PS17/24 – Responses to CP6/24: OCP policy statement

1: Overview

1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses the PRA received to consultation paper (CP) 6/24 – Occasional consultation paper: April 2024. It also contains the PRA’s final policy, as follows:

• amendments to the Disclosure (CRR) Part of the PRA Rulebook (Appendix 1);
• amendments to the Reporting (CRR) Part of the PRA Rulebook (Appendices 1 and 2);
• amendments to the Regulatory Reporting Part of the PRA Rulebook (Appendix 2);
• amendments to the Glossary of the PRA Rulebook (Appendix 2); and
• the addition of a new Rule 9.5A to the Policyholder Protection Part of the PRA Rulebook (Policyholder Protection) (Appendix 3).

1.2 This PS also provides feedback to responses in relation to a proposal in CP6/24, which was a joint consultation with the Financial Conduct Authority (FCA) (FCA Consultation paper 24/10). It also contains PRA’s and FCA’s final policy in the form of amendments to Binding Technical Standards (BTS) 2016/2251 (Appendices 4 and 5).

1.3 This PS is relevant to different firms, in accordance with the CP chapters, 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 (OPS) 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).

Background

1.4 In CP6/24 the PRA proposed to:

• 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; and
• add a new Rule 9.5A to the Policyholder Protection Part of the PRA Rulebook (Policyholder Protection).

1.5 The PRA and FCA also proposed to make consequential amendments to BTS 2016/2251 to reflect the expected changes to Article 4 and 11 of UK EMIR that will be made in the draft Securitisation (Amendment) Regulations 2024.

1.6 In determining its policy, the PRA considers representations received in response to consultation, publishing an account of them and the PRA’s response (feedback). Details of any significant changes are also published. In this PS, the ‘Summary of responses’ section contains a general account of the representations made in response to the CP and the ‘Feedback to responses’ chapter contains the PRA’s feedback.

1.7 In carrying out its policy making functions, the PRA is required to have regard to various matters. In CP6/24 the PRA explained how it had regard to the most relevant of these matters in relation to the proposed policy. The ‘Changes to draft policy’ section of this chapter refers to that explanation, taking into account consultation responses where relevant.

Summary of responses

1.8 The PRA received three responses to CP6/24 in total. Two of the respondents consented to their names being published and these names are set out in Appendix 6.

1.9 Of the responses that the PRA received to CP6/24, one response was in relation to Chapter 2 and was supportive of the proposed change but raised a question for clarification.

1.10 Two responses were in relation to Chapter 4 (FSCS eligibility – bulk purchase annuities and small business test). The respondents requested further clarity on the extent of FSCS coverage for OPS members.

Changes to draft policy

1.11 This PS takes account of how the policy advances the PRA’s objectives and of significant matters that the decision maker had regard to. These are as set out in CP6/24.

1.12 Where the final rules or Technical Standards differ from the draft in the CP in a way which is, in the opinion of the PRA, significant, the Financial Services and Markets Act 2000 (FSMA)^{footnote [1]} requires the PRA to publish:

• details of the differences together with an updated cost benefit analysis; and
• a statement setting out in the PRA’s opinion whether or not the impact of the final rules on mutuals is significantly different from: the impact that the draft rule would have had on mutuals; or the impact that the final rule will have on other PRA-authorised firms.

1.7 Having considered the response to the proposals in Chapter 2 of CP6/24, the PRA has made some minor changes to Rule 2.2 of the Disclosure Part of the PRA Rulebook. These amendments are discussed in more detail in the ‘Feedback to responses’ section of Chapter 2.

1.9 Having considered the response to Chapter 4, the PRA has also made some minor amendments to Rule 9.5A to improve clarity without changing the substance.

1.10 The PRA considers that changes to each of these rule instruments will provide further clarity for firms, but do not alter policy, and therefore the cost benefit analysis and ‘have regards’ analysis for these proposals will remain the same. Similarly, the PRA also does not consider that these changes will have a significantly different impact on mutuals relative to the impact on other PRA-authorised firms.

1.12 When making rules, the PRA is required to comply with several legal obligations. In CP6/24, the PRA published its explanation of why the rules proposed by the CP were compatible with its objectives and with its duty to have regard to the regulatory principles.^{footnote [2]} The PRA considers that the minor amendments being made to the draft rules do not alter the policy and so this explanation, as presented in CP6/24, remains unchanged.

1.12 When making CRR Rules and certain rules applying to holding companies, the PRA must consider and consult HM Treasury (HMT) about the likely effect of the rules on relevant equivalence decisions. The PRA has done so and received no further comments.

1.13 In addition, when making CRR rules or rules applying to certain holding companies, the PRA must also publish a summary of the purpose of the proposed rules.^{footnote [3]} These summaries, relevant to Chapters 2 and 3 of CP6/24, are set out in the CP.

Implementation

1.14 The implementation date for the rules covered by this PS is 4 November 2024.

1.15 The amendments to BTS 2016/2251 will be effective on 1 November 2024, which is when the final Technical Standards instrument by the PRA and FCA comes into force.

2: Feedback to responses

2.1 Before making any proposed rules or Technical Standards, the PRA is required by FSMA to have regard to any representations made to it in response to the consultation, and to publish an account, in general terms, of those representations and its feedback to them.^{footnote [4]}

2.2 The PRA has considered the representations received in response to the proposals set out in Chapter 2 and Chapter 4 of CP6/24. This chapter sets out the PRA’s feedback to those responses, and its final decisions.

