IEO evaluation of the PRA's approach to the secondary competitiveness and growth objective

Foreword from the Chair of Court

In August 2023, the Prudential Regulation Authority (PRA) gained a new statutory requirement – the secondary competitiveness and growth objective (SCGO). Court believes that achieving the PRA’s primary objective of maintaining a stable financial system remains the most important way that we can support UK growth and competitiveness. But this new objective puts added impetus on ensuring that the PRA is thinking about how it can support competitiveness and growth in the way that it goes about meeting its primary aim. We have seen considerable focus on the SCGO inside and outside the Bank ahead of and since its introduction and it is important that we have the right structures and approach in place to deliver it effectively. Reflecting that, in December 2023, Court commissioned the Independent Evaluation Office (IEO) to review whether the PRA is ‘set up for success’ with respect to the SCGO.

The IEO’s report found numerous positive aspects to the PRA’s approach to its new objective. The PRA has invested in its approach to the SCGO including hosting a conference to bring together and develop thinking on this topic, explaining its views in public speeches and a consultation paper, developing and delivering training for staff in the policy departments, and putting in place a process to ensure the objective is considered during policymaking. Overall, and to support these positive steps, looking forward the PRA should ensure that its vision is clearly articulated so that stakeholders can understand the extent of change that should flow from this new objective, and spell out what the PRA will do differently in terms of its approach to its work.

The IEO’s recommendations provide a foundation for doing so. They make nine detailed recommendations, grouped into four broad themes: clarifying the PRA’s vision and desired culture for supporting competitiveness and growth across all its activity; ensuring staff across the PRA have a consistent understanding of the new objective, and what they have to do to support it; harnessing intelligence from inside and outside the Bank to help inform policy making and prioritisation; and refining transparency and oversight mechanisms to build trust in the PRA’s approach.

At our 22 May 2024 meeting, Court welcomed the PRA’s commitment in taking forward these recommendations. We will monitor their implementation as part of the IEO’s follow-up framework. The PRA will report on progress in implementing the recommendations through its annual reporting.

David Roberts, Chair of Court
July 2024

Executive summary

The Bank of England has responsibility for the prudential regulation and supervision of around 1,500 banks, building societies, credit unions, insurers and major investment firms. The part of the Bank that carries this out is the PRA.

The PRA’s objectives are given by Parliament and set out in law. Since its creation in 2013, the PRA has had two ‘primary’ objectives: a general objective to promote the safety and soundness of all the firms it regulates, and for insurance firms, contributing to the protection of insurance policyholders.

Since 2014, the PRA has had a secondary objective of facilitating effective competition in the markets served by the firms the PRA regulates, known as the Secondary Competition Objective (SCO).

Last year, as part of updating how financial services regulation operates in the UK, the PRA was given an additional secondary objective. This is known as the Secondary Competitiveness and Growth Objective (SCGO). It requires the PRA to facilitate the international competitiveness of the UK economy and its medium to long-term growth (subject to aligning with international standards). It came into effect in August 2023.

Given this new responsibility for the PRA, in December 2023, the Bank’s Court of Directors (Court) commissioned the IEO to evaluate whether the PRA is ‘set up for success’ with respect to the SCGO.

The IEO approached this by asking whether the PRA is clear on what it should do to advance the SCGO; whether it has embedded this consistently and effectively across the PRA; and whether the PRA and its senior leadership can monitor this and be held to account. The IEO’s dedicated project team conducted an extensive evidence-gathering exercise, including reviewing PRA documents, conducting around 90 interviews with people across the Bank and externally (including firms, industry bodies, international academics and policymakers), surveying PRA staff and speaking with focus groups and regularly consulting with an internal Senior Advisory Group comprising senior Bank staff. The IEO’s resultant findings and recommendations were approved by the Bank’s Court on 22 May 2024.

Overall, the IEO’s work found numerous positives. The PRA has invested in its approach to the SCGO including: hosting a conference to bring together and develop thinking on this topic; developing and delivering training for staff in the policy departments; and putting in place a process to ensure the objective is considered during policymaking. PRA senior leaders have delivered speeches explaining the PRA’s general approach and the PRA has explained in publications how the SCGO has been considered in the flow of new policies. Additionally, competitiveness and growth issues appear to be receiving airtime and gaining traction at all levels of the organisation, including in discussions at the PRA’s Supervision, Risk and Policy Committee (SRPC) and Prudential Regulation Committee (PRC). Key aspects of the SCGO are well understood across policy staff, and the PRA’s framework supports the consistent treatment of competitiveness and growth issues in different types of policy initiative, as well as a broadly appropriate approach to prioritisation. The IEO also found evidence of proactivity, particularly in the teams that handle applications from firms seeking PRA approvals and authorisations, who are considering the SCGO when reviewing their policies and procedures with a view to increasing their operational efficiency. The IEO also saw evidence that its recommendations made previously, in the context of the SCO, had been implemented in the PRA’s current approach to the SCGO.

