PS19/23 – Responses to proposed minor amendments in CP8/23, Chapter 11 of CP12/23 and CP22/23

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to the following consultation papers (CP):

• CP8/23 – Occasional consultation paper – April 2023
• Chapter 11 of CP12/23 – Review of Solvency II: Adapting to the UK insurance market
• CP22/23 – Occasional consultation paper – October 2023

1.2 This PS also contains the PRA’s final policy in the form of final rules and an updated statement of policy (SoP).

1.3 This PS is relevant to different firms, as follows:

1.4 The appendices to this PS provide links to the final policy as set out in the table below.

Background

1.5 In three CPs published in 2023, the PRA proposed to make minor amendments to rules and a SoP.

1.6 In CP8/23, the PRA proposed to:

• amend the PRA’s approach to fulfilling its obligation to publish 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.

1.7 In Chapter 11 of CP12/23, the PRA proposed to make minor consequential changes to the PRA Rulebook to update definitions that encompass, or refer directly to the Solvency II Commission Delegated Regulation (SII CDR). The proposed minor amendments are consequential to HM Treasury's reforms Opens in a new window to the Solvency II risk margin.

1.8 In CP22/23, the PRA proposed to:

• amend the Depositor Protection Part of the PRA Rulebook (DPP) to facilitate the ability of the Financial Services Compensation Scheme (FSCS) to pay compensation to eligible depositors of insolvent deposit takers via electronic transfer; and
• amend the Senior Managers and Certification Regime (SM&CR) Forms C and D related to the Financial Conduct Authority’s (FCA) new consumer duty rules.

Summary of responses

1.9 The PRA received one response to Chapter 2 of CP8/23 that was supportive of the proposed change but raised a question for clarification.

1.10 The PRA received ten responses to Chapter 11 of CP12/23. No objections were made to the proposals.

1.11 The PRA received five responses to CP22/23. No objections were made to the proposals.

1.12 Details of the responses received and the PRA’s feedback are set out in Chapter 2 of this PS.

1.13 When making rules, the PRA is required to comply with several legal obligations, including publishing an account, in general terms, of representations made in the responses to consultation and the PRA’s response to them. In making rules the PRA must also satisfy its duties regarding advancing its objectives, having regard to relevant matters and regulatory principles. In all three CPs, the PRA provided explanations for each set of proposals. Given that no changes have been made to draft policy, the analyses in CP8/23, Chapter 11 of CP12/23, and CP22/23 remain unchanged.

Implementation

1.14 The implementation date for amended rules and updated SoP reflecting policy changes set out in CP8/23 and CP22/23 is 22 December 2023. The implementation date for amended rules reflecting policy changes set out in Chapter 11 of CP12/23 is 31 December 2023.

1.15 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: Feedback to responses

2.1 Before making any proposed rules, the PRA is required by 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.^{footnote [2]}

2.2 The PRA has considered the responses received to proposals in CP8/23, Chapter 11 of CP12/23, and CP22/23. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 For proposals in CP8/23 not discussed in this chapter, the PRA did not receive any responses.

The PRA’s approach to the publication of Solvency II technical information – minor updates (Chapter 2 of CP8/23)

2.4 The PRA proposed 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 proposed to update its SoP on the publication of Solvency II TI to reflect these changes.

2.5 One respondent commented in support of the proposals, but requested clarification on the appropriateness of using data from the Society of Lloyd’s in the non-GBP VA RPs, given that the Society of Lloyd’s does not apply the VA.

2.6 The PRA notes that the VA RPs are intended to reflect all UK firms’ asset exposures, irrespective of whether they apply the VA.^{footnote [3]} As set out in paragraph 2.7 of CP8/23, the PRA considers that inclusion of data from the Society of Lloyd’s in the non-GBP VA RPs increases the representativeness of these VA RPs.

2.7 Having considered this response, the PRA has decided to proceed with the proposals outlined in Chapter 2 of CP8/23.

Administrative amendments to PRA rules (Chapter 11 of CP12/23)

2.8 The PRA proposed that minor consequential changes be made to the PRA Rulebook to update definitions that encompass, or refer directly to the SII CDR. These proposed changes are consequential to the Government’s reforms to the Solvency II risk margin (RM). The changes will ensure that PRA rules refer to the SII CDR as amended by HMT’s legislation.

2.9 One respondent was supportive of the proposals. Nine respondents acknowledged the proposals and did not raise any specific concerns, or otherwise stated they had no comments.

2.10 Having considered the responses, the PRA has decided to proceed with the proposals outlined in Chapter 11 of CP12/23.

Facilitating alternative payment mechanisms for FSCS compensation payments (Chapter 2 of CP22/23)

2.11 The PRA proposed to amend the DPP to facilitate the ability of the Financial Services Compensation Scheme (FSCS) to pay compensation to eligible depositors of insolvent deposit takers via electronic transfer. Specifically, the PRA proposed to amend DPP 9.2 so that rather than obliging the FSCS to ‘pay compensation’ within the relevant time period set out in DPP 9.3, it is instead required to ‘make available the compensation’ within that time period.

2.12 The PRA received five responses to this proposal. Four respondents expressed broad support for the proposal. One respondent was concerned that individuals who are unable to access the portal could be disadvantaged relative to those who could use the portal to get an electronic transfer of their compensation. This is because they may have to wait longer to have access to their compensation payment, which, for them, could be made by cheque or cash over the counter.^{footnote [4]} The PRA considers that the intention behind this proposal is to speed up compensation payments for depositors where possible. This proposal will do that where electronic payment is feasible. The PRA acknowledges that there may be some situations where some depositors without access to the portal may wait slightly longer to have access to their compensation payment than those with access to the portal. However, the FSCS is required to pay depositors as soon as reasonably practicable,^{footnote [5]} and the PRA expects that the compensation for all depositors will be made available as quickly as possible. Notwithstanding this, the PRA has raised the respondent’s concern with the FSCS so that it can be considered during the implementation phase.

2.13 The PRA also received a number of other comments that were beyond the scope of the proposals but were relevant to the depositor protection framework. The PRA has noted these and may consider them in any future work on depositor protection.

2.14 Having considered the responses, the PRA has decided to proceed with the proposals outlined in Chapter 2 of CP22/23.

Updating SM&CR Forms C and D for the FCA’s new consumer duty (Chapter 3 of CP22/23)

2.14 The PRA proposed to amend SM&CR Forms C and D to allow firms to notify the PRA and the FCA of breaches of the new Consumer Duty rule using the forms.

2.15 The PRA received five responses that expressed broad support for the proposal. The PRA also received a response that was beyond the scope of the proposal.

2.16 Having considered the responses, the PRA has decided to proceed with the proposals outlined in Chapter 3 of CP22/23.