Commentary Financial Conduct Authority and Prudential Regulation Authority The PRA
131.The PRA is a limited company formed under the Companies Act 2006. New section 2A renames that company as the Prudential Regulation Authority, and provides for it to have the functions conferred on it under FSMA; references to its functions, for example in the application of its general objective (see new section 2B), include the PRA’s functions under the Insolvency Act 1986, the Banking Act 2009, provisions of EU law specified by order by the Treasury for this purpose and this Act; references to functions of the PRA do not include its functions under the legislation relating to mutual societies except to the extent that an order under section 50 so provides (see new section 2J(2)).
132.New section 2B requires the PRA to discharge its general functions in a way which advances its general objective, which is the promotion of the safety and soundness of PRA-authorised persons. The primary means by which the PRA is to advance that objective are by seeking to ensure that the way in which the business of PRA-authorised persons is carried on avoids any adverse effect on the UK financial system (subsection (3)(a)), and by seeking to ensure that, if a PRA-authorised person fails, that failure occurs in as orderly a manner as possible (subsection (3)(b)). New section 2J(3) provides further details about the meaning of “failure”. It includes: insolvency; being taken for the purposes of the financial services compensation scheme as being, or being likely to be, unable to meet claims against it; and having a stabilisation option under Part 1 of the Banking Act 2009 implemented (for example transfer to a private sector purchaser (section 11 of that Act), transfer to a bridge bank (section 12 of that Act), or transfer to temporary public ownership (section 13 of that Act)). New section 2G emphasises that the PRA’s objectives do not oblige it to ensure that no PRA-authorised person fails.
133.New section 2C provides for the PRA to have an additional objective which will apply if an order made under section 22A FSMA provides for certain activities relating to insurance to be PRA-regulated activities. Where the PRA is discharging its general functions in relation to PRA-authorised persons who are insurers or reinsurers, it must seek to advance its insurance objective; the insurance objective is contributing to the securing of an appropriate degree of protection for policy holders (new section 2C). The insurance objective and the general objective have the same legal status. When the PRA is discharging its functions in relation to such PRA-authorised persons, it must act compatibly with both the general objective and the insurance objective and act in a way which the PRA considers most appropriate for advancing both objectives.
134.New section 2D provides that further objectives may be specified in relation to activities that become PRA-regulated activities by order under section 22A of FSMA (see commentary on section 9 below).
135.New section 2E requires the PRA to determine its strategy in relation to its objectives and from time to time (and at least every 12 months) review that strategy. The PRA must consult the court of directors of the Bank on a draft of the strategy and any revisions to it. The strategy and any revised strategy must be published.
136.New section 2F makes provision for how references in FSMA to the PRA’s objectives should be interpreted. For example, a reference in FSMA to the PRA’s objectives in the context of a function which is exercisable in relation to insurance (such as the rule-making power in new section 137E) is to be taken as a reference to the general objective and the insurance objective.
137.New section 2I requires the PRA to give guidance on how it intends to advance its objectives in relation to different categories of PRA-authorised persons or PRA-regulated activity. For example, the PRA must give guidance as to how it proposes to regulate PRA-authorised persons who accept deposits differently from PRA-authorised persons who effect or carry on contracts of insurance.
138.Definitions relevant to the PRA’s general duties are set out in new section 2J, including a list of the PRA’s “general functions”.
139.New section 2K provides that the PRA must maintain arrangements for supervising PRA-authorised persons. The concept of “supervision” encompasses matters such as monitoring the safety and soundness of PRA-authorised persons, forming a view on the person’s long term strategy for doing business, providing advice and, where appropriate, warnings, monitoring compliance with regulatory requirements and taking disciplinary action where appropriate.
140.New section 2L requires the PRA to make and maintain effective arrangements for consulting those who are PRA-authorised persons or who appear to the PRA to represent the interests of such persons (for example, relevant industry associations), and to consider representations made under those arrangements.
