CP7/23 – Regulated fees and levies: Rates proposals 2023/24

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’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 Friday 12 May 2023.

The PRA prefers all responses to be sent by email to: CP7_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Alexander Zaremba
Finance, Planning, Performance & Analysis Team
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 This consultation paper (CP) sets out proposals for the Prudential Regulation Authority’s (PRA) fees for 2023/24. The proposals would make amendments to the Fees Part of the PRA Rulebook (Appendix 1). The proposals include:

• the fee rates to meet the PRA’s 2023/24 Annual Funding Requirement (AFR);
• changes to the internal model application fees and the model maintenance fee;
• updates to Supervisory Statement 3/16 (SS3/16) to include the information provided in Fees 2.9 and 2.10 (Appendix 2);
• setting out how the PRA intends to distribute a surplus from the 2022/23 AFR (Chapter 3); and
• the retained penalties for 2022/23 (Chapter 4).

1.2 This CP is relevant to all firms that currently pay PRA fees or are expecting to do so within the 2023/24 fee year.^{footnote [1]}

1.3 The PRA has a statutory duty to consult when changing rules (FSMA s138J), or new 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. 

1.4 In carrying out its policy making functions, the PRA is required to comply with several legal obligations. Appendix 3 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.

Summary of proposals

1.5 The PRA’s AFR for 2023/24 is composed solely of the budgeted cost of Ongoing Regulatory Activities (ORA). Further information on this can be found in Chapter 2. The proposed ORA for 2023/24 is £302.9 million, a decrease of £9.7 million (3%) on 2022/23. This figure is provisional and may need to be revised when final estimates for the PRA’s costs are available (please see section 2 for further detail).

1.6 The PRA’s proposed Total Funding Requirement (TFR) for 2023/24 is £312.0 million, down £8.9 million (3%) from 2022/23 (£320.9 million). The TFR is composed of the AFR and other fees.

Implementation

1.7 The PRA proposes to publish the changes resulting from this CP on Thursday 29 June 2023, and proposes that the implementation date for the changes resulting from this CP would be Monday 3 July 2023.

Responses and next steps

1.8 This consultation closes on Friday 12 May 2023. The PRA invites feedback on the proposals set out in this CP. Please address any comments or enquiries to CP7_23@bankofengland.co.uk. Please indicate in your response if you believe any of the proposals in this CP 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 [2]}

2. PRA proposals

PRA Annual Fees consultation – 2023/24

2.1 This chapter sets out proposals on fee rates to meet the PRA’s TFR for 2023/24. Detailed information on the PRA’s strategy and workplan for the coming year, which will be funded by the TFR, is set out in the PRA Business Plan 2023/24, which is expected to be published on Tuesday 2 May 2023.

Total Funding Requirement (TFR)

2.2 The PRA’s TFR covers the total fees it proposes to raise from firms and comprises the AFR and ‘other fees’ (see Table 2.A). The PRA’s TFR for 2023/24 is £312.0 million, down £8.9 million from 2022/23 (£320.9 million).

2023/24 Annual Funding Requirement (AFR) and comparison with 2022/23

2.3 The AFR is the budget required by the PRA to advance its statutory objectives. The PRA’s proposed AFR for 2023/24 is £302.9 million and is composed of the budget for the ORA.

2.4 The proposed AFR for 2023/24 is £9.7 million lower than the AFR for 2022/23 of £312.5 million, a decrease of 3%. The decrease is due to expected slightly reduced headcount, an expected reduction in pensions costs partially offset by inflation, annualisation of prior year recruitment and a share of the increase in the Bank’s central and other support services including technology and legal costs.

2.5 The impact of external market conditions, as at 28 February 2023, on the PRA’s pension costs for 2023/24 has yet to be fully confirmed. The figure for the ORA is therefore provisional and may need to be revised when final cost estimates are available. Compared to the estimated AFR, the anticipated variation is likely to be less than £7.0 million, an increase or decrease on the AFR of 2.3%. If the final variation in costs exceeds £7.0 million, an updated CP will be issued. If any responses have been received prior to the issuance of an updated CP, these will be followed up individually to check whether any respondents wish to revise their response.

Allocation of 2023/24 Ongoing Regulatory Activities (ORA) to fee blocks

2.6 The proposed allocation of the ORA across the seven PRA-authorised fee blocks, including the minimum fee block, is set out in Table 2.B. Firms are allocated to PRA fee blocks based on the regulated activities for which they hold permissions, and pay a periodic fee for each fee block into which they fall. The proposed allocation to fee blocks is based on the anticipated work to be performed within each area and reflects the PRA’s risk-based approach.

