Presented to Parliament pursuant to section 47 of the Financial Services and Markets Act 2023 and The Financial Services and Markets Act 2023 (Panel Remuneration and Reports) Regulations 2023
Chair’s Foreword
As Chair of the Cost Benefit Analysis (CBA) Panel (the Panel), I am pleased to introduce our Annual Report for 2024. The Panel was formed in July 2024 in accordance with the Financial Services and Markets Act 2023 requirement for independent advice in relation to the Cost Benefit Analyses (CBAs) associated with rules introduced by both the PRA and the Bank of England (the Bank) with respect to certain aspects of Financial Market Infrastructure (FMI) regulation. The Panel is essentially a ‘critical friend’, providing expertise on the preparation and use of CBA. Detailed Terms of Reference and Statements of Policy (SoP) on the Bank’s and PRA’s CBA Approach are available on the Bank’s website. The Panel does not evaluate or scrutinise options or alternatives that might be considered by the PRA or the Bank, but rather focuses on the costs, benefits and net impact of the specific policy proposals that have been made and are intended for public consultation.
The Panel is still in the early days of its formation, as is the review process it applies. To date, our work has been largely shaped by the transfer of material from legislation to the PRA Rulebook. The backlog of policies following the general election waiting for this transition created a heavy load of work and compressed the Panel’s normal meeting schedule from what should have been a six month time frame to less than a calendar quarter. The pipeline remains substantial, to be managed over around eight meetings of the Panel in 2025. As of 12 December 2024, to be subject to Panel review, CBAs relating to PRA rules must meet a materiality threshold of +/- £10 million annualised net direct cost to PRA regulated firmsfootnote [1] (this threshold does not apply for CBAs when the Bank uses its rulemaking powers as FMI regulator). At the time of the Panel’s formation in July 2024 this threshold was not in place, leading to the Panel reviewing some CBAs of low materiality. While excluding such CBAs from the review process is a sensible use of resources, the Panel has noted the risk of a number of policies falling below the threshold which in aggregate would be more significant. The Chair has regular discussions with the PRA and Bank on the policy pipeline including those that fall below the threshold.
Each of the four meetings we have now had has provided significant scope for learning how to best engage with the PRA and the Bank and provide meaningful input to their work. We anticipate further evolution of both how CBAs are prepared and our process of review in the coming year. Our early observation is that there are genuine challenges in applying cost benefit analysis to prudential regulation and FMI regulation. The primary benefit of financial regulation is to prevent or mitigate the occurrence of very low probability yet high impact events. In the areas we have seen so far, which are principally CBAs relating to non financial policies or those not directly tied to policy proposals of high materiality, tools for assessing costs of this regulation have previously been established, whereas in some instances, the benefits are inherently more difficult to quantify at a practical level. One of the key strands of work the Panel envisages for 2025 is supporting the PRA and the Bank in developing practical concepts for assessing and communicating benefits to provide a clearer sense of value. We also note that often there are challenges posed by the data that is available in preparing CBAs which is acknowledged by the PRA and the Bank. Work to address this is ongoing and should benefit future CBA development and assessment. Recruitment is also ongoing for the second PRA firm member of the CBA Panel, with the process nearing completion. The new member, who will become the seventh member of the Panel, is expected to join in early 2025 and I look forward to welcoming them to the Panel.
Finally, our work to date suggests that there are opportunities to materially advance the CBA development approach used by the PRA and the Bank in their work. In addition to our set piece schedule of meetings for 2025, the Panel has also agreed a workshop intended to discuss best practice and current thinking on the preparation of CBAs, and to provide guidance for future efforts. It is our expectation that a product of this work will contribute to the existing toolkit available to teams in preparation of future CBAs that will support quality and communication.
