PS12/24 – The Prudential Regulation Authority’s approach to rule permissions and waivers

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 3/24 – The Prudential Regulation Authority’s approach to rule permissions and waivers. It also contains the PRA’s final statement of policy (SoP) – The Prudential Regulation Authority’s approach to rule permissions and waivers (Appendix 2).

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

Background

1.3 In CP3/24 the PRA proposed a new SoP that will set out the PRA’s approach to rule permissions made under section 138BA of the Financial Services and Markets Act (FSMA) 2020.

1.4 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (‘feedback’). Details of any significant changes are also published. In this PS, the ‘Summary of responses’ contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.5 In carrying out its policy making functions, the PRA is required to have regard to various matters. In CP3/24 the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.6 The PRA received four responses to the CP. The names of respondents to the CP who consented to their names being published are set out at Appendix 1.

1.7 The comments raised in the responses broadly fall into four themes:

• the contents of subject specific SoP;
• the weight given to s138A statutory tests;
• the PRA’s use of the power to vary permissions; and
• the PRA use of power and operational accountability.

Changes to draft policy

1.8 This PS takes account of how the policy advances the PRA objectives and of significant matters that the decision maker had regard to. These are as set out in CP 3/24.

1.9 Following the responses to CP3/24 we have made two amendments to the draft SoP – The Prudential Regulation Authority’s approach to rule permissions and waivers.

1.10 These are to clarify:

• what the PRA generally expects to include in a subject specific SoP; and
• that there may be exceptional circumstances where it may be appropriate to grant a s138BA permission for which it has not set out a criteria despite the s138A statutory tests not being met.

1.11 The PRA expects these changes to be beneficial to persons subject to PRA rules by making its policy on s138BA permissions clearer and more transparent. The PRA considers that the impact of the proposals in this CP on mutuals is expected to be no different from the impact on other firms.

1.12 In carrying out its policy making functions, the PRA is required to have regard to several matters. In CP3/24, the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The PRA does not consider these matters to have changed.

Implementation

1.13 The SoP – The Prudential Regulation Authority’s approach to rule permissions and waivers will take effect on publication of this PS on 25 July 2024.

2: Feedback to responses

2.1 Before publishing a SoP the PRA must consider representations that are made to it in accordance with its duty to consult on its general policies and practices and must publish, in such manner as it thinks fit, responses to the representations.

2.2 The PRA has considered the representations received in response to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The sections below have been structured broadly along the same lines as the themes of the responses received. The responses have been grouped as follows:

• the contents of subject specific SoPs;
• the weight given to s138A statutory tests;
• the PRA’s use of the power to vary permissions; and
• the PRA use of power and operational accountability.

The contents of subject specific SoPs

2.4 In the draft SoP the PRA set out that where the PRA envisages granting specific permissions under s138BA with pre-determined criteria in relation to a particular PRA rule, it will set out the availability and effect of that type of permission. Generally, this will be in a subject specific SoP.

2.5 Respondents thought the SoP should set out more detail about what subject specific SoPs will include. They gave examples of what they thought could be included.

2.6 Having considered the responses, the PRA has decided to amend the SoP to say that generally the PRA expects subject specific SoPs to include:

• a description of the purpose of the rule permission, including an explanation of the effect the rule permission has on the PRA’s rules;
• the criteria the PRA will expect to be met, or the specific factors (also referred to as criteria in the remainder of the SoP) that it will take into account, in deciding whether to grant the permission; and
• details of the information the PRA will need to assess the rule permission application.

2.7 Operational elements, such as which application form to use, will primarily be communicated in the Authorisations pages of the Bank of England website.

The weight given to s138A statutory tests

2.8 In the draft SoP the PRA set out that if a firm applies for a rule permission under s138BA where the PRA has not set out specific criteria, the PRA generally expects to consider, and place significant weight upon, the statutory criteria that apply to the PRA’s power under s138A.

2.9 Respondents thought that giving weight to the s138A statutory tests, when an application is made under s138BA and there is no subject specific SoP, is too restrictive and does not achieve the flexibility the respondents believe was intended to be available to the PRA in its use of s138BA.

