On 25 January 2024, HM Treasury published a report by the Prudential Regulation Authority (PRA), setting out the PRA’s conclusions following its 2023 review of the ring-fencing rules. The scope of this review was limited to the rules set by the PRA and did not cover the statutory regime. The report itself is not intended to create policy but examines the PRA’s ring-fencing rules and identifies any areas for improvement or enhanced protection.
The PRA concluded that, overall, the ring-fencing rules are performing satisfactorily, the rules are well understood by firms and there are no significant gaps in the rules’ coverage. However, the PRA has identified several areas where it intends to consult on changes to the ring-fencing rules in due course following firms’ responses to the its questionnaire (found at Annex B of the report) and its own review more generally. The PRA will do so following an exploration into the costs and benefits of the options it has identified.
Provision of services
The PRA identified potential overlap between the ring-fencing rules on continuity of provision of services (Rule 9, PRA Rulebook, Ring-fenced Bodies) and the rules relating to operational resilience and securing operational continuity in resolution. The PRA considers that the ring-fencing rules could be better aligned and focus more directly on the core activities (e.g., the regulated activity of accepting deposits) and other essential business of Ring-fenced Bodies (RFBs). The PRA offers several possible options to modify Rule 9, such as making greater use of individual modifications or amending guidance through supervisory statements to clarify the scope of Rule 9. Any modifications will require the PRA’s further consideration before it publishes a consultation to ensure the safety and soundness of firms and the PRA’s compliance with its statutory obligations are not compromised.
Arm’s length transactions
The PRA considers the rules on this matter to be essential and any material amendments would be difficult given the regime’s focus on operational independence of RFBs and the clear legislative basis of the rules. However, the PRA considers that there may be a more proportional approach to the frequency with which an RFB must review its internal policies on arm’s length transactions.
The PRA does not consider any significant changes to the governance arrangements under the ring-fencing rules to be appropriate. However, the PRA notes that rules in this area have been extensively tailored to individual RFBs. To the extent further changes may be introduced, the PRA may consider maintaining individual modifications for longer periods on a case-by-case basis. This would reduce the frequency of compliance action and reduce the administrative burden on firms. The PRA will also consider re-assessing the level at which some governance rules apply, potentially applying rules at a sub-group level as opposed to each individual subsidiary, thus simplifying requirements on firms.
The PRA identified one regulatory report, RFB005 – Joint and Several Liabilities Arising from Taxes: reports on VAT and bank levy data for group and RFB, which it considers may be unnecessary given that the materiality of the amounts that have been reported has been low and that other regulatory processes such as Pillar 2 ICAAP also allow for monitoring of tax risks.
Lastly, the PRA identified several areas where supervisory statements could be brought up-to-date or provide clarification to firms. For example, the definition of “governing body” in the PRA rules is not intended to extend to committees of management below board level. The PRA intends to clarify this to firms and confirm this via through a supervisory statement.
The PRA intends to consult on changes to its ring-fencing regime, including those summarised above, so more can be expected on this topic in due course.