PS5/22 | CP4/22 – Regulated fees and levies: Rates proposals 2022/23

1. Overview

1.1 This Prudential Regulation Authority (PRA) Policy Statement (PS) provides feedback to responses to Consultation Paper (CP) 4/22 ‘Regulated fees and levies: Rates proposals 2022/23’. It also contains the PRA’s final policy, as follows:

• the fee rates to meet the PRA’s 2022/23 Annual Funding Requirement (AFR) for the financial period Tuesday, 1 March 2022 to Tuesday, 28 February 2023 (fee year); and
• amendments to the Fees Part of the PRA Rulebook (Appendix 1).

1.2 This PS is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2022/23 fee year.

Background

1.3 In CP4/22, the PRA made proposals on:

• the fee rates to meet the PRA’s 2022/23 AFR;
• fees applicable to temporary regimes;
• changes to internal model applications fees and the model maintenance fee;
• changes to the special project fees for restructuring; and
• how the PRA intends to distribute a surplus from the 2021/22 AFR and distribute the retained penalties for 2021/22.

Summary of responses

1.4 The PRA received three responses to the CP. Respondents made a number of observations and requests for clarification which are set out in Chapter 2. After considering the consultation responses received, no changes have been made to the proposals outlined in the CP.

1.5 When making rules, the PRA is required to comply with several legal obligations, including considering responses to consultation and publishing an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [1]} In CP4/22, the PRA set out this explanation in Chapter 5 ‘The PRA’s statutory obligations’, and below the PRA has provided an updated explanation to take into account consultation responses.

1.6 In carrying out its policy making functions, the PRA is required to have regard to several matters, as set out in Chapter 5 CP4/22, 'The PRA's Statutory Obligations'. In CP4/22 the PRA explained how it had had regard to the application of these matters in relation to the proposed policy. Below the PRA provides feedback to consultation responses received to CP 4/22, details of the PRA Annual Funding Requirement for fee year 2022/23, refunds for Annual Funding Requirement surplus for fee year 2021/22, and allocation of retained penalties in fee year 2021/22 under the financial penalty scheme. As no changes are being made to the policy consulted on in CP4/22, the PRA has not updated its summary of the ‘have regards’ assessment.

Implementation

1.7 The implementation date for the PRA FEES AMENDMENT (No 1) INSTRUMENT 2022 is Friday, 1 July 2022.

1.8 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law. Visit the Transitioning to post-exit rules and standards webpage, for more information.

Online fees calculator

1.9 The Financial Conduct Authority (FCA) provides an online fees calculator to enable firms to calculate their periodic fees for the forthcoming year, using the PRA rates (set out in Appendix 1). The updated fees calculator for 2022/23 fees, and levies using the final fee rates as set out in this PS, will be available for firms to use from Thursday, 30 June 2022.

2. Feedback to responses

2.1 Before making any proposed rules, the PRA is required by the Financial Services and Markets Act 2000 (FSMA) to have regard to any representations made to it, and to publish an account, in general terms, of those representations and its feedback to them.

2.2 The PRA has considered the responses received to the CP. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The PRA received three responses to the CP, regarding the following:

• The minimum fee;
• The PRA’s cost control and staffing levels;
• Fee block allocations; and
• Barriers to entry for new insurance firms.

The minimum fee

2.4 In CP4/22 the PRA proposed not to increase the minimum fee in the 2022/23 fee year. One respondent was supportive of the decision not to propose an increase to the minimum fee.

Increase in the Annual Funding Requirement (AFR)

2.5 In CP4/22 the PRA detailed that its AFR would be £312.5 million. Two respondents provided comments on the proposal to increase the AFR by 9% and the PRA’s efforts to seek cost efficiencies. One respondent also commented on the appropriateness of the proposed 7% increase in staffing levels. As detailed in the PRA’s business plan for 2022/23, the increase in resources is necessary for the PRA to be able to deliver on its materially expanded policy-making responsibilities, proactively prepare for emerging risks in the financial system such as operational and cyber resilience, and to further the development of its data analytics and technology capabilities. Alongside this, the PRA set out a commitment to undertake a multi-year programme of work to improve the PRA’s efficiency, effectiveness and data culture, through phased investment in tools, technology, and digital skills.

2.6 One respondent stated that the increase in the PRA’s budget coupled with the reduction in the number of fee payers would run counter to HM Treasury’s recommendations to the Prudential Regulation Committee (PRC), about aspects of the Government’s economic policy to which the PRC should have regard when considering how to advance the PRA’s objectives and apply the regulatory principles. In formulating the PRA’s fees policy, the PRA takes into account all ‘have regards’ requirements. A summary of the PRA’s assessment was provided in Chapter 5 of the CP. In particular, fees are allocated in a proportionate way through the use of fee blocks that take into account the size and nature of firms and separate consideration is given to the interests of minimum fee payers and firms not affected by certain PRA activities.