141.New section 2M provides that the arrangements maintained under section 2L must include the establishment and maintenance of a panel of persons, to be known as the PRA Practitioner Panel, to represent the interests of practitioners. The PRA must appoint the chair of the Panel. The approval of the Treasury is required for the appointment and removal of the chair.
142.New sections 2O and 2P make provision for the Treasury to arrange for an independent review of the economy, efficiency and effectiveness with which the PRA has used its resources, and access to documents and information for the purposes of such a review.
143.Part 1 of new Schedule 1ZB (The Prudential Regulation Authority) sets out requirements for the PRA’s constitution and imposes certain obligations on the PRA. Part 2 deals with the status of the PRA. Part 3 makes provision in relation to penalties and fees and Part 4 gives the PRA and those who work for it limited immunity from liability in damages and makes other miscellaneous provision.
144.Paragraphs 2 to 14 of new Schedule 1ZB make provision in relation to the constitution of the PRA.
145.The PRA must have a governing body consisting of:
146.The appointed members are appointed by the court of directors of the Bank with the approval of the Treasury. The appointment process and terms of appointment are designed to ensure the independence of the appointed members (paragraph 11). The majority of the governing body of the PRA are to be non-executive members (paragraph 8). For the purposes of determining the balance of the board, and for corporate governance purposes, the Governor of the Bank and the Deputy Governors, and any board members who are PRA staff (whether employees of the PRA or secondees from the Bank), are not to be treated as non-executive members (paragraph 9); this is to ensure a proper number of independent board members, and it is those members who will undertake the corporate governance roles reserved to non-executives. In addition, the chief executive of the FCA is not to take part in any firm-specific decisions made by the PRA (paragraph 5).
147.Paragraph 4 provides for the acts of the PRA still to be valid irrespective of a vacancy in the office of the ex-officio members of its governing body (those listed at (a) to (d) above) or any defect in an appointment of an ex-officio member or an appointed member. This is to prevent the PRA’s rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect.
148.Paragraph 16 allows the PRA’s functions, with the exception of its legislative functions and its functions in relation to the strategy under section 2E, to be delegated. The legislative functions set out in paragraph 16(3) include: rule-making; issuing codes and statements of principle under section 64 of FSMA; issuing statements of policy under section 69 of FSMA relating to the imposition of penalties, suspensions and restrictions on approved persons; issuing statements of policy under section 210 of FSMA relating to the imposition of penalties, suspensions and restrictions on authorised persons; giving directions under section 316 of FSMA that the general prohibition or certain FSMA provisions are to apply to members of Lloyds; giving directions under section 318 of FSMA to the Council of Lloyds; and issuing guidance under section 2I of FSMA.
149.Paragraph 17 requires the PRA to maintain satisfactory arrangements for recording decisions made in exercise of its functions and the safe-keeping of those records.
150.Paragraph 18 requires the PRA for each of its financial years to adopt an annual budget. The budget must be approved by the Bank. The PRA may, with the approval of the Bank, vary its budget. The budget, and any variations to it, must be published.
151.Paragraph 19 requires the PRA to report at least once a year to the Treasury on the discharge of its functions; on the extent to which its statutory objectives have been met; its consideration of its regulatory principles and the need to minimise any adverse effect on competition in the relevant markets that may result from the manner in which the PRA discharges its functions; and on such other matters as directed by the Treasury. The report must be accompanied by a statement setting out the remuneration of the members of the governing body, and any other information or reports the Treasury may direct. It must also include an account of the how the PRA has complied with the general duty to coordinate (section 3D), the use of the PRA powers of direction over the FCA (sections 3I and 3J), and how it has cooperated with regulatory bodies outside the UK. The Treasury is to lay the report before Parliament. Paragraphs 20 and 21 require the PRA to consult publicly on its annual report; the PRA must publish a report on its consultation, including an account of representations received.
152.Paragraph 22 provides that the Treasury may require the PRA to comply with any provisions of the Companies Act 2006 dealing with accounts and audit which would otherwise not apply to it. A Treasury direction may modify provisions of the Companies Act 2006 dealing with accounts and audit in their application to the PRA.
