CP27/23 – The Prudential Regulation Authority’s approach to policy

Following a discussion paper in 2022 on its future approach to policy making (please see EventID 17460 in this context for more information), the Prudential Regulation Authority (PRA) has now published a follow-up consultation paper in this matter. The consultation paper builds upon the discussion paper in that it takes into account the feedback received by respondents and sets out a „final“ approach to policy making as deemed best fit for meeting future regulatory needs and challenges by the PRA. The approach would result in a new PRA policy document titled The Prudential Regulation Authority’s approach to policy which may be found in Appendix 1.
Specifically, the PRA proposes to set out the following key concepts / principles as they relate to policy making:
(1) The PRA’s objectives and regulatory principles and its approach to such objectives and principles: As far as the PRA’s objectives are concerned, the Authority notes
1. the promotion of safety and soundness in the UK financial market (primary objective),
2. the protection of policy holders (primary objective),
3. the facilitation of competition (secondary objective), and
4. the alignment with international standards (secondary objective)
as key priorities and goals of the regulator. To achieve these objectives, the regulator proposes to apply some overarching principles such as the application of proportionality in rulemaking thereby acknowledging differences in firms of all sizes or the achievement of good outcomes for customers. Besides these overarching principles, the PRA proposes to group all of its regulatory initiatives – current or future – along the noted four objectives and others (if needed), e.g. the implementation of the remaining Basel 3.1 requirements would be classified under (1) or (4). The aim of the classification is to increase regulatory efficiency, for example, by considering similar rule-making initiatives at the same time and by taking into account relating factors and issues.
(2) The PRA’s approach to international engagement and collaboration: To promote issues that are relevant globally – e.g. measures to combat climate change and or the setup of ESG reporting or rating standards – the PRA is currently engaging in and will continue to engage in various international initiatives such as the Network for Greening the Financial System (NGFS). Furthermore, the Authority plans to adopt all international policies and standards worth adopting, as international standards promote regulatory convergence and typically adherence by market participants, so the regulator. Furthermore, the PRA will continue to inform equivalent decisions by the HM Treasury. It will thereby take an outcome-based approach to determine whether or not the rules and regulations of a third country regulator may be deemed equivalent to those of the UK.
(3) A description of the PRA’s policy cycle from the launch of an idea to the final review: According to the PRA, any policy making should include three key components: transparency over what is being done and why, regulatory flexibility to adopt the most suitable measure to achieve an intended outcome (e.g. via regulation, policy statements, exclusion orders, etc.), and stakeholder engagement to ensure a high degree of acceptance of the measures being proposed or implemented. Having said this, the PRA provides an overview of and describes in detail the entire policy cycle, beginning with the initial need for regulatory adjustments, to the development of corresponding proposals which will be consulted on with stakeholders, to the implementation of a final policy via the issuance of a policy statement and corresponding regulatory amendments, to the final review of the regulatory initiative following implementation to evaluate how well the measures are working AND to evaluate how the costs have developed for firms compared to those projected.
(4) Delivering a first-rate PRA Rulebook: Finally, the last issued covered in the proposed new document (The Prudential Regulation Authority’s approach to policy) is the approach of the PRA to deliver „a first-rate“ Rulebook. This would primarily include measures to ensure that
– the Rulebook is easily accessible via a well-known, dedicated website;
– the Rulebook is well structured, in plain language, easy to comprehend; and
– the Rulebook is efficient in that it only contains „relevant“ policies and procedures, eliminating unnecessary and redundant ruling.
Details on some of the proposed initiatives to achieve these objectives are outlined in the paper.