OpinionFeb 12 2014

PRA proposes updates with fundamental rules

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In its supervisory approach documents that were published last year the Prudential Regulation Authority stated that it would streamline the handbook it had inherited from the FSA in order to align its content closer to its statutory objectives and the new threshold conditions.

In January the PRA issued the first in a series of consultations aimed at reshaping the handbook and creating a more concise rulebook. Consultation paper 2/14: The PRA rulebook presented proposals designed to change the principles for businesses, Financial Stability and Market Confidence Sourcebook and certain chapters of the supervision manual for PRA-authorised firms.

In particular the PRA proposed to replace the principles for businesses with fundamental rules that will apply to all PRA-regulated firms irrespective of size and business. As the principles are currently shared with the FCA, the PRA proposed that the fundamental rules would only relate to prudential matters. As with the principles, the fundamental rules will be high-level overarching requirements. The PRA proposed there should be nine fundamental rules. The first five are:

* A firm must act with integrity. Obviously this is a shortened version of principle one (a firm must conduct its business with integrity) but replacing the words ‘conduct of business’ to ‘act’ covers the PRA’s desire to capture all behaviour that could affect a firm.

* A firm must act with due skill, care and diligence. A shortened version of principle two (a firm must conduct its business with due skill, care and diligence). This is wider than internal arrangements and covers the everyday course of activities conducted by a firm.

* A firm must act in a prudent manner. This is new and means that a firm must demonstrate sound judgement and exercise caution. The PRA stated that this does not prevent a firm entering into speculative investments, but that such a firm would be required to take due account of all the risks and possible consequences for it before entering into such arrangements.

* A firm must at all times maintain adequate financial resources. This is similar to principle four (a firm must maintain adequate financial resources) but with the inclusion of ‘at all times’ which is in line with the Capital Requirements directive IV and proposed Solvency II requirements.

* A firm must have in place sound and effective risk strategies and risk management systems. The wording of part of this rule is taken from principle three (a firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems). Firms will need to accurately identify and understand the risks inherent in their businesses and ensure that there are robust structures for managing and reporting on these risks.

Simon Lovegrove is a lawyer with the financial services team at Norton Rose LLP.