Laurel C Powers-Freeling
Chair, Cost Benefit Analysis Panel
1: Overview
1.1 The CBA Panel is a statutory panel established to provide advice to the PRA and the Bank on the preparation of CBAs. It was established in July 2024 by the Prudential Regulation Authority in accordance with section 138JA of the Financial Services and Markets Act 2000 (FSMA). Since 1 August 2024 the PRA and the Bank have been required to consult the CBA Panel on relevant CBAs. The PRA supports the Panel on an ongoing basis.
1.2 The Panel provides independent input to the PRA’s and the Bank’s CBAs, helping to support increased transparency and scrutiny of their policymaking. The Panel provides advice on the preparation of CBAs when the PRA or the Bank proposes new rules, or to amend existing rules, for firms and financial market infrastructure entities. It also keeps under review how the PRA and the Bank are performing generally in carrying out CBAs and provides recommendations to the PRA and the Bank on how they can improve their methodology and approach to CBAs. There may also be instances where the Panel reviews updated CBAs which accompany Policy Statements.
1.3 While the Panel provides advice both to the PRA and the Bank on specific CBAs and on their methodological approach, it does not assure or audit CBAs prepared by the PRA or the Bank, nor does it make recommendations on which policies the PRA and/or the Bank should consult.
1.4 The Panel will meet approximately eight times each year to consider PRA and Bank CBAs and provide feedback. The feedback from the Panel is primarily provided at these meetings but there are circumstances when feedback is sought in writing. These details are outlined in the Panel’s Terms of Reference.
1.5 This report covers the period from 1 July to 31 October 2024. The Panel is required to provide its first report to HM Treasury by 25 December 2024. From 2025, the report will be published in accordance with the PRA’s and the Bank’s wider annual reporting schedule. In line with the PRA’s and the Bank’s broader approach to annual reports, the Panel’s 2024-2025 report will cover the year to 28 February 2025. It will provide information relating to the remaining meetings in 2024, including a meeting in November which is not included in this report, any meetings held up to 28 February 2025, and details of costs incurred by the PRA in connection with the Panel.
CBA membership – as of 31 October 2024
1.6 Appointments to the Panel are agreed by the Prudential Regulation Committee (PRC), in consultation with the Financial Market Infrastructure Committee (FMIC). The appointment of the Chair is approved by HM Treasury. As of 31 October 2024, the members of the Panel are:
- Laurel Powers-Freeling (Chair)
- Stephen Gibson
- Martina Garcia
- Andrew Maclaren
- David Aikman
- Kristy Robinson (PRA firm member)
- Vacancy (PRA firm member)
1.7 Members of the Panel are external to the PRA and the Bank and are not employed by either the PRA or the Bank. Independent membersfootnote [2] serve a term of three years and members employed by a PRA authorised firm serve a term of one year, both renewable for one additional term at the discretion of PRC, in consultation with FMIC.
1.8 There is a vacancy in the Panel membership for the second member from a PRA-authorised firm. The process for recruiting this seventh, and final, Panel member, as of 31 October 2024, had almost been completed. The outcome of this process will be announced on the Bank’s website and reported in the Panel’s 2024-2025 report.
1.9 All members of the Panel are responsible for identifying and declaring actual, potential, or perceived conflicts of interests in line with the Panel’s conflicts guide, which are recorded in the Panel’s register of interests. In accordance with the guidance, this register is reviewed in advance of each meeting of the Panel. Any actual, potential, or perceived conflicts are declared to the Chair, who then takes appropriate action to manage such actual and/or potential conflicts.
2: Panel engagement with the PRA and the Bank
2.1 The Panel met four times between 1 July 2024 and 31 October 2024, during which the Panel provided independent advice to the PRA and the Bank on its CBAsfootnote [3]. The Panel provides feedback on CBAs relating to the proposed rule, which are prepared by the PRA and the Bankfootnote [4] in accordance with section 138J of FSMA 2000. Prior to its first meeting, the Panel was also briefed by various members of the PRA and the Bank on the work and processes of the PRA and the Bank.