Nevertheless, the IEO’s work suggests that there are some aspects that the PRA should be considering further. This is not surprising given that the PRA is still at an early stage of delivering on the new objective. Our work suggests that further articulation of the PRA’s vision and desired supporting culture should help clarify internally and externally the extent of change that should flow from the new objective. The IEO found scope to embed the SCGO more firmly into relevant PRA processes, thereby helping to maintain a consistent and appropriately proactive approach to the objective throughout the organisation. There is also an opportunity to refresh the PRA’s strategy on external liaison and communication on SCGO issues, as well as to review the listening mechanisms currently in place so that intelligence from inside and outside the Bank informs policymaking. The IEO additionally identified opportunities to ensure that external reporting supports effective accountability and to strengthen governance and oversight from the PRA’s leadership of how the SCGO is being embedded.

Table A sets out our nine detailed recommendations, grouped into four broad themes, to address these findings.

Context for the evaluation

As part of the Financial Services and Markets Act 2023 (FSMA 2023), the PRA was given a new secondary objective to:

This is known as the SCGO and it came into effect on 29 August 2023. The Financial Conduct Authority (FCA) was given the same objective, relative to its other objectives, at the same time. The definition is set out in full and explained in Box A. The SCGO was given to the PRA as part of the restructuring of the powers of the regulators following the UK’s departure from the European Union (EU).

FSMA 2023 explicitly describes this as a ‘secondary objective’. To put that in context, the PRA has two primary objectives: promoting the safety and soundness of PRA-authorised firms; and in relation to insurers, promoting policyholder protection. The PRA also has an existing secondary objective, of facilitating effective competition in the markets for services provided by PRA-authorised persons. We know this as the SCO.

The SCGO has to be understood and pursued by the PRA within this framework. It is not ‘superior’ to the SCO – this must be pursued by the PRA as well as the SCGO. And both secondary objectives are subordinate to the primary objectives.

This hierarchy of objectives means that they are not ‘in tension’ and cannot be traded-off against each other. The SCGO applies only when the PRA is advancing the primary objectives. The Government has made it clear that this ‘does not detract from [the PRA’s] existing objective of ensuring that UK firms remain safe and sound’.^{footnote [2]} And the PRA too has stated that it sees safety and soundness as complementary to competitiveness and growth. For example, the Deputy Governor for Prudential Regulation (DGPR) has said that ‘financial stability is the single most important ingredient of competitiveness in financial services’.

While the SCGO gives the PRA a statutory objective on competitiveness and growth, the PRA’s previous mandate required it to take competitiveness and growth considerations into account. For example, ‘remit letters’ sent by the Chancellor to the PRA have said that the PRA should have regard to competitiveness and growth.^{footnote [3], footnote [4]} The PRA also had to ‘have regard’ to acting proportionately (so that the burdens it imposes should be proportionate to the benefits), to carrying out its activities in a way that supports firms to grow, and to providing simple and straightforward ways to engage with firms. And – until it was repealed by FSMA 2023 in order to make room for the SCGO – the PRA also had to have regard to the desirability of the sustainable growth of the UK economy.^{footnote [5]}

There is, therefore, some continuity and complementarity between the SCGO and the PRA’s previous mandate. The introduction of the SCGO, however, marks a step-change by elevating competitiveness and growth to the status of an objective, which the PRA agrees requires it to take a proactive approach.

Finally, an important point of application: the SCGO formally applies when the PRA is ‘discharging its general functions’. ‘General functions’ has a specific meaning in law. It means, essentially, the PRA making rules and setting the general policies and principles by which it carries out its statutory functions.^{footnote [6]} This means that most firm-specific decisions and management matters would not be included within its scope. Reflecting this, an important aspect of the IEO’s evaluation has been about how the PRA can strike the right balance between ensuring it has a culture that supports the SCGO, while also ensuring that the SCGO does not improperly or inappropriately drive decisions that are outside the scope of its application, as set in statute.

Rationale for this evaluation

The Court of the Bank of England (Court) recognises that the SCGO is an important new feature in the PRA’s legal framework, and one upon which there is considerable focus, from PRA leadership as well as external stakeholders. Court therefore commissioned this report in December 2023 to assess whether the PRA was ‘set up for success’.

Court and the IEO recognise that the SCGO has only been in effect for a short time and therefore the PRA only has limited experience of the SCGO in practice. However, like all IEO evaluations, this evaluation looks to the future, taking into account the work done by the PRA to date, and that which is still in progress.