153.Paragraph 23 provides for the PRA’s annual accounts to be audited by the Comptroller and Auditor General; the National Audit Office carries out audit functions of the Comptroller and Auditor General. The Treasury must lay before Parliament the certified accounts of the PRA and the report of the Comptroller and Auditor General on them.
154.Paragraph 24 specifies that, in relation to any of its functions, the PRA is not to be regarded as acting on behalf of the Crown and its members, officers and staff are not be regarded as Crown servants.
155.The PRA is a company limited by shares; as it is not able to benefit from the exemptions available in section 60 of the Companies Act 2006 from the requirement to include “limited” in its name, paragraph 25 exempts the PRA from having to do so. Paragraph 26 provides for the Secretary of State to remove that exemption after consulting the Treasury, if it is inappropriate for it to continue. Similar provision was made in respect of the FSA by paragraphs 14 and 15 of paragraph 1 of Schedule 1 to FSMA.
156.Paragraph 27 provides that in determining its policy with regard to the level of penalties to impose under powers in the Act, the PRA may take no account of its expenses or anticipated expenses; there is to be no link or incentive to fund the PRA by levying penalties on the persons it regulates.
157.Paragraph 28 provides that the PRA, in respect of each of its financial years, pay to the Treasury its penalty receipts after deducting and retaining its enforcement costs. Sub-paragraph (2) defines “penalty receipts” for this purpose as any amounts received by the PRA by way of penalties imposed under FSMA. Sub-paragraph (3) defines “enforcement costs” for these purposes as the expenses incurred by the PRA in connection with the exercise of consideration of the exercise of its enforcement powers (as defined by sub-paragraph (4)) in particular cases or the recovery of penalties. The effect of this provision is that the PRA may retain from penalty receipts funds to cover its enforcement case costs. The general costs of the FCA’s enforcement capability which are not attributable to case work (e.g. the cost of senior management or enforcement policy work) would not be treated as an “enforcement cost”. Sub-paragraph (6) provides that the Treasury may give a direction to the PRA as to how it is to comply with its duty under sub-paragraph (1). Sub-paragraph (9) provides that the Treasury must pay into the Consolidated Fund any sums received under this paragraph.
158.Paragraph 29 requires the PRA to operate a scheme to ensure that penalty receipts which the PRA is, under paragraph 28, entitled to retain are applied for the benefit of PRA-authorised persons. The scheme must ensure that those who have become liable to pay a penalty to the PRA in any financial year do not receive a benefit under the scheme in the following year.
159.Paragraph 30 requires the PRA to consult on these arrangements.
160.Paragraph 31 provides for a rule-making power for the PRA to raise fees for what it does in the discharge of its qualifying functions. Qualifying functions means its functions under FSMA, the Act, the Banking Act 2009, the Insolvency Act 1986 and certain EU provisions which have been specified for the purpose by the Treasury. It may use the fees to meet its expenses, to repay borrowing incurred in connection with the commencement of the Act, and to maintain adequate reserves. Sub-paragraph (6) provides that the PRA may not take into account any penalties which it has received, or expects to receive, in setting the fees under FSMA. This will ensure that penalty setting policy is kept distinct from PRA budget setting.
161.Paragraph 32 provides that fees may not be charged when a person gives notice of their intention to exercise EEA passporting rights under Schedule 3 to FSMA, or to persons approved under Part 5 of FSMA.
162.Paragraph 33 provides immunity for the PRA and its members, officers and staff from liability in damages except where they act in bad faith or where damages are sought under the Human Rights Act 1998. This immunity applies where the PRA or its staff are exercising investigative powers by virtue of an appointment by the FCA or the Bank under sections 97, 166 to 169 or 284 of FSMA.
163.Paragraph 34 treats the actions of an accredited financial investigator who is an employee of the PRA or undertaking an investigation for the PRA as being done in the exercise or discharge of a function of the PRA. Financial investigators are accredited by the National Policing Improvement Agency.