2.2 In its first constitutive meeting in July, the Panel agreed its Terms of Reference and was consulted on the PRA’s draft Approach to CBA SoP (PRA SoP). The PRA SoP explains why the PRA undertakes CBA, the role of CBA in the policymaking process, how the PRA analyses and estimates costs and benefits, and the role of the PRA’s CBA Panel. The Panel discussed the references in the PRA SoP to the development of the PRA’s CBA toolkit over time. It also commented on how the PRA’s approach to CBA compares to the approach of other organisations, the use of qualitative and quantitative data in CBAs, and the PRA’s approach to modelling of costs and benefits. The Panel provided views on how the PRA assesses the overall impact of its policies, as well as distributional and behavioural impacts. Members gave feedback on the materiality threshold which is used to determine on which CBAs the Panel is consulted, how it is calculated and the way in which this is presented to stakeholders. The Panel also expressed opinions on the uncertainty involved in CBA relating to PRA and Bank policymaking, including in relation to direct cost estimation and the role of confidence intervals in communicating uncertainty. Finally, members suggested on the appropriate balance of technical detail in the PRA SoP and the need to enhance the accessibility of the document to non specialist readers. The final version of this document, which incorporates the Panel’s feedback, was published on the Bank’s website on 12 December 2024.
2.3 In its third meeting, the Panel was consulted on the Bank’s draft Approach to CBA SoP (Bank SoP). The Bank SoP explains how the Bank conducts CBAs when exercising its rulemaking powers in relation to financial market infrastructures (FMIs), such as central counterparties (CCPs) and centralised securities depositories (CSDs). The methodology is consistent with the PRA’s CBA framework while highlighting certain specificities relating to FMIs. The Panel’s comments focused on three areas: methodology, document structure, and clarifications on FMIs and their role in the financial system. Regarding methodology, the Panel acknowledged the challenge of quantifying benefits to financial stability of policy choices and discussed how CBA approaches in other sectors might provide useful comparators. On structure, members advised on reducing repetition, particularly on the role of CCPs and CSDs in the financial system. Regarding FMIs, the Panel recommended ensuring the benefits set out in CBAs concentrate on how proposals aim to prevent risks to financial stability, the inclusion of stress testing in the CBA toolkit, and that CBAs should be clear about the systemic importance and high level of interconnection of FMIs. The final version of this document, which incorporates the Panel’s feedback, was published on the Bank’s website on 12 December 2024.
2.4 The Panel considered a range of CBAs during its meetings in September and October, which are covered in the following section, and provided initial observations and suggestions on the PRA’s and the Bank’s approach to CBA.
2.5 All meetings of the Panel were attended by relevant senior executives from the PRA and the Bank. Key outcomes and insights from these meetings are provided to relevant decision makers and policy leads, contributing to the transparency of the PRA’s and the Bank’s policymaking processes. The Panel’s comments on any given CBA, and the PRA’s and Bank’s responses to these comments, are summarised in the relevant Consultation Paper (CP).
CBAs considered by the Panel
2.6 The table below lists the CBAs considered by the Panel between 1 August 2024 and 31 October 2024. For more context, this table should be read alongside the associated CPs available on the Bank’s website (except for the CP for Depositor Protection, which is not yet published). Three CBAs published after 1 August 2024 were not reviewed by the Panel, as the CBAs for these had been finalised before that datefootnote [5]. Two additional CPs were published after 1 August 2024footnote [6], but the statutory duty to produce a CBA did not apply under section138L(3) of the FSMA 2000footnote [7].
