CP8/23 – Occasional consultation paper – April 2023

Privacy statement

By responding to this consultation, you provide personal data to the Bank of England. This may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the response itself.

The response will be assessed to inform our work as a regulator and central bank, both in the public interest and in the exercise of our official authority. We may use your details to contact you to clarify any aspects of your response.

The consultation paper will explain if responses will be shared with other organisations (for example, the Financial Conduct Authority). If this is the case, the other organisation will also review the responses and may also contact you to clarify aspects of your response. We will retain all responses for the period that is relevant to supporting ongoing regulatory policy developments and reviews. However, all personal data will be redacted from the responses within five years of receipt. To find out more about how we deal with your personal data, your rights or to get in touch please visit Privacy and the Bank of England.

Information provided in response to this consultation, including personal information, may be subject to publication or disclosure to other parties in accordance with access to information regimes including under the Freedom of Information Act 2000 or data protection legislation, or as otherwise required by law or in discharge of the Bank of England’s functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the Bank of England receives a request for disclosure of this information, we will take your indication(s) into account, but cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on emails will not, of itself, be regarded as binding on the Bank of England.

Responses are requested by Thursday 22 June 2023.

Please address any comments or enquiries by email to:
OCP.Responses@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Policy Delivery Team (MG07)
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to make minor amendments to a statement of policy (SoP) and PRA rules.

1.2 The proposals in this CP would result in minor changes to the:

• SoP – ‘The PRA’s approach to the publication of Solvency II technical information’ (Appendix 1)
• Group Supervision Part of the PRA Rulebook (Appendix 2)
• Glossary of the PRA Rulebook (Appendix 3)
• Auditors Part of the PRA Rulebook (also Appendix 3)

1.3 The changes proposed in this CP would:

• amend the PRA’s approach to fulfilling its obligation to publish technical information (TI) necessary for the valuation of insurance liabilities for each relevant currency;
• insert the definition of ‘participating Solvency II undertaking’ in the Group Supervision Part of the PRA Rulebook;
• update the definition of ‘accounting principles’ in the Glossary of the PRA Rulebook; and
• correct the reference number of the form used to notify the PRA of an auditor appointment in the Auditors Part of the PRA Rulebook.

1.4 The chapters in this CP are relevant to different types of firms, as follows.

• Chapter 2 – all UK Solvency II firms, including the Society of Lloyd’s and its managing agents, and third-country branches making use of the TI published by the PRA.
• Chapter 3 – all UK Solvency II firms within the scope of the Group Supervision Part and the Society of Lloyd’s.
• Chapter 4 – all PRA-authorised firms.
• Chapter 5 – all PRA-authorised firms.

1.5 The PRA has a statutory duty to consult when introducing changing rules (FSMA s138J), or standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

1.6 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. Appendix 4 lists the statutory obligations applicable to the PRA’s policy development process. The analysis in this CP explains how the proposals have had regard to the most significant matters, including an explanation of the ways in which having regard to these matters has affected the proposals.

Implementation

1.7 The PRA intends to publish a policy statement (PS) resulting from this CP in Q4 2023, pending consideration of responses to this consultation. For Chapter 2, the PRA proposes that the implementation date would be March 2024. For Chapters 3, 4, and 5, the PRA proposes that the implementation date would be Q4 2023, following the publication of the PS.

Responses and next steps

1.8 This consultation closes on Thursday 22 June 2023. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to
OCP.Responses@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.9 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.^{footnote [1]}

2. The PRA’s approach to the publication of Solvency II technical information – minor updates

2.1 In this chapter, the PRA proposes amendments to its approach to fulfilling its obligation to publish TI necessary for the valuation of insurance liabilities for each relevant currency.

2.2 The proposals would be made effective through an update to SoP – The PRA’s approach to the publication of Solvency II technical information.

2.3 This chapter is relevant to: all UK Solvency II firms, including the Society of Lloyd’s and its managing agents, hereafter referred to as ‘UK insurers’; and third-country branches making use of the TI published by the PRA.

Proposals

Reference portfolios for the volatility adjustment

2.4 The PRA proposes to make two amendments to its approach to deriving the reference portfolios (RPs) for the volatility adjustment (VA) that will take effect from 31 March 2024. The PRA proposes to update the SoP accordingly to reflect these changes.

2.5 The SoP explains that the PRA derives VA RPs using the same technical approach as the European Insurance and Occupational Pensions Authority (EIOPA), except for specific areas where the PRA’s approach differs (paragraphs 3.8 to 3.12 of the SoP). The two proposed amendments represent differences in the PRA’s and EIOPA’s approach.

2.6 The first proposal relates to VA RPs for non-GBP PRA relevant currencies. As outlined in paragraph 3.9 of the SoP, VA RPs for non-GBP PRA relevant currencies are derived using a weighted average of:

• EIOPA’s published VA RPs derived using Quantitative Reporting Templates (QRT) data submitted to EIOPA; and
• VA RPs derived using QRT asset data submitted to the PRA for (UK) parent undertakings.