2.7 Within each fee block, the costs to be recovered from individual firms are based on the size of their business. The aim is to ensure that those firms that could potentially cause the greatest harm to the stability of the UK financial system are the main contributors to the PRA’s AFR. As for previous years, cost recovery within the A1 fee block is weighted further towards higher impact firms.

2.8 Any firm authorised to carry out any of the regulated activities covered by the ‘A’ fee blocks is also subject to the A0 minimum fee (with the exception of the A6 fee block, which consists of the Society of Lloyd’s and its subsidiaries only) and is invoiced on an individual basis.

Online fees calculator

2.9 The Financial Conduct Authority (FCA) provides a facility on its website to enable firms to calculate their periodic fees for the forthcoming year based on the proposed PRA consultative rates (Appendix 1). The fee calculator for 2023/24 fees is expected to be available to firms from Tuesday 11 April 2023.

Changes to tariff data used in AFR calculations to fee blocks relative to 2022/23

2.10 Table 2.C sets out the analysis of tariff data used for allocating the PRA’s proposed AFR to firms within fee blocks for 2023/24, and a comparison to 2022/23. Table 2.C shows ‘gross’ tariff data.

Other fees

2.11 Other fees include implementation fees, the model maintenance fees, special project fees for restructuring (SPF) and regulatory transaction fees. These fees vary from one year to another and can lead to greater volatility in periodic fees. Additional context on the PRA’s approach to other fees can be found in (SS 3/16 – Fees: PRA approach and application.

2.12 For 2023/24, the PRA proposes to raise £9.1 million in other fees, an increase of £0.8 million on 2022/23.

Internal model application fees and the model maintenance fee

2.13 The model application fees and model maintenance fees were reviewed as part of last year’s fees consultation. For the 2023/24 fee year, the PRA is proposing to increase these fees in line with CPI inflation since March 2022.

2.14 The vast majority of firms holding internal model permissions and firms applying for model permissions come from entities paying fees in the highest application bands, so the PRA does not consider increasing these charges to be a barrier to entry.

Other changes to fees rules

2.15 The PRA has reviewed the rules that detail its approach to firms that consider a fee to be unduly burdensome and/or would not achieve the purpose for which the fee rule was made. The original intention of the rules was to add clarity to the ‘appeals’ process and the PRA considers this guidance is better placed in SS3/16. The PRA proposes to delete Rules 2.9 and 2.10 and amend SS3/16 to provide the detail provided by those rules.

2.16 The PRA has also reviewed the wording of Fees 4.5(3) and considers that the rule, as currently drafted, does not achieve the purpose for which it was made. The PRA proposes to amend the wording so that any type of firm can benefit from a fee reduction if the criteria is satisfied.

2.17 In considering alternative wording for Fees 4.5(3), the PRA concluded the current classifications did not necessarily reflect the specific circumstances of the individual applications. The PRA proposes to amend the new firm application classifications to make them broader. This will help the PRA to achieve the objective of allowing all new firm applications to benefit from a reduction in the fee charged.

3. Surplus for 2022/23 AFR

3.1 In the PRA’s 2022/23 fee year, there was a surplus of £0.8 million. This is a draft, unaudited figure and therefore will be subject to change, with the final figure to be confirmed when the final policy is published. This surplus consists of additional income received in the year (due to changes in tariff data following publication of Policy Statement 5/22 and in the form of Retained Financial Penalties) partially offset by higher costs in relation to central overheads.

Surplus on AFR

3.2 This surplus is allocated to firms in two stages:

• Stage 1 – allocation to fee blocks – the PRA proposes to allocate the AFR surplus across all fee blocks, with the exception of the A0 minimum fee block, in proportion to the AFR for the 2022/23 fee year; and
• Stage 2 – allocation to individual firms – within each fee block, the AFR surplus is allocated with reference to the fee block population and tariff data for the 2022/23 fee year, excluding firms that are no longer PRA fee payers.

3.3 Table 3.B includes the proposed allocation of the AFR surplus for 2022/23, presented by firm type.

Table 3.B Proposed allocation of the AFR surplus for 2022/23^(*)

4. Financial penalty scheme and application of retained penalties for 2022/23

4.1 The legislative framework for financial penalties is set out in FSMA.^{footnote [3]} Under FSMA, the PRA must:

• pay any fines and other financial penalties received as a result of regulatory enforcement activity to HM Treasury (HMT) after deducting certain enforcement costs (these costs are referred to as ‘retained penalties’);
• publish and operate a financial penalty scheme to ensure that retained penalties are applied for the benefit of PRA-authorised firms; and
• ensure that any firm that has had a penalty imposed does not share in the distribution of retained penalties for the relevant fee year.

