CP6/24 – Occasional consultation paper: April 2024

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Responses are requested by 30 May 2024

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Responses can be sent by email to: OCP.Responses@bankofengland.co.uk. FCA firms should address any comments or enquiries on proposals contained in Chapter 5 to the FCA at cp24-10@fca.org.uk.

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

Or for comments and enquiries on proposals in Chapter 5 for the FCA to:

Philip Bronk and Oliver McCausland / Market Conduct and Post-Trade Policy

Financial Conduct Authority

12 Endeavour Square

London

E20 1JN

Responses to proposals in Chapter 5

The proposal in Chapter 5 is a joint consultation by the PRA and the FCA. Responses to that proposal will therefore be shared between authorities, meaning the other organisation will also review the responses and may also contact you to clarify aspects of your response.

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Although the FCA and PRA have considered the proposals in Chapter 5 independently of one another and in accordance with their statutory objectives, we have decided to consult jointly to avoid unnecessary duplication.

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1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposals to make minor amendments to PRA rules and to add a new rule to the Policyholder Protection Part of the PRA Rulebook. Also included are joint PRA and Financial Conduct Authority (FCA) proposals to make amendments to technical standards relating to risk mitigation techniques for over-the-counter (OTC) derivative contacts not cleared by a central counterparty.

1.2 The proposals in this CP would:

• amend the Disclosure (CRR) Part of the PRA Rulebook;
• amend the Reporting (CRR) Part of the PRA Rulebook:
• amend Regulatory Reporting Part of the PRA Rulebook;
• amend the Glossary of the PRA rulebook;
• add a new Rule 9.5A to the Policyholder Protection Part of the PRA Rulebook (Policyholder Protection); and
• amend Binding Technical Standards (BTS) 2016/2251.

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

• Chapter 2 - institutions that were subject to Article 92b, ie that are material subsidiaries of non-UK G-SIIs and are not resolution entities (Article 92b firms).
• Chapter 3 – Proposal 1: Firms subject to CRR requirements; Proposal 2: All UK Solvency II firms; Proposal 3: Firms subject to CRR requirements.
• Chapter 4 - policyholders, the Financial Services Compensation Scheme (FSCS), trustees of occupational pension schemes and insurance firms.
• Chapter 5 - banks, building societies, and PRA-designated investment firms in scope of the margin requirements under UK European Market Infrastructure Regulation (UK EMIR). In addition, the proposed changes are relevant to all FCA solo-regulated entities and non-financial counterparties in scope of the margin requirements under UK EMIR (FCA firms).

1.4 The PRA has a statutory duty to consult when introducing new rules and changing rules (FSMA s138J), or making technical 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.

1.6 The FCA has a statutory duty to consult when amending a technical standard such as BTS 2016/2251 under s138S FSMA. Please refer to the ‘FCA compatibility statement’ section in Chapter 5 for an explanation of how the FCA is complying with relevant statutory requirements applicable to the proposal in this consultation.

1.7 None of the statutory practitioner panels were consulted by the PRA about the proposals in this CP. The FCA’s Markets Practitioners Panel was informed of the proposal in Chapter 5

Implementation

1.8 The PRA proposes that changes in Chapters 2, 3 and 4 would be implemented by the end of 2024. The PRA and FCA propose that the implementation date for the changes in Chapter 5 resulting from this CP would be Friday 1 November 2024, but subject to HMT making the commencement order revoking the Securitisation Regulation.

Responses and next steps

1.9 This consultation closes on Thursday 30 May 2024. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to [OCP.Responses@bankofengland.co.uk]. FCA firms should address any comments or enquiries for the proposals in Chapter 5 to cp24-10@fca.org.uk.

1.10 When providing your response, please tell us whether or not you consent to the PRA or FCA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.11 Please also 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.

1.12 References related to the UK’s membership of the EU in the rules and BTS covered by this CP have been updated as part of these proposals to reflect the UK’s withdrawal from the EU. 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: Consequential Amendments as a Result of the Revocation of Article 92b UK CRR

2.1 This chapter sets out the PRA’s proposals to amend references to Article 92b of Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (UK CRR) ^{footnote [2]} in the PRA’s Rulebook, following the revocation by HM Treasury (HMT) of Article 92b of the UK CRR.