PRA engagement with the SCGO

The PRA’s first Annual Report into its secondary objectives is being published alongside this evaluation. This evaluation does not replicate or replace the PRA’s report. However, the IEO highlights here a number of steps the PRA has taken, because these form a backdrop to our overall evaluation, and specifically to the themes we have identified and the recommendations we are making.

The PRA has been actively engaging with the SCGO, both before it became law and since. In the public arena, the PRA opened up debate in this area through its discussion paper (DP) of September 2022 DP4/22 – The Prudential Regulation Authority’s future approach to policy, on its approach to policymaking.^{footnote [7]}

It followed this by holding a conference (and publishing a summary afterwards) in September 2023. This was attended by over 250 participants from academia, other regulators and industry. The conference was accompanied by two Staff Working Papers (available on the conference website) to stimulate debate and understanding.

In December 2023, the PRA then published a more detailed consultation paper, CP27/23 – The Prudential Regulation Authority’s approach to policy. This sets out how the PRA considers it can advance competitiveness and growth and how it will approach the interpretative question of alignment with international standards, embedded within the SCGO text itself.

Alongside that CP, and following discussions with HM Treasury (HMT), the PRA also set out a list of ‘SCGO metrics’ that it will report on publicly to support its accountability on the SCGO.

These publications have been supported by public speeches by PRA senior leadership. The PRA has said that it can contribute to competitiveness and growth through three main channels: (i) efficient capital allocation; (ii) ‘ability to sell’, by facilitating UK firms competing in international markets; and (iii) ‘ability to attract’, by facilitating international firms operating in the UK. Supporting these, it identifies three ‘foundations’: (i) maintaining trust in the PRA and the UK prudential framework; (ii) adopting effective regulatory processes and engagement; and (iii) adopting a responsive approach to UK risks and opportunities.

The PRA Business Plan likewise identifies a number of actions which, in principle, would visibly advance the SCGO. In the foreword to the 2024 PRA Business Plan, DGPR expresses his commitment to the success of this new SCGO. Before the Treasury Committee, PRA senior leaders have expressed their support for the objective, and they have acknowledged its importance to the PRA and how this marks a point of change.

The PRA has committed to increasing external engagement, announcing it will pilot a roundtable with stakeholders interested in innovation. The PRA has also committed to making its rulebook more accessible and streamlined.

In terms of policy, the PRA has identified a number of areas (such as changes to the Bonus Cap) in which – through prioritisation and execution of the policy – the SCGO has influenced its decisions. Policy decisions taken at the PRA’s senior governance committees are set out in papers with a ‘box’ that prompts consideration and explanation of relevant SCGO matters. The overall prioritisation of policymaking activity – which finds reflection in the PRA Business Plan 2024/25 and is discussed quarterly by PRA senior leadership – takes place through a framework that incorporates competitiveness and growth considerations. As a step towards building a greater understanding of how prudential regulation can facilitate competitiveness and growth, some research work is scheduled within the Bank.

The PRA has also taken a number of actions to help staff understand the implications of the SCGO. Setting the tone from the top, the PRC has discussed this objective and DGPR has – within his personal performance objectives – an objective to embed and progress the SCGO. The Prudential Policy Directorate (PPD) has prepared mandatory training on the new SCGO for all its staff. SPRC has considered a staff paper on what the SCGO means for supervisors. A number of actions are underway to follow on from this, such as updating internal guidance for supervisors.

Box B explains the SCGO within the PRA’s organisational structures and governance.

Approach to the evaluation

Court commissioned the IEO to evaluate whether the PRA is ‘set up for success’ with respect to its new SCGO in December 2023. Court also requested the IEO publish its evaluation alongside the PRA’s first report on actions taken to implement the PRA's new SCGO. The team reported its findings to Court on 22 May 2024.^{footnote [8]}

The evaluation considered a set of questions and benchmarks (‘what good looks like’) to explore the overarching research question. These were:

• external clarity: is the PRA’s approach to the SCGO broadly well understood externally?
• internal embedding: does the PRA consistently apply its approach to the SCGO across its functions where relevant?
• oversight and accountability: can PRC and the PRA senior leadership team monitor the application of the SCGO, reflect it within its policy priorities, and be held to account externally?

The IEO conducted an extensive evidence-gathering exercise, drawing on four main sources:

• research: desk-based reviews of key internal documents, relevant case studies where the SCGO has been considered and observation of policy meetings;
• interviews: around 90, conducted across the Bank and externally, including all PRA directorates, a selection of regulated firms, industry bodies, peer regulators, international organisations, academics, public figures and HMT;
• staff engagement: we conducted a survey open to all PRA staff and received 270 responses, well-distributed across the organisation. We followed that up with four targeted focus groups with different areas to further explore how the new objective was being implemented; and
• advisors: we regularly consulted with an internal panel of senior Bank staff, the Senior Advisory Group.