2.7 The approach described above is used to reflect UK firms’ asset exposures in the VA RPs. The PRA proposes that for non-GBP VA RPs, alongside its existing practice of using QRT asset data for (UK) parent undertakings, data from Society of Lloyd’s solo QRTs is also included.^{footnote [2]} The PRA is proposing this change in order to increase the representativeness of UK firms’ non-GBP asset exposures within the VA RPs for non-GBP PRA relevant currencies. This is expected to have a small impact on the VA published by the PRA.

2.8 The second proposal relates to the treatment of bonds issued by Regional Governments and Local Authorities (RGLA) in the derivation of RPs. The PRA’s existing practice is to categorise RGLA issued bonds from UK or EEA countries as government bonds, and RGLA issued bonds from other countries as corporate bonds, when deriving VA RPs.

2.9 The PRA proposes to change its approach so that all RGLA issued bonds would be categorised as corporate bonds when deriving VA RPs. This is a proportionate approach that is consistent with the provisions of Article 50 of the on-shored Solvency II Delegated Regulation 2015/35 (CDR). This change is expected to have a small impact on the VA published by the PRA.

2.10 The PRA has a statutory obligation from the end of the EU Exit transition period to publish TI which UK insurers should use to calculate technical provisions. The proposals in this chapter refine the PRA’s approach to fulfilling this obligation.

Implementation

2.11 The PRA intends to implement these proposals for VA RPs derived from 31 March 2024 onwards, following the publication of a policy statement in Q4 2023.

Cost benefit analysis

2.12 The combined effect of the two proposed changes will improve the relevance of the TI for UK firms, and will not lead to any additional operational costs for UK firms. Minimal PRA resource is required to implement these changes.

2.13 The combined effect of the changes is expected to be a small overall impact on the VA published by the PRA, leading to a small impact on the technical provisions calculated by UK firms with approval to use the VA.^{footnote [3]} An assessment of the changes to the published VA for PRA relevant currencies for the 12 months over the period from October 2021 to October 2022 showed that the maximum impact in that period would have been:

• GBP: nil
• USD: -1 basis point (bp)
• CAD: +2bps
• AUD: -1bp

PRA objectives analysis

2.14 The PRA has primary statutory objectives to promote the safety and soundness of firms and ensure that policyholders are appropriately protected. The PRA considers that the proposals set out in this chapter advance the PRA’s primary statutory objectives since the TI is used for the valuation of insurance liabilities for each relevant currency. The proposals would also result in the VA better reflecting the asset exposures of the UK insurance industry.

2.15 When discharging its general function in a way that advances its primary objectives, the PRA has, as a secondary objective, a duty to facilitate effective competition in the markets for services provided by PRA-authorised persons, so far as is reasonably possible. The PRA considers that the proposals in this chapter would not have an impact on effective competition due to the low materiality of the changes.

2.16 The Financial Services and Markets (FSM) Bill 2022 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, and assuming they do so in their current form, this new secondary objective would require the PRA (in discharging its general functions in a way that advances its primary objectives and so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

2.17 In light of this and the planned implementation date for the changes proposed in this CP, the PRA has also considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term. The PRA does not expect the proposals to have a material effect on the international competitiveness of the UK economy and its growth in the medium to long term because of the low materiality of the changes.

‘Have regards’ analysis

2.18 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in HM Treasury’s (HMT) recommendation letter from December 2022, and previous letters from April 2022 and March 2021. The FSM Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it will add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposals outlined in this chapter:

1. Efficient and economic use of resources (FSMA regulatory principles): The proposed changes in methodology do not have an impact on the resources required to derive the RPs.

2. Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): Updating the SoP enhances the transparency of the PRA’s approach to produce the TI by ensuring firms continue to have up-to-date information about the inputs into the VA calculation.

2.19 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for the proposals.

Impact on mutuals

2.20 The PRA considers that the impact of the proposed changes on mutuals would be no different from the impact on other firms.

Equality and diversity

2.21 The PRA considers that the proposals do not give rise to equality and diversity implications.

3. Group Supervision Part – minor update

3.1 In this chapter, the PRA sets out its proposal to update the Group Supervision Part of the PRA Rulebook to define the term ‘participating Solvency II undertaking’.

3.2 This proposal is relevant to UK Solvency II firms within the scope of the Group Supervision Part and to the Society of Lloyd’s.

Proposal

3.3 The PRA proposes to amend Group Supervision Part 1.2 to include the definition of the term ‘participating Solvency II undertaking’ to clarify references to the term. The PRA Rulebook: (EU Exit) Instrument 2020 deleted the defined term ‘participating Solvency II undertaking’ from the Glossary. However, the term continues to be referred to in the Group Supervision Part.

Cost benefit analysis

3.4 The PRA considers that the benefit of the proposal would be to clarify the meaning of references to participating Solvency II undertaking within the Group Supervision Part. The PRA does not anticipate that firms would incur costs.