2.2 The revocation, which was implemented by HMT via Regulation 5(b)(i) of the Financial Services and Markets Act 2023 (Commencement No. 1) Regulations 2023, became effective on 1 January 2024. The effect of this revocation is that material subsidiaries of non-UK Global Systemically Important Institutions (G-SIIs) will no longer be required under UK CRR to maintain internal Total Loss Absorbing Capacity (iTLAC) scaled at 90%.

2.3 As set out in the HMT consultation on the revocation of Article 92b^{footnote [3]}, iTLAC will instead be carried out through the Bank of England’s established minimum requirement for own funds and eligible liabilities^{footnote [4]} (MREL) framework.^{footnote [5]} Separate to the MREL framework, disclosure requirements and binding reporting requirements are contained in the PRA Rulebook. Therefore, it is necessary for the PRA to replace references to Article 92b within the PRA Rulebook with equivalent language to ensure that the scope of existing requirements is maintained.

2.4 The proposals in this chapter would result in changes to:

• The Disclosure (CRR) Part of the PRA’s Rulebook; and
• The Reporting (CRR) Part of the PRA’s Rulebook.

2.5 The chapter is relevant to institutions that were subject to Article 92b, ie that are material subsidiaries of non-UK G-SIIs and are not resolution entities (Article 92b firms).

Proposals

2.6 The PRA proposes to amend references to Article 92b in the Reporting (CRR) and Disclosure (CRR) Parts of the PRA Rulebook, in order to maintain the same levels of scope and application as before the revocation.

Proposal 1- Disclosure (CRR) Part of the rulebook

2.7 Articles 437a and 447(h) of the Disclosure (CRR) Part of the PRA Rulebook provide requirements for firms subject to Article 92a and Article 92b to disclose information regarding their own funds and eligible liabilities. Article 433a(3) states the frequency that Article 92a and Article 92b firms must disclose the information set out in Articles 437a and 447(h). The PRA proposes to amend Articles 433a(3) and 437a by replacing the reference to ‘institutions that are subject to [..] Article 92b’ with an updated definition that reflects the original scope of Article 92b firms.^{footnote [6]} The PRA considers that this proposed change should therefore maintain the current population of firms subject to such disclosure requirements.

2.8 Article 447 details the requirements for CRR firms to disclose certain key metrics. Article 447(h) requires Article 92a and Article 92b firms to disclose information regarding their own funds and eligible liabilities and their components, and for such information to be calculated in accordance with Article 92a and Article 92b respectively.

2.9 The PRA proposes to amend Article 447(h) by deleting the reference to ‘as calculated in accordance with Article[..] 92b’ and insert a new reference which has the same scope as the previous reference to Article 92b firms. Therefore, the proposed change would maintain the information that firms are currently required to disclose, as well as the current population of firms that were in scope of Article 92b. The PRA considers that there is no substantive change in disclosure requirements as a result of this proposal as compared with the pre-revocation position.

2.10 Consultation paper (CP) 5/21 - Implementation of Basel standards noted that some firms are voluntarily disclosing the Basel disclosure templates for Total Loss Absorbing Capacity (TLAC).^{footnote [7]} The PRA has not mandated the format of these disclosures but, as noted in CP5/21 (paragraph 14.23), the PRA is supportive of firms using the relevant Basel disclosure templates.

Proposal 2 - Reporting (CRR) Part of the rulebook

2.11 Article 430(1)(b) of the Reporting (CRR) part of the PRA Rulebook requires G-SIIs and material subsidiaries of G-SIIs to report their own funds and eligible liabilities to the PRA as laid down in Articles 92a and 92b of the UK CRR. The PRA proposes to amend Article 430(1)(b) by replacing the reference to ‘institutions that are subject to [..] Article 92b’ with a new reference that has the same scope as the previous reference to Article 92b firms.^{footnote [8]} The PRA considers that this proposed change should therefore maintain the current population of firms subject to such reporting requirements.

2.12 This proposed change would not result in a change to the information that firms report to the PRA. As noted in CP5/21 (paragraph 13.21), Article 430(1)(b) was introduced so that a binding requirement is in place for firms to report TLAC. The PRA considers that its current supervisory reporting provides sufficient information to continue to monitor firms’ MREL, including via MRL001-MRL003 reporting templates which are contained in SS19/13 – Resolution Planning.