Themes and recommendations

Theme 1: Clarifying the PRA's vision and desired culture for supporting competitiveness and growth across all its activity

The PRA has put considerable effort into defining and communicating its vision for how the PRA can advance the SCGO through its policies. Following public consultation, and informed by public debate (including by discussions at an international conference that it hosted in September 2023), the PRA has developed a framework for how prudential regulation can support the competitiveness and growth objective.^{footnote [9]} PRA senior leaders have delivered several speeches to articulate emerging thinking and the intended approach to the new SCGO. We observed that internal and external stakeholders had a strong understanding of the PRA’s core messages. These include the key point that the primacy of the PRA’s safety and soundness and policyholder protection objectives continues with the SCGO in place, that financial stability is a necessary condition for sustainable growth and that high regulatory standards support the international reputation of the UK and its firms. Interviewees supported the PRA’s position that it will not compromise on safety and soundness to engage in a ‘race to the bottom’ on standards to advance competitiveness.

However, many of our external interviewees also drew attention to the PRA’s messaging that there would be significant change to the PRA’s approach as a result of the introduction of the new SCGO, in terms of mindset, regulatory engagement and responsiveness. But they had not yet seen a significant change in behaviour, or a clear articulation of the culture the PRA would adopt in order to support it. We provide two recommendations to address these areas.

Recommendation 1: Further clarify the PRA’s vision for advancing competitiveness and growth, including how it will affect policymaking priorities

The PRA has committed to a proactive approach to the objective, and has prominently set out how individual policies have, and its pipeline of future policies will, advance the SCGO. In its consultation on its approach to policy, it has set out the transmission channels through which it, in principle, considers the actions of the regulator can affect competitiveness and growth, and the three regulatory foundations where direct action can activate these channels. Every time the PRA consults publicly on potential changes to its policy and rules, it sets out details of how it has considered the SCGO and taken it into account. These consultations, in the form of a published CP, are often supported by other, consistent, communications such as speeches by PRA senior leaders.

However, stakeholders inside and outside the PRA were unclear on the PRA’s broader vision for advancing the SCGO. Several indicated that a fuller vision was needed, covering how the SCGO will inform policy prioritisation, supervisory engagement and the PRA’s overall approach to its work. This included how the PRA would maintain a ‘thought leadership’ position in the international regulatory community – which stakeholders viewed as important – in light of the SCGO. Although the UK is no longer a member of the EU, many standards are set or discussed at international level. For example, the BCBS, the International Association of Insurance Supervisors and the Financial Stability Board are all international bodies which the PRA actively engages with, and whose standards and guidelines influence the policies and rules made in the UK and other jurisdictions. There was interest in how the PRA would prioritise between: (i) updating the large ‘stock’ of existing rules made prior to the introduction of the SCGO; and (ii) focusing more on the emerging ‘flow’ of policy opportunities (eg in emerging technologies and business models). Many industry stakeholders preferred to see targeted action on selected priority areas. We also heard a desire to understand whether the PRA would focus policy development in sectors where the UK has an existing comparative advantage or facilitate improved performance in sectors where the UK underperformed other jurisdictions. One stakeholder suggested the PRA should signal action through a ‘flagship’ policy bringing the SCGO to life, like ‘Strong and Simple’ has done for the SCO.

While the IEO is not endorsing any particular approach, the PRA should consider these suggestions as part of articulating its future vision for delivering on the SCGO. Following on from this vision, the PRA should clarify externally how the SCGO is factored into its broader strategy and policymaking prioritisation decisions.

In developing that vision, the PRA should consider co-ordinating with the wider ecosystem of financial and digital regulators to ensuring complementarity of regulation across developing sectors. The Competition and Quantitative Impact (CQI) team plans to proactively engage with other areas of the Bank, including parts of the Markets and Banking, and Financial Stability areas where there is some complementarity, even though the SCGO does not apply in those areas (Box B). It would also be beneficial to co-ordinate externally, with the FCA and with HMT, in developing the strategy that flows from this vision. This is important because in interviews industry stakeholders tended to aggregate the impacts of PRA and FCA regulation on competitiveness and growth.

Recommendation 2: Set out the culture and behaviour the PRA wants (and does not want) in its day-to-day activities, to support the SCGO

Under statute, the new SCGO applies only when the PRA exercises its ‘general functions’ of rule and policymaking. However, the PRA has spoken about how it can support competitiveness and growth by adopting effective regulatory processes and engagement, and how the mindset of the PRA needs to evolve to support the new objective. How attitudes and behaviours, particularly in its interactions with firms, will be affected by the new objective is a point of ambiguity for external stakeholders.