4.2 The PRA’s financial penalty scheme provides for retained penalties to be refunded as a rebate to the periodic fees payable by firms in the six fee blocks. There is no allocation to the A0 minimum fee block, as it does not bear any share of enforcement costs.

Application of retained penalties for 2022/23

4.3 In 2022/23, enforcement activity by the PRA resulted in fines and penalties of £28.6 million, of which £2.6 million is included into the calculation of the £0.8 million surplus being returned to industry. The remainder is remitted to HMT.

5. PRA objectives analysis

5.1 The PRA considers the proposals to be compatible with the PRA’s statutory objectives under FSMA:

• to promote the safety and soundness of PRA-authorised firms;
• in the context of insurance, to contribute to policyholder protection; and
• as a secondary objective, to facilitate effective competition in the markets for services provided by PRA-authorised persons in carrying out regulated activities.

5.2 The PRA considers that the proposed PRA Fees Amendment (No 1) Instrument 2023 set out in Appendix 1 will enable the PRA to fund the regulatory activities required to advance its statutory objectives during 2023/24.

5.3 The proposed fees levels are expected to advance the PRA’s secondary competition objective because fees for ORA are allocated in a proportionate manner across all PRA-authorised firms, while fees for specific projects and transactions are targeted only to those predominantly larger firms which generate these specific regulatory activities or, in the case of fees for new authorisation applications, continue to be subsidised by incumbent firms. For these reasons, the PRA considers the proposals to be compatible with the requirement for the PRA to act in a way that advances this objective.

5.4 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, 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.

5.5 In light of this, and the proposed 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. For the same reasons set out in paragraph 5.10, the PRA considers that the proposals will facilitate competitiveness and growth as described in the new objective.

‘Have regards’ analysis

5.6 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. The PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent in April 2022. The FSM Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it would 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 to the PRA’s proposals.

• The principle that a burden or restriction which is imposed on a person should be proportionate to the benefits which are expected to result from the imposition of that burden (FSMA regulatory principles): By allocating fees in a proportionate way through the use of fee blocks that take into account the size and nature of the PRA-authorised community, the PRA has had regard to this principle.
• The desirability of sustainable growth in the economy of the UK in the medium or long term (FSMA regulatory principles): The PRA has had regard to this principle by giving separate consideration to the interests of minimum fee payers and firms not affected by certain PRA activities.
• The principle that the PRA should exercise its functions transparently (FSMA regulatory principles and Legislative and Regulatory Reform Act of 2006): The PRA has had regard to this principle by clearly setting out the basis on which the proposed fees are calculated and providing advance notice of the proposed changes to its fees and charges.
• Competition (HMT recommendation letters): As stated above, the PRA allocates fees in a proportionate way through the use of fee blocks and thresholds that take into account the size and nature of its regulated community. Through the use of model application and maintenance/change fees, the PRA also seeks to ensure a balance, with its fees being appropriately targeted while not representing a barrier to the adoption and use of models by smaller firms.
• Growth (HMT recommendation letters): The PRA considers the importance of the financial services sector contributing to sustainable economic growth. By ensuring the proposals consider the size and nature of firms, the PRA fees will not act as a barrier to the growth of the financial services sector.
• Competitiveness (HMT recommendation letters): Given the international nature of some financial services, a transparent and proportionate fee regime helps to support the stability and competitiveness of the UK’s financial markets.
• Recognition of different business models (FSMA regulatory principles) and innovation (HMT recommendation letters): The proposals contained within this CP consider the differences in the business models employed by firms and support innovation by ensuring that they do not result in barriers to new entrants.

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

Cost benefit analysis

5.8 The PRA is exempt from having to carry out a cost benefit analysis on its draft fee rates.

Impact on mutuals

5.9 Within each fee block, the proposed costs to be recovered from individual firms are based on the size of their business. The PRA proposes to continue to discount the periodic fees payable by non-Directive general insurance firms, many of which are mutuals, by 11%. In addition, all life insurance non-Directive firms are excluded from periodic fees. The PRA does not consider the impact of the proposed fee rates on mutual societies to be significant. These continue to be lower than the minimum fee that applies to all other firms, and considerably lower than the cost to the PRA of supervising these firms.

Equality and diversity

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