PRA objectives analysis

2.13 With regards to the PRA’s primary objective, the PRA considers that its proposed approach ensures that the PRA’s Rulebook accurately reflects and maintains the population of firms subject to reporting and disclosure requirements. This allows such firms to continue to accurately report to the Bank and the PRA and continue to accurately disclose to the market. The continuation of accurate reporting and disclosure supports the PRA’s safety and soundness objective.

2.14 The Bank and the PRA receive information on resources, projected resources, and individual instrument characteristics via MRL001-MRL003 reporting templates, as set out in the Appendix section of SS19/13. This will continue to allow the PRA and the Bank to effectively monitor firms’ implementation of their MREL requirements, in turn supporting the PRA’s safety and soundness objective.

2.15 The reporting and disclosure proposals in this chapter do not change the current reporting and disclosure requirements and the population of firms subject to the requirements compared to the pre-revocation position, so therefore are unlikely to have an impact on the PRA’s secondary competition or competitiveness and growth objectives.

Cost benefit analysis (CBA)

2.16 The PRA considers that any increase in cost to firms would be minimal because there is no change to the population of firms covered or their reporting and disclosure requirements. The proposed updates would benefit firms by providing clarity on whether they are in scope of the requirements following the revocation of Article 92b of the UK CRR.

‘Have regards’ analysis

2.17 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 following factors, to which the PRA is required to have regard, were particularly significant in the PRA’s analysis of the proposal:

• The principle that regulators should ensure clear information, guidance and advice is available to help those they regulate meet their responsibilities to comply (Legislative and Regulatory Reform Act 2006): The aim of these proposals is to ensure the PRA’s Rulebook is up to date and evolves in line with a changing legislative framework. This gives clarity with respect to firm’s reporting and disclosure obligations.
• Transparency (FSMA regulatory principles, and Legislative and Regulatory Reform Act 2006): The aim of these proposals is to ensure that it is clear and simple for firms to understand whether they are in scope of the requirements.

2.18 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.

Impact on mutuals

2.19 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

2.20 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.

3: Regulatory Reporting, Reporting & Glossary- Minor updates

3.1 This chapter sets out the PRA’s proposals to make minor changes to the Regulatory Reporting Part of the PRA Rulebook and corresponding amendments to the Glossary of the PRA Rulebook.

3.2 The proposals in this chapter would result in changes to:

• The Regulatory Reporting Part of the PRA Rulebook; and
• The Glossary of the PRA Rulebook.

Proposal 1 - Amendments to the Regulatory Reporting (CRR Firms) Part of the PRA Rulebook

3.3 The PRA proposes amendments to the Regulatory Reporting (CRR Firms) Part of the PRA Rulebook.

3.4 This proposal applies to firms subject to CRR requirements. CRR requirements currently apply to PRA-authorised banks, building societies, PRA-designated investment firms, CRR consolidation entities and PRA-approved or PRA-designated financial holding companies or mixed financial holding companies (‘firms’).

3.5 The PRA proposes amendments to cross-references in the Regulatory Reporting Part of the PRA Rulebook because the rules currently reference the incorrect columns of a table.

3.6 Rule 6.1 of the Regulated Activity Groups chapter (6) of the Regulatory Reporting Part of the PRA Rulebook sets out the reporting rules applicable to the firms belonging to specific regulated activity groups (this rule is referenced as Table 6.1 within the chapter and will hereafter be referred to as Table 6.1). Certain rules within the Regulatory Reporting Part of the PRA Rulebook incorrectly reference components of Table 6.1 including:

• Rule 1.1(1) of Applications and Definitions, chapter (1) of the Regulatory Reporting Part of the Rulebook refers to ‘column (1)’ of table 6.1 to reference the regulated activities the firms are permitted to carry on; however, the regulated activities are listed in ‘column (2) within table 6.1’. The PRA proposes to amend the rule to cross reference column (2).
• Rule 2.1 of the Reporting Requirements - Data Items, chapter (2) of the Regulatory Reporting part of the Rulebook, incorrectly refers to the ‘corresponding rule referred to in column (2) of the table in 6.1’. Column (2) lists regulated activities whilst column (3) sets out relevant rule references. The PRA proposes to replace the reference to column (2) with a reference to ‘column (3)’.
• Rule 3.1 of Reporting Requirements Frequency and Period, chapter (3) of the Regulatory Reporting part of the Rulebook, also incorrectly cross-references table 6.1. Here the referenced text ‘must submit this information at the frequency and in respect of the periods specified in the rule referred to in the relevant row of column (3)’ is incorrect as it references the incorrect column. The PRA proposes to replace the incorrect reference to ‘column (3)’ with a reference to ‘column (4)’.