There are notable examples of areas where the PRA has proactively enhanced interactions to be more open, accessible and responsive with firms. We heard a number of positive examples on engagement on technical issues (such as hosting roundtables to assist firms submitting models to the PRA for approval) and greater responsiveness (such as, efforts to accelerate processing times on applications). However, this level of proactivity was not evident in all areas. A more co-ordinated and strategic approach could better align with the foundations the PRA has identified for advancing the SCGO.

The PRA should, therefore, further set out, both internally and externally, the type of culture that will support the implementation of the SCGO, and what behaviours it expects its staff to adopt. This would support the delivery of the objective and help stakeholders understand what changes they can expect from the PRA, while reducing ambiguity around the extent to which the SCGO may influence the supervisory approach. By articulating the scope of the objective and changes the PRA will make in relation to its day-to-day engagement with firms, and where it will not make changes (eg supervisory decisions), the PRA will be better able to align the public expectations it has set with its expectations it has of how staff should behave in support of the SCGO. Reflecting the cultural change required, the PRA could consider capturing behaviours and tasks related to the SCGO in staff objectives. We noted that DGPR has such an objective, but stakeholders inside and outside the Bank suggested that this should cascade throughout the organisation.

Theme 2: Ensuring staff across the PRA have a consistent understanding of the new objective, and what they have to do to support it

The PRA has taken strong steps to embed SCGO considerations into the policymaking process. The PRA’s current model focuses on ensuring staff in PPD – which has primary responsibility for policy development – effectively consider the SCGO. They receive training, provided by the CQI team in PPD. Authors of policy papers for key committees are required to set out considerations relevant to secondary objectives in their papers, with a box on the paper template acting as a further prompt, and the IEO has seen evidence of the SCGO being considered in discussions at key committees. The Bank’s Legal Directorate is also well set up to engage and provide support during these committees.

However, the PRA policy process also envisages a role for supervisors, and the PRA considers that regulatory engagement and responsiveness – which can be relevant to many parts of the PRA – is a foundation of competitiveness and growth. We found there is still more to be done to further fully embed the objective – and in understanding of its limits – in the broader PRA, and so make two recommendations in this respect.

Recommendation 3: Extend a version of training to supervisors and authorisation teams, making clear what they are (and are not) expected to do to advance the new objective

As set out in Box B, all areas of the PRA have some engagement with the SCGO, but training so far has been focused on PPD staff. There have been some good examples of the PRA engaging the SCGO within supervisory and authorisation directorates, such as townhalls and upcoming updates to internal guidance documents. However, at the time of writing, there had been no mandatory or targeted training in these areas.

It was therefore unsurprising that survey results and focus groups revealed the widest understanding gaps in relation to the SCGO in supervision and authorisations. Clarifications are required to avoid the risk of supervisors and authorisations staff over or under-applying the SCGO. For example, a considerable proportion of supervision and authorisations staff surveyed thought it applied beyond the PRA’s general functions, such as to firm specific decisions. Additionally, a number of supervisors responding to our survey said that firms had raised the SCGO in engagements. It is important that supervisors are able to deal with firms’ questions and understand their own responsibilities in terms of passing on relevant points from these discussions to PPD (Recommendation 5).

While townhalls and planned forthcoming updates to internal advisory documents^{footnote [10]} are all good first steps, the IEO judges that more is needed to land the messages about the implications of the SCGO for PRA staff across all areas, particularly in supervision, to clarify areas of ambiguity around whether to apply the SCGO outside rulemaking. This includes when they should and, just as importantly, should not be acting with reference to the SCGO – ie when making firm-specific decisions that are not carrying out a ‘general function’ and their responsibilities in gathering intelligence from firms to inform policymaking. We therefore recommend that the PRA extend a shorter, tailored version of the training to relevant PRA staff (especially supervisors and authorisations staff), clarifying their responsibilities.

Recommendation 4: Update training for policy teams and other key contributors to clarify ambiguities and facilitate consistent application of the SCGO

The training developed for policy teams in PPD is an impressive starting point. The PPD training provides a sophisticated exploration of many of the key theoretical ways in which the PRA should consider the SCGO in policymaking this, it sets out where and how the objective applies and relates to existing PRA initiatives. As the training is mandatory for PPD, it also gives staff a direct engagement with the central team. This has resulted in most PPD staff responding that they either ‘strongly agree’ or ‘agree’ when we asked whether they know who to reach out to and where to find resources if they need help or information relating to SCGO. The training has been praised by staff in focus groups and survey results. The IEO also saw evidence that recommendations made by the IEO in its 2016 evaluation of the PRA’s SCO had been implemented in the PRA’s current approach to SCGO training.^{footnote [11]}

However, we found policy teams could benefit from further steers on points of interpretation of the SCGO. For example, articulation of the scope of the SCGO should be clearer and more prominent. Evidence from our staff survey suggests that there remain ambiguities in understanding the interplay between primary and secondary objectives, the scope of the SCGO and how to interpret ‘international standards’.