CBAs considered by the Panel |
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Subject |
Description |
Panel feedback |
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CP13/24 – Remainder of CRR: Restatement of assimilated law | Bank of England |
The CBA assessed the transfer of remaining assimilated capital regulations into PRA policy materials, along with some changes to securitisation capital requirements (primarily, the use of a new formulaic p-factor). The main benefits included increased clarity on the relevant regulations and expanded options for calculating securitisation capital requirements. For areas where the PRA is proposing to restate CRR provisions without changing policy substance or intent, there would be minimal costs or benefits. For proposals introducing policy adjustments, the CBA has assessed the incremental costs and benefits, particularly in Chapter 3 of the CP, which addresses the main changes to the securitisation requirements. |
The Panel recommended that the CBA more explicitly address the primary drivers of the policy proposals and their potential financial stability impacts. Members noted that the benefits arising from the change relating to securitisations risk weighted using the Standardised Approach (which are quantified in the CBA) depend on firms choosing to use a new p-factor. Given this dependency the Panel recommended that the CBA addresses how certain the PRA is that these benefits will arise. Members also noted the complexity and technical nature of the proposals, recommending that, where possible, the CBA be made more accessible to readers unfamiliar with securitisation capital requirements. Paragraph 3.37 in the CP describes this feedback and states how the PRA has incorporated it. |
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The CBA assessed proposals to improve the PRA remuneration regime, aiming to make the requirements more effective, simple, and proportionate in achieving their primary aim of ensuring accountability for risk taking through firms’ remuneration arrangements. The main benefits included reduced compliance costs for firms, improved staff retention and attraction, and potential prudential benefits. The expected costs were primarily one off costs for firms to familiarise themselves with the proposals and, where applicable, to restructure their remuneration regimes. |
The Panel provided feedback on the overall presentation of the CBA assessment as well as analysis of data on risk events which are relevant from a remuneration perspective. On this latter point, members suggested that data on risk events over a longer time horizon than 4 years could be captured in the CBA. Members recommended greater clarity was included in the CBA around the benefits of the PRA’s proposals on the use of the material risk takersfootnote [8] identification process as a risk management tool. The Panel also recommended that the CBA present the impact of the proposals on employee remuneration in a more systematic way. Paragraph 10.4 in the CP describes this feedback and states how the PRA has incorporated it. |
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The CBA assessed proposed reforms to the ISPV regime to enhance its global competitiveness, while maintaining a policyholder protection level consistent with the PRA’s objectives. The primary benefits included an increased range of capital available to the UK insurance market. Expected costs included some marginal additional risk of cedants not receiving payments from the ISPV when required (mitigated by a new supervisory statement), and costs associated with firms familiarising themselves with the new rules. |
The Panel recommended that the economic benefits of the proposals be further explained to demonstrate more clearly how they advance the PRA’s primary and secondary objectives and outweighed the costs. Members commented that a smaller upfront investment (under a proposal related to the aggregate maximum risk exposurefootnote [9]) could encourage a broader range of investors, which would be beneficial for risk dispersion. The Panel commented that the proposal for an accelerated pathway could increase the risk of some ISPVs being approved when they should not have been and that this should be factored into the CBA. The Panel mentioned that there could be extra cost under the ‘Simplification of Authorisation process’ proposal if requests for additional information, which were previously provided upfront but would no longer be under the simplified process, result in delays. Paragraph 8.38 in the CP describes this feedback and states how the PRA has incorporated it. |
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Fundamental Rules for financial market infrastructures | Bank of England |
The CBA assessed a proposed set of fundamental rules for FMIs. These aim to increase the resilience of FMIs through enhanced supervisory effectiveness by setting out at high level clear and transparent outcomes that encompass the Bank’s policy framework. The Panel was consulted on the CBA for CCPs and CSDs only. The CBA for recognised payment system operators and specific service providers was conducted on a non-statutory basis. |