Proposal 2 - Amendments to the Glossary Part of the PRA Rulebook

3.7 The PRA proposes amendments to the Glossary Part of the PRA Rulebook.

3.8 This proposal is relevant to all UK Solvency II firms, the Society of Lloyd’s and its members and managing agents, and insurance and reinsurance undertakings that have a UK branch (third-country branch undertakings).

3.9 The PRA proposes to reinstate two defined terms to the Glossary of the PRA Rulebook, ‘railway rolling stock’ and ‘suretyship’, as both terms are currently undefined in Chapter 2 of the Reporting Part of the PRA Rulebook. Defining these terms will provide clarity to firms on the business that is in scope of the reporting requirements. These definitions were previously consulted on in 2015 but inadvertently deleted.

• The PRA proposes to reinstate a definition of ‘railway rolling stock’ to the Glossary. ‘Railway rolling stock’ currently appears in the Reporting: Reporting to the PRA section of the Solvency II firms PRA Rulebook as a defined term in (2.6(9(7))) without being linked to a glossary definition. The PRA proposes to add to the Glossary Part the definition ‘railway rolling stock means the class of contract of insurance specified in paragraph 4 of Part 1 of Schedule 1 to the Regulated Activities Order’.
• The same issue applies to ‘suretyship’ which appears as a defined term in the Reporting Part (2.6(4)). The PRA proposes to add a definition of ‘suretyship’ to the Glossary. The proposed definition will be ‘suretyship means the class of contract of insurance specified in paragraph 15 of Part 1 of Schedule 1 to the Regulated Activities Order’.

Proposal 3 - Amendments to the Reporting (CRR) Part of the PRA Rulebook

3.10 The PRA proposes amendments to the Reporting (CRR) Part of the PRA Rulebook.

3.11 This proposal applies to firms subject to CRR requirements, which currently apply to PRA-authorised banks, building societies, PRA-designated investment firms, and PRA-approved or PRA-designated financial holding companies or mixed financial holding companies (‘firms’), and CRR consolidation entities.

3.12 The PRA proposes to amend point 5 of Article 5 Individual Basis – Quarterly Reporting in Chapter 3 Format and Frequency of Reporting on Own Funds, Own Funds Requirements of the Reporting (CRR) Part, because it does not explicitly include a reference to the reporting template C 09.04. This reference was unintentionally omitted when the European Commission’s Implementing Regulation (EU) 2021/451 was onshored into the PRA’s Rulebook. However, taking into account the origin of reporting template C 09.04 and the fact that C 09.04 is included in Annex 1 of the Reporting (CRR) Part of the PRA’s Rulebook, the PRA considers that firms continue to be required to report C 09.04 pursuant to Article 5(5) of the Reporting (CRR) Part.

3.13 To ensure further clarity about firms’ reporting obligations, the PRA proposes to amend Article 5(5) to include an explicit reference to template C 09.04 and to make clear that firms are required to submit this template to the PRA.

3.14 Currently the text states the following: ‘Information on the geographical distribution of exposures by country, as well as aggregated at a total level, shall be submitted as specified in templates C 09.01 of Annex I, in accordance with the instructions in point 3.4 of Part II of Annex II.’ The PRA proposes the following amendment: ‘Information on the geographical distribution of exposures by country, as well as aggregated at a total level, shall be submitted as specified in templates C 09.01, C 09.02 and C 09.04 of Annex I, in accordance with the instructions in point 3.4 of Part II of Annex II’.

3.15 The PRA also proposes to amend Article 7(b) Reporting on a Consolidated Basis in Chapter 3 Format and Frequency of Reporting on Own Funds, Own Funds Requirements of the Reporting (CRR) Part because it does not explicitly include a reference to the reporting template C 06.02. This was unintentionally omitted when the European Commission’s Implementing Regulation (EU) 2021/451 was onshored into the PRA’s Rulebook. However, taking into account the origin of reporting template C 06.02 and the fact that C 06.02 is included in Annex 1 of the Reporting (CRR) Part of the PRA’s Rulebook firms continue to be required to report C 06.02 pursuant to Article 7(b) of the Reporting (CRR) Part.

