Background

1.9 Sometimes it may be appropriate for rules to vary if the PRA is satisfied that a firm meets specific criteria. This is achieved through permissions, modifications, or waivers.

1.10 FSMA 2023 gives the PRA a new power. S138BA of FSMA allows the PRA, on application or with the consent of a person who is subject to the PRA rules, to give the person a permission that enables them not to apply the rules, or to apply the rules with a modification specified in the permission.^{footnote [2]} This new power is available in relation to PRA rules specified by HM Treasury (HMT). HMT’s statement of 22 June 2023 provided that ‘HMT will use the power at new s138BA of FSMA to grant the PRA flexibility to disapply or modify the application of any of its rules’.^{footnote [3]}

1.11 The PRA’s power to grant rule permissions under s138BA of FSMA is expected to be used to transfer some assimilated law (previously known as retained EU law) permissions and approvals into the PRA Rulebook. The proposed SoP would explain how the PRA will generally exercise the power.

Implementation

1.12 The PRA proposes to publish a final SoP in June 2024.

Responses and next steps

1.13 This consultation closes on Tuesday 30 April 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP3_24@bankofengland.co.uk. Please 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.

1.14 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of assimilated law.^{footnote [4]}

2: The PRA’s proposal

2.1 The PRA proposes a new SoP – The Prudential Regulation Authority’s approach to rule permissions and waivers. The proposed SoP sets out the PRA’s approach to the granting of rule permissions under s138BA of FSMA. The PRA considers that setting out the PRA’s approach in a SoP will help to improve clarity and transparency over the criteria the PRA will use to assess applications and industry will be clearer of the PRA’s expectations when making s138BA applications. This in turn should reduce unnecessary costs for both the PRA and industry.

2.2 The proposed SoP has 3 key messages:

• that criteria or factors which the PRA expects to take into account when assessing specific rule permissions under s138BA of FSMA will generally be communicated in subject specific SoPs the PRA may publish;
• that when assessing applications made under s138BA of FSMA for rule permissions where approval criteria have not been set out in subject specific SoPs, the PRA expects to consider, and place significant weight upon, the statutory criteria that apply to the PRA’s power under s138A of FSMA; and
• that for applications under both s138BA and s138A of FSMA for rule permission and waivers the PRA will expect applications to be accompanied by detailed information and evidence demonstrating how the relevant criteria are met.

2.3 Where the PRA has not set out criteria for a rule permission, the PRA encourages firms wishing to apply for the modification or waiver of a rule to apply under the PRA’s general modification and waiver power in s138A of FSMA. As per paragraph 2.2 where the PRA has not set out specific criteria in relation to a s138BA rule permission, it will consider the criteria set out under s138A in assessing any application under s138BA.

PRA objective analysis

2.4 The PRA’s primary objectives of firm safety and soundness, and policyholder protection would be advanced by setting out the PRA’s approach and expectations in relation to s138BA of FSMA rule permissions in the proposed SoP. This would provide clarity and transparency over how the PRA will assess applications under s138BA of FSMA. This in turn would lower the cost and increase the speed of s138BA rule permissions, by reducing the need for firms and the PRA to spend time clarifying the approach on a case-by-case basis.

2.5 The PRA’s primary objectives would also be advanced by considering the statutory criteria that apply to the PRA’s power under s138A if a firm applies for a rule permission under s138BA and the PRA has not set out specific criteria. This helps to ensure a consistent approach to the granting of rule permissions under s138BA and waivers and modifications under s138A and helps to maintain a level playing field for persons subject to PRA rules. Additionally the s138A statutory criteria are consistent with the PRA’s objectives in that they prevent modifications that would adversely affect the general objectives. In turn this helps to ensure firms do not have inappropriate concessions which could undermine their safety and soundness.

2.6 The PRA’s secondary objectives to facilitate effective competition, and competitiveness and growth would be advanced by making the PRA’s approach clearer and more transparent, making it easier for firms to do business in the UK because the need for firms and the PRA to spend time clarifying the approach would be reduced. By helping to ensure a consistent approach to the granting of rule permissions under s138BA where the PRA has not set out specific criteria, the PRA maintains a level playing field for persons subject to PRA rules, which in turn facilitates effective competition, and competitiveness and growth.

Cost benefit analysis (CBA)

2.7 The PRA has considered the costs and benefits of this proposal. The proposed SoP provides clarity on the PRA’s approach to the granting of rule permissions under s138BA of FSMA and waivers and modifications under s138A of FSMA. It will save both firms’ and the PRA’s resources when firms seek rule permissions, which is a benefit. Without the clarity provided by the SoP, there would be additional costs associated with ambiguity surrounding rule permissions and waivers as firms and the PRA might have to spend time clarifying the approach on a case-by-case basis. The proposed transparency will also make it easier for firms to access flexibility in relation to PRA rules where rule permission criteria are met.

‘Have regards’ analysis

2.8 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022, and to the principles in the Legislative and Regulatory Reform Act 2006 and the Regulators’ Compliance Code. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• Promoting competitiveness and government strategic priorities (HMT recommendation letter): The proposed SoP will implement some aspects of the Government’s Smarter Regulatory Framework (namely the insertion of s138BA into FSMA 2000). By providing clarity on how the PRA will use the s138BA rule permissions powers, and what criteria it will consider, our approach bolsters the UK's attractiveness for international financial services.
• The principle that the PRA should exercise its functions transparently (FSMA regulatory principle): The proposed SoP helps to provide transparency on how the PRA will exercise its functions relating to granting rule permissions. In particular, it explains how the PRA will use the new power which replaces EU regulations being deleted through the transfer of assimilated law into the PRA Rulebook.
• The use of the resources of the PRA in the most efficient and economic way (FSMA regulatory principle): The proposal is similar to existing practice. This will help use the PRA's resources economically. Also, by clarifying how the PRA will use its powers, the PRA’s approach will help focus firms' applications. This will make it easier and more efficient for the PRA to review applications.
• LRRA five principles: The proposals contained in this CP are in line with LRRA principles of good regulation. By clarifying how the PRA will act, it favours transparency. Highlighting which powers and criteria the PRA will use also helps external stakeholders hold the PRA to account. By mainly suggesting proposals that are similar to what currently exists the approach is proportionate and consistent. Finally, it is mainly targeted where action is needed (eg focusing on how the PRA will use its new power).

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

Impact on mutuals

2.10 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

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