CP22/23 – Occasional consultation paper – October 2023

Privacy statement

By responding to this consultation, you provide personal data to the Bank of England (the Bank, which includes the Prudential Regulation Authority (PRA). 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 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.

Responses are requested by 13 November 2023.

Consent to publication

The PRA publishes a list of respondents to its consultations, where respondents have consented to such publication.

When you respond to this consultation paper (CP), please tell us in your response if you agree to the publication of your name, or the name of the organisation you are responding on behalf of, in the PRA’s feedback response to this consultation.

Please make it clear if you are responding as an individual or on behalf of an organisation.

Where your name comprises ‘personal data’ within the meaning of data protection law, please see the Bank’s Privacy Notice above, about how your personal data will be processed.

Please note that you do not have to give your consent to the publication of your name. If you do not give consent to your name being published in the PRA’s feedback response to this consultation, please make this clear with your response.

If you do not give consent, the PRA may still collect, record and store it in accordance with the information provided above.

You have the right to withdraw, amend or revoke your consent at any time. If you would like to do this, please contact the PRA using the contact details set out below.

Responses can be sent 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 PRA rules.

1.2 The changes proposed in this CP would:

• 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.

1.3 The chapters in this CP are relevant to different types of firms, as follows:

• Chapter 2 – this chapter is relevant to the FSCS and of interest to deposit-taking firms and depositors.
• Chapter 3 – this chapter is relevant to all PRA-authorised firms, including credit unions.

1.4 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. 

1.5 In carrying out its policymaking functions, the PRA is required to comply with several legal obligations. 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. The PRA has not consulted any statutory panels as part of this CP.

Implementation

1.6 The PRA proposes that the implementation date for the changes resulting from this CP would be in December 2023.

Responses and next steps

1.7 This consultation closes on Monday 13 November 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.

1.8 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.^{footnote [1]}

2: Facilitating alternative payment mechanisms for FSCS compensation payments

2.1 In this chapter, the PRA proposes a change to Rule 9.2 of 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, in accordance with rules on eligibility and compensation limits. This would support faster pay-outs and is linked to FSCS’ ongoing work supporting the Bank’s work on improving depositor outcomes in bank or building society insolvency (IDOBI).

2.2 The proposal in this chapter would result in a change to DPP 9.2.

2.3 This chapter is relevant to the FSCS and of interest to deposit-taking firms and depositors.

Proposal

2.4 The PRA proposes to amend DPP 9.2 which provides that the FSCS is required to pay compensation within the timescales set out in DPP 9.3. At present, the FSCS must pay the compensation to depositors within ten working days of a deposit taker failing; at the end of 2023, the maximum time to pay the compensation will be reduced to seven working days.

2.5 Currently, the FSCS usually pays compensation by issuing a cheque within the timeframe set out in the PRA rules. However, that cheque will need to reach the depositor, be banked, and cleared before the depositor can use the funds to buy goods and services. That process may require some depositors to open an account with another bank, which may take some time. Thus, while an FSCS pay-out is underway, depositors may temporarily lose access to their funds at the bank or building society in insolvency. The impact of this would depend on the depositor profile of the bank or building society in question and whether the depositor has access to a deposit account with an alternative provider. For example, the impact will be greater for a bank with a high proportion of depositors whose primary source of income is paid into the bank. The impact arising from the insolvency of a bank that mainly caters to depositors or small businesses, which they rely on for day-to-day banking services, such as standing orders and direct debits, will also be greater.

2.6 In order to further the Bank’s work on IDOBI, the FSCS is working to introduce an online portal (the Portal), which will allow depositors of insolvent deposit takers to be paid compensation electronically. The Portal aims to reduce the disruption caused by insolvency for those depositors who are protected by the FSCS; particularly those that are reliant on their accounts with the failed firm for day-to-day banking and access to money. The Portal will provide eligible depositors with the opportunity of requesting the compensation be paid either by electronic transfer to an alternate bank account or by cheque.

2.7 The PRA is proposing 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. The PRA has identified that, under the current rules, if a depositor does not access the Portal promptly, in practice within three working days of receiving the notification, the FSCS will be required to issue the depositor with a cheque payment or risk breaching DPP 9.2 as currently worded. This could undermine the purpose and benefits of the Portal. In practice, amending DPP 9.2 would mean that the FSCS would, within that time period, need to send eligible depositors a notification to enable access to the Portal but would not risk breaching DPP 9.2 if the depositor does not access the Portal. The FSCS remains under a duty to pay compensation following the proposed rule change. If a depositor cannot access the Portal, or does not do so within a reasonable time, the FSCS would need to make other arrangements to pay that depositor such as sending a cheque.

Cost benefit analysis

2.8 The PRA considers that the main benefit of amending DPP 9.2 is that it will enhance the practical ability of the FSCS to give depositors the flexibility of choosing whether they would prefer to be paid compensation electronically where they have an alternative bank account or be paid by cheque. The depositors who prefer to be paid electronically could access their funds more rapidly than under the current system, reducing the disruption from the failure of a deposit taker. Therefore, the PRA considers that the proposed rule change would provide a better outcome for depositors. In addition, the PRA considers that facilitating faster pay-outs enhances depositor confidence in the FSCS and the UK deposit-taking sector.