3.16 Therefore, in order to ensure clarity with respect to firm’s reporting obligations, the PRA proposes to amend Article 7(b) to include an explicit reference to template C 06.02 to reflect that firms are required to submit this template to the PRA.

3.17 Currently Article 7(b) states the following: ‘(b) the information specified in template C 06.01 of Annex I, in accordance with the instructions provided in point 2 of Part II of Annex II regarding entities included in the scope of consolidation, with a semi-annual frequency’. The PRA proposes the following: ‘(b) the information specified in templates C 06.01 and C 06.02 of Annex I, in accordance with the instructions provided in point 2 of Part II of Annex II regarding entities included in the scope of consolidation, with a semi-annual frequency’.

PRA objectives analysis

3.18 The PRA considers that Proposals 1 and 2 ensure the accuracy of the PRA Rulebook through updating specific references. Ensuring the Glossary is complete provides confidence to firms using the PRA Rulebook. Proposal 3 ensures the accuracy of the PRA Rulebook by clarifying templates that firms are expected to complete. An accurate PRA Rulebook advances the PRA’s primary objective of safety and soundness as firms are able to understand their reporting requirements, which enables the PRA to effectively supervise them.

3.19 Proposal 1 is unlikely to have an impact on the PRA’s secondary competition or competitiveness and growth objectives, as it is correcting minor reference errors within the PRA Rulebook. Proposals 2 and 3 are unlikely to have an impact on the PRA’s secondary competition or competitiveness and growth objectives because both proposals are correcting unintentional omissions in the PRA Rulebook. For reasons outlined in paragraphs [3.12, 3.15] firms are already required to report templates C 09.04 and C 06.02. For Proposal 2, firms are already expected to have an understanding of the proposed additions.

Cost benefit analysis (CBA)

3.20 The PRA considers that the proposals would not result in any additional costs to firms because the PRA is correcting omissions of template references that firms are already required to report, updating references within the PRA Rulebook and correcting omissions from the glossary. The benefits of the proposed amendments would result in an accurate reflection of the obligations of firms within the Regulatory Reporting Part and the Reporting (CRR) Part of the Rulebook and an up-to-date Glossary that includes already defined terms.

‘Have regards’ analysis

3.21 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 following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• 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 reporting requirements as transparent and clear as possible so that firms understand their reporting obligations.

3.22 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

3.23 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms. This is because the rule changes do not impact mutuals more than other firms.

Equality and diversity

3.24 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.

4: FSCS eligibility - bulk purchase annuities and small business test

4.1 In this chapter, the PRA proposes to add a new Rule 9.5A to the Policyholder Protection Part of the PRA Rulebook (Policyholder Protection). This rule would clarify that individuals, who become members of occupational pension schemes (OPS) while they are resident in the UK, would benefit from FSCS protection even if they move outside the UK before an annuity (linked to that OPS) is purchased following a buy-out.

4.2 The proposals in this chapter would result in a new Rule 9.5A being added to Policyholder Protection.

4.3 This chapter also sets the PRA’s response to feedback to one part of the PRA’s discussion paper (DP) on the FSCS general insurance limit (DP2/23) dealing with the definition of ‘small business’ set out in Policyholder Protection. Following the feedback, the PRA has decided not to introduce a proposal to change the definition at this point.

4.4 This chapter is relevant to policyholders, the FSCS, trustees of OPS and insurance firms.

Proposal

4.6 The PRA proposes to add a new Rule 9.5A to Policyholder Protection to clarify rule 9.5(4) Policyholder Protection which sets out where a risk or commitment is situated for the purpose of the rules. The PRA considers that a clarification is needed because there is confusion as to whether an individual annuity policy issued by an insurance company following a buy-out is protected by the FSCS if the member of the OPS no longer has their habitual residence in the UK.