Current training should be refreshed to clarify such ambiguities and extended to other key staff whom the PRA considers to have an important role in applying the SCGO. Future planned updates to training should include illustrative practical case studies to help explain how the SCGO is considered in relation to: (i) primary objectives; (ii) relevant international standards; and (iii) how changes can be made in respect to existing standards. This will help facilitate an informed and consistent starting point, at all levels. As the PRA’s model relies heavily on policy teams and senior staff in other areas for making judgements about when to apply the SCGO, it is important they also receive training. While we did not survey decision-makers as a cohort, the PRA may wish to consider doing so to ensure that they are appropriately supported.

Theme 3: Harnessing intelligence from inside and outside the Bank

The Bank has established mechanisms for gathering intelligence, particularly from industry, to help inform policymaking. There are several different types of PRA policy publications, including DPs used to stimulate debate on issues about which it is considering making rules or setting out expectations and CPs, which are the formal documents by which the PRA sets out draft proposals and invites comments from the public. These allow the PRA to formally gather views from industry to inform policy. The PRA also gathers intelligence from industry through its statutory panels and ad hoc roundtables.

Given the importance the PRA has placed on effective regulatory engagement as a foundation of how the PRA can support competitiveness and growth, it is important to ensure that voices from outside the PRA and outside the perimeter of PRA-regulated firms are feeding into its strategy and approach following the introduction of the SCGO. There are opportunities for the PRA to build on these listening mechanisms, and we make three recommendations to support this.

Recommendation 5: A team should champion the SCGO, co-ordinating and building on existing networks so that intelligence from inside and outside the Bank informs policymaking

The PRA has established a centre of expertise to help assist policymakers with SCGO considerations within the existing PPD CQI team. As well as developing and delivering training, the CQI team is available to help policy leads think about how the SCGO applies in their policy area. There is evidence of policy leads reaching out to them for advice at the early stages of policy development, as well as when drafting papers for decision-making committees. The PRA is also establishing mechanisms for sharing information between PPD, SRS, ARTIS, UKDT and Insurance Supervision, such as a monthly call between the CQI team and representatives from those other teams. The PRA’s approach to policymaking states that supervisors have a role in identifying thematic issues from firms to inform policymaking. Some supervisory areas have also established policy implementation hubs to strengthen links and help ensure consistent application of policy.

However, intelligence from areas leading firm engagement often does not flow as effectively as it could to inform policymaking. Our survey of supervisors found only limited awareness of who they should be telling about issues they had identified or asking for guidance on the SCGO. At present, supervisors are not always proactively seeking and gathering information from firms. This means that the onus is on firms to raise topics. The IEO has heard evidence that senior members of large firms do engage with PRA senior leaders and provide feedback on policies, but more intelligence could be gathered at working level, and from engagement with smaller firms, which may not have such regular access to PRA senior leaders. The PRA could take lessons from peer regulators with similar objectives. The Monetary Authority of Singapore (MAS), and Hong Kong Insurance Authority (HKIA) use dedicated, externally visible teams focused on advancing competitiveness, growth and development. Instead of relying on supervisors and other functions to gather information, these teams can speak directly to industry and other external stakeholders (Box C). We note industry stakeholders widely cited those peer regulators as leaders in effective firm interaction and cited the importance of having a named point of contact as a signal of their commitment to competitiveness and growth. But this is not the only possible approach and could have drawbacks if it leads to staff taking an overly siloed focus to the objective.

The PRA should aim to optimise the flow of intelligence across the Bank, industry and the wider regulatory ecosystem to inform policymaking. This may involve further considerations of the PRA’s model for operating under the SCGO. Whichever team is designated as SCGO champions should be prominent across the PRA and Bank. This would better enable it to coordinate intelligence gathering across the Bank’s functions and beyond. It should be set up and resourced to proactively gather intelligence, interacting with those leading engagement with firms and, potentially through external engagement when appropriate. The team need not only focus solely on the SCGO, but advancing and embedding this objective should be part of its remit. Regardless of the model used, the PRA should aim for the smooth flow of information, particularly from those on the front lines of firm interaction to those making decisions on policy prioritisation and formulation.

