CP12/24 Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision

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1 Ashleigh Collins Financial Services Authority 25 The North Colonnade Canary Wharf London E14 5HS Sent via to 12 December 2012 Dear Ms Collins, CP12/24 Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision I am responding to this document on behalf of the Society of Lloyd s. We appreciate the opportunities provided to comment on the detailed arrangements for the reform of the UK financial supervisory system. For the most part we consider the provisions set out in CP 12/24 to be satisfactory. We have not therefore responded to all the questions asked, only to those where we have substantive comments to make. Q1: Do you have any comments on the proposed new text for GEN 2 to explain the interpretation of joint Handbook provisions? We accept that at legal cutover some provisions in the FSA Handbook will be adopted by both regulators, so will appear identically in each regulator s Handbook. Consequently, for a limited period, it may be necessary for each regulator s Handbook to contain provisions which go beyond their powers and responsibilities. To that extent, we accept the necessity of R and the associated Guidance. However, we do not consider that this is a desirable situation. In due course, the Handbooks should be amended so that the provisions they contain are precisely aligned with the powers and responsibilities of the respective regulators, making R unnecessary. The usefulness of the Handbooks will be diminished if many of their provisions go beyond the powers and responsibilities of the regulatory authorities to which they belong. Regulated firms should not need to refer to separate lists of powers and responsibilities in order to understand the application of provisions. CP12/24 Page 1 of 5 Lloyd s One Lime Street London EC3M 7HA Telephone +44 (0) Fax +44 (0) Lloyd s is authorised under the Financial Services and Markets Act 2000

2 We note that the section in which R appears contains a reference to Cutover in its heading. This implies that it is intended to have specific application to legal cutover and possibly less relevance thereafter. We therefore consider that the whole section ( R G) should be explicitly timelimited, so that it expires, say, three years after legal cutover G says: The published Memorandum of Understanding between the FCA and the PRA describes their regulatory responsibilities. The regulatory responsibilities of the FCA and the PRA will be set out in the Financial Services and Markets Act 2000 (as amended). The draft Memorandum of Understanding includes a short account of the roles and responsibilities of the FCA and PRA, but we had not understood this as having any wider application than is necessary to understand the workings of the Memorandum itself. If the Memorandum is intended to serve as a formal, legal account of the FCA and the PRA s regulatory responsibilities referenced by the Handbook it should be re-drafted, firstly to reflect amendments to the legislation since January 2012, secondly so that it provides a comprehensive account of the authorities powers and responsibilities. Q6: Do you have any comments on our proposals to amend SUP 5? Amendments to SUP 5 are necessary, as the Bill will permit a regulator to appoint a Skilled Person to provide a report. Our concerns about the exercise of this power are reflected in the Cost Benefit Analysis (annex 1; pages A1:3 A1:4). There are real risks that an authorised firm will find itself liable to pay a significant fee for an exercise carried out by a Skilled Person it has had no part in selecting. As the Skilled Person will contract with the regulator, the ability of a firm to exercise any control over costs will be limited. As no costs will fall on the regulator, it will have no incentive to keep expenses at a reasonable level. Recent years have seen a significant increase in the commissioning of s. 166 reports by the FSA. In 2007/8 it commissioned 29 skilled person reports at a total cost of 5.8m; in 2011/12 it commissioned 111 skilled person reports at a total cost of 31.2m 1. In the first six months of 2012/13 it has already commissioned 61 skilled person reports, suggesting that the trend of increasing reliance on these reports is continuing. We accept that the power to commission Skilled Person reports is a necessary element of the regulatory tool kit available to regulators. Nevertheless, the volume of reports commissioned suggests that the reports are viewed as a routine element in the process of supervising straightforward firms that do not appear to present substantial risks to the FSA s statutory objectives. We have reservations over whether this approach should continue to characterise the operations of the new regulatory authorities. 1 These figures are taken from the FSA Annual Reports CP12/24 lett fsa cp12 24 (2).docx Page 2 of 5

3 We are pleased to note that the PRA s approach to resourcing will be to employ staff with the necessary skills to carry out the forward-looking, judgement-based approach to supervision necessary to advance its objectives. 2 We question whether this approach is compatible with continued heavy reliance on Skilled Person reports, which can amount to the effective outsourcing of regulatory knowledge and experience and the regular referral of supervisory challenges outside the organisation, reducing the ability of the organisation to develop its in-house skilled capacity. We appreciate that amendments to SUP 5 are intended to provide the new authorities with rules and guidance required to exercise their new powers in this area, rather than to define the ways in which they operate. Nevertheless, we caution against continued excessive reliance on Skilled Person reports. The authorities powers to contract directly with Skilled Persons should be exercised sparingly, and with due regard to the costs likely to be imposed on the authorised firm concerned. Q7: Do you have any comments on our proposed approach to amending SUP 6? We welcome the intention to grandfather existing Part IV permissions. We note that the PRA will determine an application to vary a permission only with the consent of the FCA and the PRA is required to consult the FCA when determining an application to cancel a permission. This consultative aspect between the PRA and FCA should not slow down the processes of varying or cancelling permissions. Q12: Do you have any comments on our proposed approach to updating SUP13? We note that, if a dual-regulated firm seeks passport approval to carry on business from another EEA member state on either a services or an establishment basis, the Bill will require the PRA to consult the FCA before deciding whether to give a consent notice 3. It is important that this does not give rise to delays in the process of issuing consent notices, bearing in mind the Insurance Directives provisions on timescales in which consent notices must be issued (three months for establishment; one month for services) and the restricted grounds on which a home state supervisor can decide not to issue a consent notice. Q17: Do you have any comments on our proposed approach to amending SUP15? Q18: Do you have any comments on our proposed approach to amending SUP16? SUP 15 and SUP 16 will be amended to require dual-regulated firms to submit notifications and returns to both regulatory authorities. 2 The PRA s approach to insurance supervision, October 2012, the Bank of England, Prudential Regulation Authority, p FSMA Sch. 3 (EEA Passport Rights) Para 19(7C) (as amended) CP12/24 lett fsa cp12 24 (2).docx Page 3 of 5

4 These are clear examples of regulatory duplication. We find it difficult to reconcile this approach with paragraph 10 of the draft FCA/PRA Memorandum of Understanding, which reads: Exchange of information will take place at many levels. Information available to one regulator (including regularly provided regulatory data) that is relevant to the responsibilities of the other regulator will be shared where requested. In addition, if one regulator considers that information it has gathered would be of material interest to the other, it will actively offer such information to the other. Not all information will be shared because that is unnecessary and would overwhelm each regulator with information that was not central to its mission. If dual-regulated firms are required to submit notifications and returns to both regulators this paragraph becomes redundant, as each regulator will receive the same information as the other, removing the need for sharing arrangements. On the other hand, it is likely that some, at least, of the information in notifications and returns falls into the category of unnecessary information, not central to a regulator s mission. CP12/24 paragraph 10.5 says that: After legal cutover, it is envisaged that information submitted via an online system, for example GABRIEL and ONA, will continue to be submitted through the relevant current system. It is essential that this is the case and that dual-regulated firms can continue to make single submissions of required information via these systems, rather than separate submissions on duplicated systems. This should remain the position for the foreseeable future: the PRA and FCA should not develop independent systems for the submission of notifications and returns. Please let us know if you have any questions or wish to discuss any of these points further. Yours sincerely James Walmsley Senior Manager Lloyd s Government Policy and Affairs Telephone +44 (0) Fax +44 (0) james.walmsley@lloyds.com CP12/24 lett fsa cp12 24 (2).docx Page 4 of 5

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