4.7 Trustees of an OPS often enter into bulk purchase annuity (BPA) agreements with insurers to help manage the liabilities associated with the pension scheme. On a buy-in, the trustee takes out an insurance policy that covers certain pension scheme liabilities. The policy is held by the trustees as an asset of the scheme. The policy pays an income equal to the benefits of the members covered, therefore removing the risk of there being insufficient assets to meet the scheme’s future liabilities. On a buy-out, responsibility for meeting scheme members’ benefits transfers from the trustee to the insurance company. The insurance company in turn issues individual annuity policies to the members. The PRA has become aware that there is some confusion as to whether the individual annuity policies issued by an insurance company on a buy-out are protected by the FSCS if the member no longer has their habitual residence in the UK.

4.8 At present, claims under a contract of insurance are only eligible for protection under the FSCS if (broadly) the risk or commitment is situated:

• in the UK (if the contract of insurance was issued post Implementation Period (IP) completion day^{footnote [9]});
• in the UK or EEA (if the contract of insurance was issued before IP completion day).

4.9 Rule 9.5(4) Policyholder Protection sets out where a risk or commitment is situated for the purpose of the rules. For policyholders that are individuals, this is their habitual residence. The potential for confusion arises because the definition of ‘habitual residence’ states that, in respect of the purchase of a pension annuity related to a life policy, this is the habitual residence of the policyholder at the date on which the policyholder signed the proposal for the life policy. If this is taken as the date that the member entered into the OPS, and the member was a UK resident at that point, it will be the UK. However, some people believe that this rule could require the policyholder’s habitual residence to be reassessed at the point at which an annuity is issued on buy-out with the result that the member’s habitual residence will no longer be the UK and they will not benefit from FSCS protection.

4.10 Recognising the potential for confusion, and given the growth in the BPA market^{footnote [10]}, the PRA proposes to add a new Rule 9.5A to Policyholder Protection which would apply where there is a risk that a policyholder in the above circumstances would not benefit from FSCS protection by virtue of Rule 9.5 Policyholder Protection. The new rule would clarify that the habitual residence of an individual when they joined the OPS is relevant in determining whether a life policy or pension annuity, that relates to benefits that the individual has accrued as a member of an OPS, is protected by the FSCS.

PRA objectives analysis

4.11 This proposal is intended to give policyholders greater confidence that their policies will be protected should an insurer suffer financial difficulties. This would advance the PRA’s objective of securing an appropriate degree of policyholder protection, as it seeks to minimise the adverse effect that the failure of a PRA-authorised person may have on policyholders. That would also help to promote the stability of, and confidence in, the UK financial system, and so promote the safety and soundness of firms.

4.12 The PRA has assessed whether the proposal in this chapter advances its secondary competition, and competitiveness and growth objectives. 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 advance the PRA’s secondary competitiveness and growth objective, as it would reduce the disruption caused by the failure of an insurance firm and thus enhance consumers’ trust in UK-regulated insurers. This would help ensure that the UK remains an attractive domicile for internationally active insurers.

Cost benefit analysis (CBA)

4.13 The PRA considers that the main benefit of clarifying Rule 9.5(4) is that it will provide certainty for members and trustees of an OPS about the circumstances in which its members benefit from FSCS protection following a buy-out. The PRA considers that this will enhance policyholder confidence in the FSCS and UK insurance sector.

4.14 The PRA considers that this clarification would not result in the FSCS, the PRA or insurance firms incurring additional costs. The new Rule 9.5A seeks to clarify the existing position. The FSCS would not be required to make any additional payments above that which it already would have made. The PRA considers that it would not result in a change to the annual FSCS levy imposed on insurance firms.

‘Have regards’ analysis

4.15 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 following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

1. Encouraging economic growth in the interests of consumers and businesses (HMT recommendations letter): The proposal will result in a better outcome for consumers as it will ensure that members of OPS receive FSCS protection should they move outside the UK after joining the OPS and before an annuity is issued following a buy-out. This will increase consumer confidence in the FSCS and the UK insurance sector as a whole ensuring that the UK remains an attractive place for international insurers to do business.
2. The use of the resources of the PRA in the most efficient and economic way (FSMA regulatory principle): The proposal will reduce the number of questions the PRA receives on the scope of FSCS coverage for annuities linked to OPS. This will help use the PRA's resources economically.
3. LRRA five principles: The proposals contained in this chapter are in line with LRRA principles of good regulation. By clarifying its rules, the PRA will be acting transparently and ensuring that its rules will be consistently applied.

4.16 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

4.17 The PRA does not consider that the impact of the proposal on mutual societies will be different from the impact on other firms.

Equality and diversity

4.18 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.