Recommendation 6: Further refine external engagement mechanisms to facilitate effective feedback through the policy cycle and heighten transparency of decision-making

There are existing mechanisms for industry to provide feedback and inform the PRA’s approach. These include statutory panels: the Practitioner and Insurance Practitioner Panels and the forthcoming Cost Benefit Analysis Panel. Other key mechanisms include DPs, CPs, roundtables with industry representatives and an email inbox dedicated to suggested rule updates. Industry stakeholders have been impressed with recent initiatives and several favourably cited moves towards more open discussion on policies at early stages, both through greater use of DPs and by engaging on submissions while the CPs were still out for consultation. Several external stakeholders gave positive feedback on the use of roundtables to help firms understand PRA expectations on certain policy areas. However, industry stakeholders also stated that they wished to be sighted on and engaged with policy development at an early stage.

The PRA should explore ways to further improve existing industry engagement and transparency mechanisms, particularly at early stages of the policy development. The statutory panels could be used as a forum for discussing policy ideas at early stages of development and to obtain a view of the policy queue. They should explain why particular policy developments or reviews are being prioritised, in the context of the PRA’s objectives. This would allow independent and industry voices an opportunity to understand (in line with Recommendation 1) and constructively contribute to the PRA’s strategic decisions about where to focus its future policymaking effort (including what not to prioritise). The PRA would remain solely accountable for its own strategy, but the aim should be to improve transparency and informed input regarding areas of future policy development and prioritisation.

Recommendation 7: Support further research and use reviews of rules to deepen understanding of how regulation influences competitiveness and growth

The Bank has signalled its intent to fill research gaps and deepen understanding around how regulation can impact competitiveness and growth. How regulation impacts competitiveness and growth is not well understood and is the subject of significant debate. Engagement with academics revealed that literature on how regulation influences competitiveness is relatively sparse. The PRA recognises this and has begun to take steps to deepen understanding. The PRA Business Plan and Bank of England Agenda for Research both feature competitiveness and growth topics among their research priorities. External stakeholders also found the Conference on the role of financial regulation in international competitiveness and economic growth helpful.

We understand, however, that there are relatively few active projects exploring the role of regulators in advancing competitiveness, so we encourage the PRA to consider ways of further incentivising researchers inside and outside the Bank to focus on this area. Additionally, the PRA should consider future ex-post research on the effectiveness of selected policies. On a related note, the FSMA 2023 Rule Review framework means the PRA will have the duty to review rules for whether they are functioning as intended, including in relation to competitiveness and growth. Over the longer term, the PRA should use insights from both research and rule reviews to inform its practical approach and strategic vision. This in turn should be linked clearly to the PRA’s approach to policymaking and its strategy for advancing the SCGO (Recommendation 1). Research should also aim to uncover the importance of regulation to competitiveness and growth, which in turn can help the PRA position its reporting on progress against the SCGO (Recommendation 8). This can help the PRA lead external debate. Finally, while this report focuses on the SCGO, the overall research programme should be holistic and cover the primary objective and the SCO as well – for example, to demonstrate the linkages between the primary and secondary objectives and the benefits to the UK of meeting the primary objective and maintaining financial stability.

Theme 4: Refining transparency and oversight mechanisms to build trust in the PRA’s approach

Many external stakeholders pointed to the PRA as an international leader on transparency and accountability and were pleased to see efforts made to continue this on the new SCGO. These include the statutory requirement for an annual report on progress against the secondary objectives, accompanying metrics, engagement with the statutory panels, the published framework for considering the SCGO in decision-making and the annual firm feedback survey.

The PRA is understandably only at an early stage in its journey to ensure effective transparency and fair accountability on the SCGO. But stakeholders have identified several aspects of the proposed reporting that may benefit from review and evolution over time. PRC’s oversight of how effectively the new objective is being embedded could also be strengthened by improving visibility on decision-making, in particular highlighting alternatives considered and discounted, and linking regular reporting to intended behavioural changes. We make two recommendations for how the PRA should refine its approach as it develops experience implementing the new objective.

Recommendation 8: The PRA should periodically review its external reporting on how it has advanced the SCGO

The PRA has introduced two accountability mechanisms for the SCGO: an annual report on how it has considered the SCGO and a set of metrics.

The PRA’s first annual SCGO report gives a comprehensive account of how the PRA has considered the SCGO in policy initiatives. The annual report is an important part of the PRA’s accountability to parliament and provides transparency on the PRA’s activities to industry and other external stakeholders. This comes in addition to commentary in each individual published CP and DP, where the PRA details the SCGO considerations for the relevant policy area.

