Documents issued yesterday by thePrudential Regulation Authority (PRA) make clear that the UK regulator’s approach to the supervision of banks and insurance companies will see it use its powers to address “failings in culture” within firms.
Patricia Jackson, head of financial regulatory advice at EY, told The Forum for Regulatory Change: "The focus on culture by the PRA, with increased focus on using skilled person reviews to consider aspects and indicators of culture and requirements to address any issues, does mark a shift. It highlights areas like board expertise and incentives, but goes much further."
• Fundamental Rule 1: A firm must act with integrity.
• Fundamental Rule 2: A firm must act with due skill, care and diligence.
• Fundamental Rule 3: A firm must act in a prudent manner.
• Fundamental Rule 4: A firm must at all times maintain adequate financial resources.
• Fundamental Rule 5: A firm must have in place effective risk strategies and risk management systems.
• Fundamental Rule 6: A firm must organise and control its affairs responsibly and effectively.
• Fundamental Rule 7: A firm must deal with its regulators in an open and co-operative way, and must disclose to the PRA appropriately anything relating to the firm of which the PRA would reasonably expect notice.
• Fundamental Rule 8: A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with a minimum disruption of critical services.
Each document says “it is vital that boards and senior management understand the Fundamental Rules, the more detailed rules in the PRA Rulebook and the directly applicable EU regulations, and establish within their firms a culture that supports adherence to the spirit and the letter of the requirements.”
The PRA will take action against firms that are “managing the business only to the letter, or gaming the rules.”
The PRA’s two primary objectives are:
• A general objective to promote the safety and soundness of the firms it regulates, focusing on the adverse effects that they can have on the stability of the UK financial system; and
• In relation to insurance firms, to contribute to ensuring that policyholders are appropriately protected.
A secondary objective was given to the PRA in 2014, to promote effective competition. The PRA said that separate documents relating to this part of the PRA’s role will be published later.
The PRA’s approach to insurance supervision can be downloaded by clicking here.
The PRA’s approach to banking supervision can be downloaded by clicking here.