The Building Societies Association represents mutual lenders and deposit takers in the UK including all 45 UK building societies. Building societies have total assets of nearly £330 billion and, together with their subsidiaries, hold residential mortgages of over £230 billion, 18% of the total outstanding in the UK. They hold over £230 billion of retail deposits, accounting for 19% of all such deposits in the UK. Building societies account for about 28% of all cash ISA balances. They employ approximately 39,000 full and part-time staff and operate through approximately 1,600 branches
This consultation marks the first stage of the two-year transfer of existing legacy prudential rules into a new PRA handbook. Nine “Fundamental Rules” (FRs) will form the foundation of the regulator’s approach to, and rules on, prudential matters.
The FRs are broad, overarching requirements that apply at all times, even in the absence of detailed rules. We note that the PRA may enforce against firms for not meeting the FRs, even when no detailed rule exists.
Members’ concern with the proposals is focused on two areas: supervisory statements and section 166 reports:
1. Supervisory statements
We welcome the introduction of supervisory statements. They should ensure guidance is found in one place only and is generally static, providing some continuity. We trust that they signal an end to regulation by speech and by disconnected letter.
Supervisory statements have the potential to be a more effective vehicle to demonstrate proportionality than the detailed rules. We have seen a few examples in the statements published so far, which we welcome. But this practice is not consistent or widespread. We think it should be. It could be argued that this variability shows regulators automatically have large complex plc banks in mind when considering rules, rather than the vast majority of its firms which are small. A change to a “think small first” mindset would go some way to address this failing.
Some members are uncomfortable with the concept of supervisory statements. Chapter 1.6 of the consultation defines these as “guidance that the PRA judges as necessary to support firm judgements and clarify the PRA’s expectations”. This suggests that they are more an adjunct of the rules rather than actual guidance which has in the past allowed a degree of flexibility in the interpretation of the rules. Confirmation may be found in chapter 2.3 of the consultation which says supervisory statements will be used “proportionately … to explain clearly and concisely the PRA’s expectations, where it is not possible to make rules that fulfil the same function”. There is a concern that this loss of actual guidance could leave firms in some instances without an explanation of how they should adhere to the rules.
2. Section 166 reports
We note the four new rules proposed, which are claimed to reflect current guidance. The rules are focused on the operation of the report, rather than the contents of the report itself:
provide the PRA with information about the estimated and final cost of the skilled person report.
ensure the contract with the skilled person permits the skilled person to provide the PRA, if requested to do so, with interim and draft reports, source data, documents and working papers as well as specific information about the planning and progress of a report.
provide the PRA with a copy of the draft contract between the skilled person and firm before the contract is executed.
ensure that a skilled person delivers a report or collects or updates information in accordance with the terms of the skilled person’s appointment.
Implicit in these rules is a role of co-client for the PRA. Essentially, the regulator can determine the scope and direction of the report once it has been commissioned by instructing the skilled person directly. The firm consequently loses control not only over the report itself but also over the costs of the report. One of the key criticisms of section 166 reports is they duplicate regulatory costs for firms – they pay once through regulatory fees and again through section 166 reports. If the PRA does wish to influence a report once its scope has been agreed, we believe it should pay the full costs of any additional work it commissions.
Click here to read the consultation paper.