UK: UK Regulatory Update

Last Updated: 11 April 2013
Article by Jonathan Rogers and Alix Prentice

Issue 6: Roadmap to PRA and FCA interaction

In this issue 6 of our step-by-step guides, we look at the roles and responsibilities of the PRA and FCA, and how they are going to co-operate not just when a firm is dual-regulated, but in policy making, information sharing, and taking enforcement action.

In issue 1, we set out the supervisory responsibilities of the two new regulators.  The PRA and the FCA will both be responsible for directly regulating firms, although their roles will differ.  The PRA will be responsible for the microprudential supervision of firms deemed 'significant' to the UK financial system, i.e., around 1,400 firms consisting of:

  • banks;

  • building societies;

  • insurers; and

  • systemically important investment firms.

The FCA will also supervise these "dual-regulated firms", as well as all others, for conduct of business purposes, and will also be responsible for the microprudential regulation all those firms not prudentially regulated by the PRA (referred to as "FCA authorised firms

So what's new?

  • Some firms are going to have two regulators. Those regulators will not conduct their supervisory activities jointly and will operate under separate rule books and according to their own policies.

  • The FCA and PRA will consult each other when considering taking significant actions against a dual-regulated firm, but the PRA may veto certain FCA regulatory actions in particular circumstances (i.e., if the PRA believes that the FCA exercising, or refraining from exercising, a power would threaten the stability of the UK financial system or result in the failure of a firm that would adversely affect the UK financial system).

  • The FCA may make recommendations to the PRA on specific actions to take in order to achieve FCA objectives, and the PRA is responsible for these on a "comply or explain" basis.

  • Co-ordination between the PRA and FCA will start at the top, and CEOs will sit on each other's board.

  • The two regulators will establish supervisory "colleges" for individual firms and groups that will meet regularly to identify risks and mitigating actions.

  • Co-ordination and jurisdiction are also the subject of two memoranda of understanding ("MOU") covering: (1) how the PRA and FCA will fulfil their statutory duty to co-ordinate when exercising public functions, including policymaking and supervision, and (2) market infrastructure issues and the supervision of members of post-trade financial market infrastructures (central counterparties and securities settlement systems).

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Information sharing

  • This will take place on request, or will be actively offered when one regulator comes into possession of information that would be of material interest to the other. Relevant thematic information will also be shared.

  • There will be routine information sharing on dual-regulated firms and groups, including capital and liquidity information (from the PRA) and findings on key conduct risks and material prudential risks in subsidiaries in groups with one or more dual-regulated firms (from the FCA).

Authorisation

  • This process will be led by the regulator responsible for the firm's prudential supervision.

  • The PRA will obtain FCA consent to the authorisation of a dual-regulated firm, and the FCA will consult the PRA before authorising a firm that is part of a group that includes a dual-regulated firm.

  • The FCA will maintain a single register of all authorised firms and approved individuals.

Change in control applications for dual regulated firms

  • For dual regulated firms, the PRA will be responsible for assessing and processing the application required to acquire or increase control in a firm, and will co-ordinate the administrative process. The PRA will consult the FCA before approving the application.

  • When there are multiple change in control applications within the same group of companies (for example, on a restructuring) the FCA must have regard to any decision of the PRA in relation to a change in control of a dual-regulated firm within that group when deciding whether or not to approve the change in control of any FCA authorised firm.

Respective roles of the PRA and FCA in processing change in control applications

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Scenario

PRA

FCA

1

Target is dual regulated.

Determines whether to approve.

FCA may make representations to the PRA on any relevant matter and object or impose conditions on money laundering / terrorist financing grounds.

2

Target is authorised by the FCA but a member of its group is dual-regulated.

PRA may make representations to the FCA on any matter and may impose conditions on the approval.

Determines whether to approve.

3

Target is authorised by the FCA and is not part of a group containing a dual regulated firm.

No role.

Determines whether to approve.

4

Target firm is authorised by the FCA.

Proposed controller is a dual-regulated firm.

PRA may make representations to the FCA on any matter and may impose conditions on the approval.

Determines whether to approve.