PRA objectives analysis

3.5 The PRA considers that ensuring the clarity and completeness of its rules helps firms understand and comply with them and provides firms with the confidence to follow PRA policies. This contributes to the PRA’s statutory objectives to promote the safety and soundness of PRA-authorised firms and contributes to securing policy holder protection.

3.6 The PRA does not expect that this proposal would have any significant impact on its secondary competition objective as it does not change existing policy.

3.7 The FSM Bill 2022 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, this new secondary objective would require the PRA (in discharging its general functions in a way that advances its primary objectives and so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

3.8 In light of this and the planned implementation date for the changes proposed in this CP, the PRA has also considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term. The PRA does not expect the proposal to have an effect on the international competitiveness of the UK economy and its growth in the medium to long term because the proposal does not change existing policy.

‘Have regards’ analysis

3.9 In developing the proposal, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022, and previous letters from April 2022 and March 2021. The FSM Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it will add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factor, to which the PRA is required to have regard, was significant in the PRA’s analysis of the proposal outlined in this chapter:

• Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The aim of this proposal is to ensure clarity of the PRA’s rules, and therefore to make the PRA’s requirements as transparent and clear as possible.

3.10 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

Impact on mutuals

3.11 The PRA does not expect this proposal to have a different impact on mutuals compared to other firms because the proposal does not change existing policy.

Equality and diversity

3.12 The PRA considers that this proposal does not give rise to equality and diversity implications.

4. Glossary – update to definition of ‘accounting principles’

4.1 In this chapter, the PRA proposes changes to the Glossary of the PRA Rulebook, to update the definition of ‘accounting principles’.

4.2 This chapter is relevant to all PRA-authorised firms.

Proposals

4.3 The PRA proposes to update and simplify the definition of ‘accounting principles’ in the Glossary of the PRA Rulebook. The existing definition contains elements that have been superseded or that are not relevant to firms. The PRA is proposing a simpler definition that encompasses the accounting principles relevant to firms. This proposal intends to make no change to the substance or intent of the existing definition.

4.4 The PRA also proposes to make a correction where the term ‘accounting principles’ has been used in another definition in the Glossary, but has not been italicised to indicate that the term is defined elsewhere in the Glossary. This is in the definition of ‘defined benefit liability’.

Cost benefit analysis

4.5 The PRA considers that the proposals would not result in additional costs because there is no change to the substance of the definition or requirements. The benefit of the proposed update would be to help ensure that the definition of ‘accounting principles’ refers to up-to-date applicable accounting requirements, removing any potential confusion.

PRA objectives analysis

4.6 As regards the PRA’s primary objective, the PRA considers that its proposed approach of keeping policy material up to date and accurate provides confidence to firms using the PRA Rulebook and advances its primary objective to promote the safety and soundness of firms.

4.7 In regard to the secondary objective, the PRA does not expect the proposals to have any impact on competition because the proposals does not make changes to existing policy.

4.8 The FSM Bill 2022 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, this new secondary objective would require the PRA (in discharging its general functions in a way that advances its primary objectives and so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

4.9 In light of this and the planned implementation date for the changes proposed in this CP, the PRA has also considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term. The PRA does not expect the proposals to have an effect on the international competitiveness of the UK economy and its growth in the medium to long term because the proposals do not change existing policy.

‘Have regards’ analysis

4.10 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022, and previous letters from April 2022 and March 2021. The FSM Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it will add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factor, to which the PRA is required to have regard, was significant in the PRA’s analysis of the proposals outlined in this chapter:

• Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The aim of these proposals is to ensure the PRA Rulebook is up to date, to make the PRA’s requirements as transparent and clear as possible.

4.11 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for the proposals.

Impact on mutuals

4.12 The PRA considers that the impact of the proposed changes on mutuals would be no different from the impact on other firms because the proposal does not change existing policy.

Equality and diversity

4.13 The PRA considers that the proposals do not give rise to equality and diversity implications.

5. PRA Rulebook administration instrument

5.1 An administration instrument is used to make minor corrections to PRA Rulebook provisions. The corrections are not substantive and are not intended to change PRA policy. The corrections will result in rule amendments.

5.2 In making this administration instrument (Appendix 3), the PRA aims to ensure that rules are correct, presented clearly and contain up-to-date references. Accurate Rulebook provisions allow the PRA to act in a way that advances the safety and soundness of PRA firms and, regarding insurers, contributes to policyholder protection. For these reasons, the PRA considers that administration instruments are compatible with the requirement of the PRA to act in a way that advances its primary objectives. The PRA considers that the proposed administration instrument has no impact on its secondary competition objective.

5.3 The PRA consults with the FCA prior to undertaking consultations on administration instruments and ensures that proposed corrections are consistent with the regulatory principles. The PRA considers that the changes would not impact competition or mutual societies, or give rise to any equality or diversity issues. Minor proposals are also unlikely to result in costs for firms, who will benefit from a more accurate Rulebook, and it is not practicable to carry out a formal cost benefit analysis.

5.4 In proposing the minor corrections in the administration instrument, the PRA has had regard to the FSMA regulatory principles and the other matters to which it is required to have regard.