2.7 One respondent commented on the Bank of England’s (the Bank) departure from a ‘flat, nominal budget’ in 2019/20. As set out in the Bank of England’s Annual Report and Accounts 2021, the Bank operated for a number of years within a constraint of holding a flat baseline budget adjusted for inflation ‘flat real’ plus exclusions for Note Production, Pensions and The Real Time Gross Settlement (RTGS) Renewal. The Bank then signalled that as the scope of its responsibilities is increasing materially and durably, in particular in relation to post-Brexit rule-making and its expanded statutory remits on the regulation of financial firms, that the budgetary outlook for the 2022/23 financial year may depart from the historical flat real constraints to reflect this new reality. The PRA follows the overall approach adopted by the Bank.

2.8 One respondent noted the PRA does not consider that the increase in fees is disproportionate for insurers or mutuals in general, and requested clarity on the actions taken by the PRA in this regards. The PRA does not consider the increase in fees to be disproportionate for insurers or mutuals in general, but continues to consider the impact of fees on different sectors. Many smaller mutuals continue to benefit from a minimum fee that is set lower than the cost to the PRA of supervising such firms and is not increasing. In addition, the PRA applies a discount of 11% to the periodic fees payable by non-Directive general insurance firms, many of which are mutuals, and all life insurance non-Directive firms are excluded from periodic fees.

Fee block allocations

2.9 In CP4/22 the PRA detailed its proposals to allocate the AFR across the separate fee blocks. Two respondents commented on the fee block allocations methodology with one stating its desire for building societies to be decoupled from other deposit takers in the A1 fee block with the other requesting a review of the PRA’s funding model.

2.10 The PRA has decided not to make any changes to the proposed allocations but continues to keep its funding model under review. Any future revisions to the PRA fees methodology will be the subject of its own consultation paper.

Barriers to entry for new insurance firms

2.11 In CP4/22 the PRA provided detail on the draft tariff data used in the calculation of the draft fee rates. One respondent was concerned about the number of fee payers reducing and the impact this has on the remaining fee payers. This respondent went on to request further information on the activities the PRA is undertaking to reduce the barriers to entry for all insurance firms.

2.12 The PRA is taking a number of actions on the barriers to entry for insurance firms. The PRA’s New Insurer Start-up Unit aims to encourage new entrants to the market and supports them through the authorisations process, including by providing feedback on proposed business plans and identifying possible barriers to authorisation at an early stage. Further, in its Business Plan for 2022/23 the PRA discussed a likely future consultation on a potential mobilisation phase for insurance firms (similar to the mobilisation phase for banks that has been in operation since 2013). The PRA is also considering proposals concerning an accelerated pathway for the authorisation of credible and well-capitalised wholesale insurance firms.

3 Annual Funding Requirement for 2022/23

3.1 The PRA’s AFR for 2022/23 is £312.5 million, which is £24.9 million higher than the AFR for 2021/22 of £287.7 million. The 25% increase in the AFR is driven primarily by the PRA’s expanded role as a rule maker and an increased focus on operational resilience. The AFR is unchanged from CP4/22.

3.2 Table 1A sets out the allocation of the PRA’s AFR to fee blocks for 2022/23 fee year and provides comparison to the draft allocation set out in CP4/22, and the allocation for 2021/22 fee year.

3.3 Table 1B sets out an analysis of the final tariff data for 2022/23 fee year, used to allocate the PRA’s AFR to firms within fee blocks compared to the draft data presented in CP4/22.

The final fee rates for 2022/23 are largely unchanged for most fee blocks. As highlighted in CP4/22, the indicative fee rates for the A3 and A4 fee blocks were completed using 2021/22 fee tariff data, as the Solvency II reporting deadline was after the publication of the CP which meant the draft rates were a less useful predictor of the final fee rates.

4. Annual Funding Requirement – Surplus and retained penalties for 2021/22

Confirmation of surplus for 2021/22 relative to CP4/22

4.1 CP4/22 stated that there was a surplus of £7.2 million between the total fees collected for 2021/22 and the actual spend, based on a draft, unaudited figure. This includes retained financial penalties and other fee income. Following the finalisation of the PRA’s annual accounts and a review of the allocation across fee blocks to ensure correct application of the rules, the total £7.2 million figure remains unchanged.^{footnote [2]}

4.2 Table 4A sets out the 2021/22 surplus.

Allocation of surplus from 2021/22

4.3 There will be a refund to fee payers surplus fees for 2021/22 of £7.2 million, including retained financial penalties of £2.7 million. This figure has been confirmed following the finalisation of the PRA’s accounts, and remains unchanged from the CP4/22. The refund will be allocated across all fee blocks, with the exception of the A0 minimum fee block, in proportion to the AFR for the 2021/22 fee year.

Retained penalties 2021/22

4.4 For 2021/22, there are retained penalties of £2.7 million which the PRA will allocate across fee blocks under the financial penalty scheme using firm population data for 2021/22 (the financial year to which the retained penalties relate). This amount will be refunded to firms across all fee blocks excluding those firms that incurred fines.

Appendices

1 Appendix 1: PRA RULEBOOK: PRA FEES AMENDMENT (No 1) INSTRUMENT 2022