However, as noted in Theme 1, stakeholders are primarily interested in seeing what the PRA has done differently as a result of the new objective. We understand the challenges in giving such a counterfactual explanation and also note that the legal requirement is that this report should explain ‘how any rules and guidance that the regulator has made advance that objective’, which lends itself to the listing of all such activities.^{footnote [12]} But it may be more useful to present the key policy initiatives which have had the most impact on the SCGO more prominently. We expect that the PRA’s approach will naturally evolve over time to achieve this focus.

Reporting should also discuss the day-to-day measures the PRA has taken to improve firm engagement. This would be consistent with industry’s interest in how the PRA had considered the new objective outside of policymaking. For example, the PRA could include in future reports more detail on its efforts in internal training and embedding of the objective, and of industry engagements such as through statutory panels and roundtables.

Additionally, the PRA has set out the metrics that it intends to monitor to support its commitment to be transparent and accountable for its actions to advance its secondary objectives.^{footnote [13]} These include quantitative metrics that have been informed by HMT’s Call for Proposals and related responses, as well as additional ones that the PRA considers to be relevant.

These offer a good foundation and are supported by some external stakeholders who argue they will provide world-leading transparency and accountability.^{footnote [14]} Internal PRA stakeholders also recognised that metrics were needed to facilitate effective accountability.

However, both internal and external stakeholders highlighted a number of shortcomings with the current metrics. The paper that set out the proposed SCGO metrics in December 2023 provided a list of variables but contained very limited guidance as to what ‘success’ would look like. For example, it is unclear in many cases whether a higher or a lower number would represent an improvement or deterioration in relation to the SCGO. These metrics on their own may, therefore, be of limited assistance in supporting effective accountability. We note that other metrics that are published by the PRA related to its operational efficiency do have clear stated aims, such as to close 98% of cases within relevant statutory service standards, although this may be challenging to do for all metrics.^{footnote [15]}

The PRA should have a mindset of continuous improvement in this area and be open to periodically reviewing and evolving its external reporting. In particular, at least some of the current metrics should be positioned as statistics rather than performance measures, targets or standards of measurement. The explanatory narrative and qualitative discussion in the PRA’s report on its secondary objective will provide more insight into how the PRA has advanced the SCGO than the numbers alone, because it will allow external audiences to understand the broader economic and regulatory considerations behind the PRA’s actions. Finally, we note that the PRA will learn over time – including through its research work (Recommendation 7) – which of the current metrics are the most effective indicators of the impact of their actions on competitiveness and growth and which other statistics might also be useful, and should be open to making changes to its reporting, in consultation with HMT.

Recommendation 9: Strengthen governance reporting to ensure PRA leadership has sufficient oversight of how the SCGO is being embedded

The PRA has updated its processes to ensure policymaking takes account of the SCGO, and that its senior committees (SRPC and PRC) have sufficient oversight.

Policy priorities are reviewed at quarterly SRPC sessions, which is informed by an assessment of how policies advance each of the PRA’s objectives, as well as other relevant policy considerations. However, apart from through the Business Planning process, there is less involvement from PRC in strategic decision making around future policy prioritisation.

Formal governance papers to the PRA’s policy committees are required to include an assessment of how a proposed policy would impact the SCGO in a separate section of the covering template. The IEO has observed productive discussions in these committees based on this information.

However, a viewpoint expressed in both interviews and survey responses was that, for authors, the SCGO considerations and the template requirements were considered at the point of producing the paper as opposed to embedded in early stage thinking. Analysis of the utilisation of the SCGO box in the SRPC paper template and the paper content suggests there are still inconsistencies in terms of the level of detail included by authors. These observations point to a risk that SCGO thinking has not been integrated sufficiently early in the policy development process. It also puts a reliance on committee chairs and members to ensure SCGO considerations are raised if these are insufficiently covered in reports and if alternative policy options have not previously been discussed with the committee.

Finally, and related to Recommendation 8, PRC and SRPC receive a quarterly performance report (QPR). This includes key performance indicators, some of which partly overlap with the SCGO operational efficiency metrics, but the IEO noted that this does not currently explicitly cover progress on embedding the SCGO.

Therefore, PRA policymaking staff should continue to be steered to consider the SCGO assessment earlier in the policymaking process and to include alternative judgements considered during this process in committee papers to facilitate good discussions at committees. There should be ongoing monitoring of whether PRC members feel sufficiently supported and involved in policymaking prioritisation and strategic discussion in relation to the SCGO. Similarly, feedback gained from the teams who present papers at PRC could also be an opportunity to find out if the report templates are facilitating good discussions on the SCGO and how it has influenced policy design.

Additionally, the PRA should review the QPR to ensure it enables the PRC to oversee the process of embedding the SCGO in the organisation. This could include capturing desired behavioural changes in relation to implementing the SCGO, training completion rates, the results of firm feedback surveys and the SCGO metrics, to ensure that they are being sufficiently discussed internally.