2.9 The PRA considers that this rule change would not result in the FSCS incurring additional costs. Improvements in FSCS depositor pay-out capabilities could increase the costs on the FSCS, however, those costs would have been incurred regardless of the rule change.

PRA objectives analysis

2.10 The PRA has a statutory general objective of promoting the safety and soundness of PRA-authorised persons. The PRA considers that the proposal set out in this section advances this primary objective as it seeks to minimise the adverse effect that the failure of a PRA-authorised person may have on depositors, and so helps promote the stability of, and confidence in, the UK financial system.

2.11 When discharging its functions in a way that advances its general objective, the PRA has a secondary objective to facilitate effective competition in the markets for services provided by PRA-authorised persons. It also has a secondary objective to advance international competitiveness and sustainable growth. The PRA considers that the proposal in this section is unlikely to have an impact on the PRA’s secondary competition objective. The PRA considers that the proposal does promote the PRA’s secondary competitiveness and growth objectives as it would allow the FSCS to use a wider range of payment methods in the event of an insolvency, thus reducing the disruption caused and enhancing consumers’ trust in UK-regulated firms. This would help ensure that the UK remains an attractive domicile for internationally active financial institutions, and that London retains its position as a leading financial centre.

‘Have regards’ analysis

2.12 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 2022. The following factor, to which the PRA is required to have regard, was significant in the PRA’s analysis of the proposal:

• Better outcome for consumers (HMT recommendation letter): In general, the role of the FSCS is to provide compensation to consumers of financial products when authorised firms are unable, or likely to be unable, to meet their obligations. A compensation scheme provides a safety net, offering protection to consumers, which in turn leads to greater confidence in their dealings with financial services firms, benefiting all firms and leading to a stronger financial system. The PRA considers that the proposed amendment, which would facilitate the FSCS using alternative payment methods for paying compensation, results in a better outcome for consumers and less disruption to consumers in the event of the insolvency of a deposit taker.

2.13 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

2.14 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

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

3: Updating SM&CR Forms C and D for the FCA’s new consumer duty

3.1 In this chapter, the PRA proposes changes to Senior Managers and Certification Regime (SM&CR) Forms C and D related to the FCA’s new consumer duty rules.

3.2 The proposal in this CP would result in changes to:

• Senior Managers Regime – Applications Notifications Part of the PRA Rulebook (Appendix 2);
• Insurance – Senior Managers Regime – Applications and Notifications Part of the PRA Rulebook (Appendix 2);
• Large Non-Solvency II Firms – Senior Managers Regime – Applications and Notifications Part of the PRA Rulebook (Appendix 2); and
• Non-solvency II Firms – Senior Managers Regime – Applications and Notifications Part of the PRA Rulebook (Appendix 2).

3.3 This chapter is relevant to all PRA-authorised firms, including credit unions. Forms submitted before the proposed changes take effect would be unaffected.

Proposal

Updating SM&CR Forms C and D

3.4 SM&CR Form C is used to notify the PRA and the FCA that a person has permanently ceased to perform a senior management function, including where the withdrawal of the approval includes a notification of disciplinary action related to conduct breaches. SM&CR Form D is used to notify the PRA and the FCA of changes to personal information, changes to information submitted on SM&CR Forms when approval was applied for, and details of conduct breaches or disciplinary action related to conduct.

3.5 Following the introduction of the FCA’s consumer duty that sets higher and clearer standards of consumer protection across financial services and requires firms to put their customers’ needs first, the FCA made a new Individual Conduct rule, such that firms, and individuals subject to the Code of Conduct, must act to deliver good outcomes for retail customers (the Consumer Duty rule). The PRA proposes to add reference to this new rule to Forms C and D so that the Forms can be used to notify the PRA and the FCA of breaches of that rule.

3.6 The PRA proposes to add a new row to the tables in question 3A.03 of Form C and question 6.02.1 of Form D that will allow firms to notify the PRA and the FCA of breaches of the new Consumer Duty rule.

Cost benefit analysis

3.7 The PRA does not expect the proposal to increase costs to firms completing Forms C and D. The proposal should make it easier for firms to notify the regulators of a breach of the consumer duty rule, which could potentially reduce administrative costs. The update also ensures the forms reflect the current state of the FCA Rules.

PRA objectives analysis

3.8 This proposal would allow firms to notify of breaches of the consumer duty rule using SM&CR Forms C and D in the same way they are able to use the form to notify of other conduct rule breaches. It is important that the PRA and the FCA are notified of such breaches and as such the proposal advances the PRA’s primary objective of advancing the safety and soundness of firms.

3.9 The proposal in this chapter is unlikely to have an impact on the PRA’s secondary competition or competitiveness and growth objectives.

‘Have regards’ analysis

3.10 In developing this 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 2022. The following factor, to which the PRA is required to have regard, was significant in the PRA’s analysis of the proposal:

• Efficient use of resources (FSMA regulatory principles): In light of the need to use the resources of each regulator in the most efficient and economic way, the PRA considered if proposing this change was an effective use of resource. Given the benefits it would bring to firms and the PRA in terms of ease of notifying of breaches of this new duty using existing forms, the PRA considered it appropriate to consult on making the proposed change.

Impact on mutuals

3.11 The PRA does not expect this proposal to have a different impact on mutuals compared to other firms.

Equality and diversity

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