2.3 The PRA did not receive any responses to the proposals set out in Chapter 3 and Chapter 5 of CP6/24 and so will implement the proposals as set out in these chapters of CP6/24.

2.4 Before making any proposed technical standards, the FCA is required to publish an account of the representations received in response to the consultation, its response to them and a list of respondents who have consent to the publication of their names.^{footnote [5]} The FCA received no responses in relation to Chapter 5 of CP6/24 and will implement the proposals as consulted on. The FCA has accordingly not provided a summary of feedback received or list of respondents.

2.5 The FCA remains satisfied the proposed amendments are compatible with its objectives (both operational and secondary objectives) as stated in CP 6/24. In addition, the FCA is satisfied that the proposed amendments are exempted from the FCA’s Rule Review Framework since the amendment is a minor policy or rule change with minimal impact. The FCA consider that the amendments will not have a negative impact on any of the groups with protected characteristics under the Equality Act and no concerns were raised with our assessment during consultation.

Consequential amendments as a result of the revocation of Article 92b UK CRR (Chapter 2 of CP6/24)

2.6 In CP6/24, Chapter 2, the PRA proposed to amend references to Article 92b in the Reporting (CRR) and Disclosure (CRR) Parts of the PRA Rulebook, to maintain the same level of scope and application following the revocation by HMT of Article 92b of the UK CRR.

2.7 One respondent questioned whether the changes within the Disclosure (CRR) part of the Rulebook would unintentionally increase the disclosure requirements for firms that previously applied Article 92b requirements on a consolidated group basis but have more than one material subsidiary for the purposes of internal MREL requirements.

2.8 It is not the PRA’s policy objective to increase the scope of disclosure obligations but simply to maintain the same level of scope and application prior to Article 92b revocation. The PRA has considered this feedback in the context of the existing level of application provisions within the Disclosure (CRR) Part of the PRA Rulebook and the CRR.

2.9 Given the feedback, the PRA has made some minor changes to the rule instrument to reflect more closely the previous scope of application. These include changes to Rule 2.2 of the Disclosure Part of the PRA Rulebook. Rule 2.2 references Article 6(1a) of the CRR, which was amended by HMT so as to remove from its scope institutions that are material subsidiaries of non-UK G-SIIs and which are not resolution entities or subsidiaries of a UK parent institution.

2.10 To maintain the original scope of application, the PRA considers it necessary to amend Rule 2.2 of the Disclosure Part to capture these institutions on an individual basis. The PRA has also made minor changes to Articles 433a and 437a to clarify that these requirements do not apply where an entity is a subsidiary of a UK parent institution. The net effect of these changes is to maintain the historical position so that where there is a sub-group of material subsidiaries under a UK parent company, only the parent company has to comply with the disclosure requirements on a consolidated basis.

2.11 The changes to the rule instrument consulted on are not substantive in effect. The minor amendments to the rules are intended to maintain the scope of the disclosure requirements and will not amend the substance of the provisions.

FSCS eligibility – bulk purchase annuities and small business test (Chapter 4 of CP6/24)

2.12 In Chapter 4 of CP6/24, the PRA proposed 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 a life policy or pension annuity (linked to that OPS) is purchased following a buy-out. FSCS protection for policyholders means that the FSCS will ensure that, if an insurer fails, an eligible policyholder is still able to be paid for claims made under an insurance policy with that insurer.

2.13 The PRA received two responses to this proposal. The respondents considered that the new rule may not always provide greater certainty to OPS trustees on whether OPS members living abroad at the point of buy-out benefit from FSCS protection. They explained that it may be difficult for OPS trustees to verify whether the OPS member was in fact based in the UK at the point they joined the OPS, as the OPS trustee will not necessarily have this information.

2.14 The rules in Chapter 9 Policyholder Protection apply to the FSCS and set out how the FSCS should administer the policyholder protection regime. While other interested parties may wish to rely on the rules to understand whether eligible policyholders will be entitled to FSCS protection, that is not the intended purpose of the rules. Therefore, the PRA considers that the possibility that the OPS trustee may not have kept records of an OPS member’s historical habitual residence is not a sufficient reason to prevent the PRA proceeding with the rule change because:

• the FSCS will carry out its own investigation into the eligibility of the policyholder and will not be reliant solely on the OPS trustee’s records; and
• if the FSCS is unable to obtain information on the habitual residence of a policyholder at the point at which they entered into the OPS, Rule 3.4 Policyholder Protection entitles the FSCS to pay compensation without investigating the eligibility of the OPS member, if it considers that:
  • the costs of investigating the merits of the claim are reasonably likely to be disproportionate to the likely benefit of such investigation; and
  • (as a result or otherwise) it is reasonably in the interests of relevant persons to do so.

2.15 The PRA considers that should OPS trustees wish to obtain comfort that an eligible OPS member will continue to benefit from FSCS protection following a buy-out, it would be proportionate for them to seek clarification that the OPS member was originally resident in the UK when they joined the OPS. This could be done as part of the typical OPS trustee/OPS member engagement during the buy-out process.

2.16 Having considered the responses, the PRA has decided to proceed with the proposals as set out in Chapter 4 of CP6/24 with some minor changes to Rule 9.5A to improve clarity.