Small business test – response to DP2/23

4.19 The PRA published DP2/23 on 2 November 2023. The DP sought input into two matters. These were increasing the level of FSCS protection for general insurance from 90% to 100% and changing the definition of ‘small business’ set out in Policyholder Protection. DP2/23 closed on 24 January 2024 and the PRA has now reviewed the responses.

4.20 The PRA has decided not to introduce a proposal to change the definition of ‘small business’ at this point. The responses to DP2/23 did not provide the PRA with sufficient data to support a change to that definition and highlighted the consequential implications and possible costs that would arise for third-country insurance branches if the definition was amended.^{footnote [11]} The PRA will provide a response to the proposal to increase the level of FSCS protection for general insurance at a later date.

5: Joint PRA and FCA Consequential Amendments BTS 2016/2251

5.1 In this chapter, the PRA and the FCA are jointly consulting on proposed consequential amendments to the UK version of Commission Delegated Regulation (EU) 2016/2251 of 4 October 2016, the regulatory technical standards for risk-mitigation techniques for over-the-counter (OTC) derivative contracts not cleared by a central counterparty (hereafter Binding Technical Standards (BTS) 2016/2251). This BTS supplements Article 11(15) of Regulation (EU) No 648/2012 on OTC derivatives, central counterparties, and trade repositories (EMIR) (Appendix 1).^{footnote [12]} The proposed changes are to reflect the expected changes to Article 4 and 11 of UK EMIR that will be made in the draft Securitisation (Amendment) Regulations 2024.^{footnote [13]}

5.2 The proposed changes are relevant to banks, building societies, and PRA-designated investment firms in scope of the margin requirements under UK EMIR. In addition, the proposed changes are relevant to all FCA solo-regulated entities and non-financial counterparties in scope of the margin requirements under UK EMIR (FCA firms).

5.3 The PRA and FCA have aligned their proposals closely, which should contribute to ensuring clarity for firms and a proportionate approach to regulation. Coordination between the PRA and the FCA is required under the Financial Services and Markets Act 2000 (FSMA) when either regulator is making technical standards.

Proposal

5.5 UK EMIR and BTS 2016/2251 implements the bilateral margining requirements in the UK. The requirements are a key aspect of the post-crisis reforms aimed at mitigating systemic risk and incentivising central clearing, in accordance with the standard on ‘Margin requirements for non-centrally cleared derivatives’ published by Basel Committee on Banking Supervision (BCBS) and International Organisation of Securities Commissions (IOSCO).

5.6 FSMA 2023 provided powers to HMT to repeal assimilated law and to create a new legislative Smarter Regulatory Framework (SRF). As part of SRF, the onshored Securitisation Regulations 2017/2402 is to be replaced by the Securitisation Regulations 2024 and FCA and PRA rules. The Act also introduced a new provision in the Securitisation Regulations 2024 that allows for HMT to, broadly speaking, designate other jurisdictions in relation to overseas simple, transparent and standardised (STS)-equivalent securitisations. In light of this new provision, it is expected that the draft Securitisation (Amendment) Regulations 2024 will make consequential amendments to Article 4 and 11 of UK EMIR to reflect this new provision such that firms are able to apply the same margining treatment to specified overseas STS securitisations that they would otherwise apply to UK notified STS securitisations. This will provide clarity for firms as to the margining treatment that can be applied to specified overseas STS securitisations in jurisdictions designated as equivalent by HMT. For the avoidance of doubt, HMT has not yet designated any other jurisdictions in relation to STS-equivalent securitisations.

5.7 The PRA and FCA propose to make further consequential amendments to BTS 2016/2251 in order to align with the amendments to Article 4 and 11 of UK EMIR by updating the cross-referencing to the definition of ‘securitisation’ to reflect the definition in the Securitisation Regulations 2024.

PRA objectives analysis

5.8 The proposal is compatible with the PRA’s primary objective to promote the safety and soundness of PRA-authorised firms. By ensuring that relevant PRA-regulated firms comply with the standards set out in Securitisation Regulations 2024, the PRA is promoting the safety and soundness of regulated firms.

5.9 The PRA considers that the proposal advances the PRA’s secondary competitiveness and growth objective, as it would facilitate the international competitiveness of UK financial services sector by allowing firms to apply the margining treatment for UK notified STS securitisations to a broader set of STS securitisations in other specified jurisdictions. The PRA does not consider the proposal to have an impact on the PRA’ secondary competition objective.