The Panel recommended the CBA highlight the benefits of the fundamental rules in addressing potential gaps in the regulatory framework. The Panel commented that while increased transparency of regulatory outcomes was a benefit, the resulting increased supervisory effectiveness in relation to monitoring compliance and holding FMIs accountable was the key mechanism through which this resulted in changing incentives at FMIs, and so increased adherence to regulatory requirements, supporting financial stability. The Panel also noted that it is very difficult to precisely quantify the financial stability benefits of introducing fundamental rules. They advised that it would be helpful to provide a sense of the benefit by referencing the cost of financial crises should they occur, especially as a result of regulatory underlap. The Panel recommended further explanation of familiarisation and compliance costs. Paragraphs 3.24 and 3.25 in the CP describe this feedback and state how the Bank has incorporated it. |
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The CBA assessed proposed reforms to the PRA large exposures (LE) framework, aiming to implement the remaining Basel LE standards. This framework complements the risk weighted capital requirements by aiming to protect firms from large losses resulting from the sudden default of a single counterparty or groups of connected counterparties. The proposals were expected to impose minimal costs on firms. |
The Panel commented on addressing the potential impacts of the proposed changes in stress scenarios. They also provided feedback on the uncertainty around the operational costs associated with the mandatory substitution approach proposal to calculate the effect of the use of credit risk mitigation techniques. Paragraph 6.3 in the CP describes this feedback. |
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Depositor Protection |
The CBA assessed proposals to update the depositor protection frameworkfootnote [10]. |
The Panel commented on the proposals’ alignment with approaches considered by other jurisdictions. Members also suggested that the PRA further explore the expected impacts on competition. The Panel commented on a number of presentational elements. |
3: CBA Panel forward agenda
3.1 The CBA Panel met four times in the period up to 31 October 2024. The Panel is due to hold one further meeting in 2024 after the period covered by this report. As mentioned in paragraph 1.5, the details of this meeting will be reported in the 2024-2025 report.
3.2 The Panel’s forward agenda is naturally shaped by the PRA’s and the Bank’s policy development pipeline, but members can influence the focus of discussions, including in relation to broader thematic matters. In 2025 the Panel will meet regularly to review relevant CBAs accompanying PRA and Bank CPs relating to rules. The Panel’s 2025 agenda will also include time allocated to provide advice on how the PRA and Bank can improve their methodologies and approach to the completion of CBAs. These discussions will be guided by Panel members’ initial impressions of the PRA’s and Bank’s approach to CBA and will focus on how the PRA and Bank could improve their respective CBA toolkits.
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This ensures that the CBA Panel is consulted for proposals that both increase (plus sign) and decrease (minus sign) costs to PRA regulated firms.
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Members of the Panel who are not employed by a PRA-authorised firm or a Bank-regulated entity.
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There was a further meeting in November 2024 which is not included in this report in light of the Panel’s obligation to provide its first report to HM Treasury by 25 December 2024. The Panel’s 2024-2025 report will provide detail on the matters considered at this meeting.
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Section 138J of FSMA is applied to the Bank by schedule 17A of FSMA.
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The CPs are the following:
CP7/24 – The Strong and Simple Framework: The simplified capital regime for Small Domestic Deposit Takers (SDDTs) | Bank of England
CP8/24 – Definition of Capital: restatement of CRR requirements in PRA Rulebook | Bank of England
CP9/24 – Streamlining the Pillar 2A capital framework and the capital communications process | Bank of England -
The CPs are the following:
CP10/24 – Updates to the UK policy framework for capital buffers | Bank of England
CP12/24 – Resolution assessments: Amendments to reporting and disclosure dates | Bank of England -
The provisions listed in subsection (4) do not apply if the regulator concerned considers that, making the appropriate comparison - (a) there will be no increase in costs, or (b) there will be an increase in costs but that increase will be of minimal significance.
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Material risk taker is a term used to refer to the individuals subject to the remuneration rules.
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The aggregate maximum risk exposure is the sum of maximum payments, including expenses that the special purpose vehicle may incur, excluding certain specific expenses.
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The information for this item is limited because the relevant CP has not yet been published. An update of this CBA will be included in the Panel’s 2024-2025 report.