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Approved persons for dual regulated firms

Controlled functions for dual regulated firms will be split between the FCA and PRA as set out in the table below:

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PRA Controlled Functions

FCA Controlled Functions

Governing functions

CF1

Director

CF2 (PRA)

PRA Non executive director

CF2 (FCA)

FCA Non executive director

CF3

Chief Executive

CF4

Partner

CF5

Director of an unincorporated association

CF6

Small friendly society

Required functions

CF12

Actuarial

CF8

Apportionment and oversight

CF12A

With-profits actuary

CF10

Compliance oversight

CF12B

Lloyd's actuary

CF10a

Client assets

CF28

Systems and controls

CF11

Money laundering reporting

Significant management function

CF29

Significant management

Customer functions

CF30

Customer function

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· The PRA non-executive director function will capture the following significant non-executive roles:

o chairman;

o senior independent director;

o chair of the audit committee;

o chair of the risk committee

· Subject to the final bullet in this section, applications should be made to the regulator responsible for the particular controlled function. Firms will continue to use ONS to submit applications.

· The PRA can only grant approval for a controlled function with the FCA's consent. This means that an applicant may be subject to information requests from both regulators, even if they have only applied for a PRA function. Interestingly, there is no reciprocal obligation for the FCA to obtain the PRA's consent.

· In the cases specified below, a single application can be made to the PRA for a particular function which will also cover the relevant individual for certain FCA functions (but only if the applicant has specified so in the application). In such cases, the relevant individual will receive a single permission for the PRA function which will be deemed to cover the 'ancillary' FCA functions.

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PRA application in respect of:

PRA application may also cover following FCA functions:

CF2 (PRA)

CF2 (FCA)

CF3

CF1, CF4, CF5, CF6, CF8

CF28

CF1, CF4, CF5, CF6

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Passporting

· PRA will be lead regulator for dual regulated firms passporting out of the UK, and the FCA for FCA authorised firms.

· For incoming firms, the PRA will be the lead regulator for notifications relating to EEA firms passporting under EU banking and insurance passports. Likewise, the FCA will be lead regulator where the incoming firm is passporting under MiFID, IMD or UCITS.

Taking regulatory action

· The FCA and PRA will consult in advance of taking significant regulatory action.

· Significant regulatory action includes:

o deciding to revoke or vary a permission;

o imposing requirements;

o withdrawing approved person status;

o issuing Warning or Decision Notices;

o applying to incept insolvency or administration proceedings; and

o waiving a rule that may be materially relevant to the other regulator's objectives.

· The FCA and PRA will consider whether to co-ordinate on investigations into dual regulated firms or groups.

· The FCA is responsible for taking enforcement action against those undertaking regulated activities without the proper authorisation. When those activities involve deposit-taking, insurance or other activities materially related to financial stability, the FCA will consult the PRA before starting an enforcement action.

· The FCA also takes the lead on financial crime, with the PRA alerting it to any evidence it believes material. The FCA will, in turn, alert the PRA to any financial-crime related investigations involving dual-regulated firms.

Fees

· Each regulator will be funded via its own levy, but the FCA will collect fees on behalf of the PRA.

· On 25 March, the FCA published its Business Plan for 2013/2014. This includes a total funding figure of £432.1 million, which while a reduction on the FSA's 2012-13 budget figure of £578 million, does mean that dual-regulated firms are going to be looking at a significant fee hike (the PRA has not yet published its budget).

Addressing the risk of underlap and overlap

Two regulators regulating the same business leads to obvious risks of underlap and overlap. A number of mechanisms are in place to address these risks:

· CEOs on each other's boards;

· Statutory duties to co-ordinate, specifically when: (i) one regulator is considering action that may have a material adverse effect on the other's achievement of its objectives; (ii) matters of common regulatory interest arise in which the other has relevant information or expertise; and (iii) necessary to ensure efficient, proportionate processes.

· The PRA and FCA make their own rules and policies, but should consult each other when deliberating policies that might have a material effect on the other's objectives and look to avoid incompatible requirements.

· The two regulators are required to avoid taking conflicting regulatory actions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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