2.10 The most significant flexibility afforded to the PRA by s138BA comes from the ability to identify permissions that should be available to firms that meet appropriate criteria (criteria that are not necessarily in line with the s138A statutory tests). This flexibility allows the PRA to replicate permissions previously available in assimilated law such as the calculation of capital requirements for insurers using internal models or firm specific adjustments to the standard formula and where appropriate to identify new permissions. The PRA may not have been in a position to grant such permissions if the only power available to it were s138A and assessments against the s138BA statutory tests were required.

2.11 The PRA does not consider it to be in line with its statutory objectives to leave the question as to how it will assess s138BA applications, that have not been pre-identified, to be considered from scratch in each case with no overarching approach. Such an approach could lead to inconsistency between the treatment of applications and potentially damage the integrity of the PRA Rulebook. As stated in the draft SoP, where the PRA has not set out criteria, 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 FSMA.

2.12 The PRA intends to apply the same rigorous processes to s138BA applications as it does to s138A applications. Therefore, the PRA generally expects that s138BA will not be an easier alternative route to being granted a waiver or modification of PRA rules than s138A, in areas where the PRA has not set out assessment criteria.

2.13 The PRA continues to believe that where the PRA has not set out assessment criteria, it will be appropriate to place weight on the statutory criteria under s138A. However, the PRA has made a minor amendment to the wording of the draft SoP to acknowledge that there may only be exceptional circumstances where it may be appropriate to grant a s138BA permission for which it has not set out criteria despite the s138A statutory tests not being met.

The PRA’s use of the own initiative to vary permissions

2.14 Respondents wanted the SoP to include more detail around the potential use of the own initiative s138BA(4)(b) power to vary permissions and suggested the PRA includes examples of when it may be used.

2.15 The PRA will use the power in a proportionate manner having considered the options available. As stated in the PRA’s approach to banking supervision and the PRA’s approach to insurance supervision, the PRA will in general discuss issues with firms in reaching our decisions, and carefully consider representations made, not least to ensure that our decisions are made on the basis of all the relevant evidence. The PRA needs to be able to use its powers to address issues as they arise, setting out in advance all of the cases where the power that might be used would unduly restrict the PRA. If specific uses of the own initiative power are identified in advance, the PRA will generally set these out in the subject specific SoP, where it is appropriate to do so. For instance paragraph 3.35 of Solvency II internal models: Permissions and ongoing monitoring.

2.16 The PRA has not made any changes to the draft SoP following these responses.

PRA use of power and operational accountability

2.17 One respondent thought that the draft SoP did not adequately explain the PRA’s policy on granting s138BA permissions.

2.18 As set out in the draft SoP – The Prudential Regulation Authority’s approach to rule permissions and waivers, the PRA's policy is to consult on subject specific SoPs containing details of s138BA permissions that the PRA has pre-identified as available. That approach allows the conditions for granting such permissions to be tailored appropriately to the risks and specificities of that permission. The SoP, for the sake of clarity and transparency, also states that where permission criteria have not been pre-identified, the PRA generally expects to place significant weight upon the statutory criteria that apply to the PRA’s power under s138A. These two elements represent the PRA's policy on s138BA permissions.

2.19 One respondent asked that the SoP clarify the PRA’s approach to existing permissions granted under assimilated law that falls away as the relevant provisions are moved into the PRA Rulebook, including the approach to firms having to make new applications.

2.20 The approach to such permissions will need to be considered on a case-by-case basis and the PRA expects that these will be consulted upon, where appropriate, as part of overall policy package in respective policy areas. It is not appropriate for the SoP to set out the approach to individual permissions given that the details of such permissions will be the subject of separate consultations relating to the relevant policy areas of those permissions. Operational elements, such as which application form to use, will primarily be communicated in the Authorisations pages of the Bank of England website.

2.21 One respondent also asked what checks and balances the PRA will impose on itself.

2.22 The PRA’s use of the s138BA powers is subject to general public law requirements and where the PRA refuses to give a permission, makes a permission subject to conditions or revokes or varies a permission, a person may refer the matter to the Tribunal.

2.23 The PRA has not made any changes to the SoP following these responses.