Cost benefit analysis (CBA)

5.10 The proposal in this chapter to update cross-referencing will help ensure that relevant PRA-regulated firms comply with the requirements set out in Securitisation Regulations 2024, thereby reducing the risk that their benefits are not fully realised. The PRA does not expect the proposal to impose material incremental compliance costs on affected firms.

‘Have regards’ analysis

5.11 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 following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006): The PRA considers that ensuring the relevant provisions in the Securitisation Regulations 2024 are applied consistently across other relevant legislation ensures that the PRA is exercising its functions as transparently as possible.

5.12 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

5.13 The PRA does not consider that the impact of the proposal on mutual societies will be different from the impact on other firms.

Equality and diversity

5.14 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposal does not give rise to equality and diversity implications.

Compatibility with the FCA’s general duties and regulatory principles

Rule Review Framework

5.15 The FCA’s Rule Review Framework states that while the FCA will generally monitor key metrics of new rules, this is not a requirement where it would be disproportionate or where the new rule relates to a minor policy or rule change with minimal impact. Due to the nature of the changes proposed here, the FCA is satisfied that the proposed amendments are exempt from the requirement to be monitored under the Framework.

Cost benefit analysis

5.16 Section 138I of FSMA requires the FCA to perform a cost benefit analysis (CBA) of the proposed requirements and to publish the results unless the FCA considers the proposal will not give rise to any cost or that the increase in costs will be of minimal significance.

5.17 The FCA does not consider that the proposal will impose material incremental compliance costs on affected firms. As such, the FCA has not conducted a CBA per the exemption under FSMA.

Impact on mutual societies

5.18 The FCA does not consider that the impact of the proposal on mutual societies differ significantly from the impact on other firms.

Compatibility statement

5.19 When consulting on new rules, the FCA is required by section 138I(2) of FSMA to explain why it believes that making the proposed rules is consistent with its strategic objective, advances one or more of its operational objectives and (so far as reasonably possible) its secondary international competitiveness and growth objective. Further, the FCA must have regard to the regulatory principles in section 3B of FSMA and the importance of taking action intended to minimise financial crime (section 1B(5)(b) of FSMA). The FCA is also required to have regard to the principles in the Legislative and Regulatory Reform Act 2006, the Regulators’ Compliance Code and aspects of the Government’s economic policy set out in the most recent HMT remit letter.

5.20 The FCA is satisfied that the proposed amendments are compatible with its objectives and regulatory principles since they will provide clarity for firms by ensuring our rules are aligned with the amendments to UK EMIR. The amendments advance the FCA’s operational objective of protecting the integrity of the UK financial system and the FCA’s strategic objective of ensuring the relevant markets function well by ensuring that relevant FCA-regulated firms comply with the standards set out in Securitisation Regulation, thereby reducing the risk that their benefits are not fully realised. The FCA is satisfied that any burdens or restrictions are proportionate to the expected benefits. The FCA is also satisfied that the proposed amendments are compatible with its secondary international competitiveness and growth objective since they will provide clarity to firms on how the bilateral margining requirements apply.

5.21 In developing the proposal, the FCA has considered the environmental, social and governance (ESG) implications of our proposals and our duty under ss. 1B(5) and 3B(c) of FSMA to have regard to contributing towards the Secretary of State achieving compliance with the net-zero emissions target under section 1 of the Climate Change Act 2008. Overall, we do not consider that the proposal is relevant to contributing to those targets. We will keep this issue under review during the course of the consultation period and when considering whether to make the final rules.

Equality and diversity

5.22 The FCA has considered the equality and diversity issues that may arise from the proposed amendments and has not identified any adverse impact that the proposal in this chapter would have on any of the groups with protected characteristics under the Equality Act 2010 (ie, age, disability, sex, marriage or civil partnership, pregnancy and maternity, race, religion and belief, sexual orientation and gender reassignment). In Northern Ireland, the Equality Act is not enacted but other anti-discrimination legislation applies.

5.23 The FCA will continue to consider the equality and diversity implications of the proposal during the consultation period and will revisit them when publishing the final instrument. In the meantime, the FCA welcomes comments on any equality and diversity considerations respondents believe may arise.