Prudential Regulation Authority Rulebook

11

If serious failings in culture are identified, the PRA acts pre-emptively to tackle the concerns that it identifies and to prevent a firm posing risks to its objectives. The PRA acts to tackle serious failings in culture through its normal supervisory activity, through use of its supervisory powers, and through enforcement action.

12

This statement focuses on the use of the PRA’s supervisory powers. The PRA’s normal supervisory activity is set out in its approach documents, but at a high level should supervisors identify deficiencies in management and/or governance practices, including cultural deficiencies, the Proactive Intervention Framework (PIF) stage may change. The intensity of supervision will increase, additional reporting requirements may be set, additional information gathering powers may be used, and the PRA will require the firm to act to address deficiencies over a set period^[8]. The PRA sends an annual letter to each firm’s board clearly outlining the key risks that are of greatest concern, and expects to verify itself that action is taken on these key risks, and communicates to the board when and how it expects to do this (with the exception of firms with the lowest potential impact where a standard letter outlines issues relevant to all firms in that group, unless specific issues have been identified with a particular firm). Less significant issues that have arisen are conveyed to the firm, but with the onus on the firm itself to address these and an expectation of self-certification by the most appropriate senior individual that issues have been closed^[9].

13

In addition to the powers outlined below, if a firm continues to fail to meet the PRA’s regulatory requirements, or if a sanction is an appropriate response, then a range of enforcement actions remain available to the PRA to promote high standards of behaviour and send a clear signal. The PRA may proceed to an enforcement investigation without having exhausted all other supervisory options. Full details are set out in The PRA’s approach to enforcement: statutory statements of policy and procedure^[10].

14

The PRA has a variety of powers available to it under the Financial Services and Markets Act 2000 (as amended) (‘the Act’), which it may use if deemed necessary to reduce risks and achieve desired supervisory outcomes, including those related to serious failings in a firm’s culture. These include powers by which the PRA can intervene directly in a firm’s business, such as varying a firm’s permission or imposing a requirement under Part 4A of the Act^[11]. In addition, to assist with its risk assessment, the PRA may use its power under section 166 of the Act to commission reports by skilled persons on a wide range of areas, including a firm’s culture.

15

While the PRA looks to firms to co-operate with it in resolving supervisory issues, it will not hesitate to use formal powers where it considers them to be an appropriate means of achieving desired supervisory outcomes.  The PRA may choose to deploy formal powers at an early stage.  The PRA is likely to consider a number of factors in connection with the possible deployment of such powers, including the confidence supervisors have that firms will respond appropriately to the PRA’s requests without the use of powers, and the PRA’s view of a firm’s proximity to failure, as reflected in its PIF stage¹².

16

The use of PRA powers and the intensity of the supervisory engagement with firms set out above and in the approach documents are independent of each other and of the PIF stage of a firm. Nonetheless it is likely that if the PRA has cause to use its powers, enhanced supervision will take place as supervisory engagement with the firm intensifies and resources devoted to supervising the firm are strengthened, given the extent of PRA concerns about the risks facing a firm. The PRA will increase its level of monitoring and use specialists as appropriate to individual circumstances, even if a firm is not in an elevated PIF stage.

17

The PRA has the power to nominate, approve or appoint a skilled person (an independent expert who can provide a view of aspects of a firm’s activities) to produce a report under section 166 of the Act to gain a deeper understanding of identified concerns, to determine whether they result from serious failings in culture, and to propose recommendations for management to address them; if the PRA feels that further information would be desirable and the PRA does not already have adequate information from other supervisory sources. The PRA may either require a firm to appoint a skilled person, or may appoint one directly itself.

18

The PRA requires skilled persons to submit an independence statement, and one of the factors that the PRA will consider is whether the skilled person appears to have any professional difficulty, potential conflict of interest, or insufficient detachment. The PRA may contract directly with the skilled person if necessary to ensure independence in instances where there may be undue management influence. There may be situations where it is appropriate to use a skilled person who has prior experience of working with a firm or may potentially do so, due to the level of existing knowledge of a firm’s systems or controls. However, in such situations any conflict of interest will continue to be an important consideration in the PRA’s assessment of independence.

19

The PRA expects reports to be delivered in a timely manner, and the PRA will normally specify a time limit for the skilled person to complete a report or update the relevant information. However the length of time must be balanced against the desire for an appropriate quality of information in the report. Firms will usually receive draft and final copies of the report at the same time as the PRA, and will typically be allowed the opportunity to respond.

20

21

The PRA may also require a firm to provide it with specified information or information of a specified description under section 165 of the Act. Further details are provided in the Statement of policy on the financial stability information power^[14].

22

The PRA has the power to impose a requirement under Part 4A, section 55M of the Act on a firm to undertake or cease a particular action. One of the grounds for exercising this power is if it appears to the PRA that it is desirable to exercise the power in order to advance any of the PRA’s objectives. It therefore enables the PRA to take early intervention action should failings in the culture of a firm pose a risk to the PRA’s objectives. The power is no longer linked to varying a firm’s permissions as it was under the Act’s original form, but instead may be used on a stand-alone basis.

23

There is substantial flexibility for the PRA to tailor requirements specific to the circumstances of a firm and the nature of the PRA’s concerns, including serious cultural failings. Requirements may include (but are not limited to) requiring the firm to address concerns identified by the PRA, requiring the nomination of an individual within a firm to have responsibility for recommendations specified by the PRA, or requiring the retention of an independent individual to ensure compliance with PRA recommendations, as judged necessary by the PRA (the latter can also be achieved under section 166 of the Act).

24

25

The PRA can also exercise its power under section 55M of the Act so that a firm can be prohibited from dealing with its assets or customer assets held by the firm, the consequences of which are set out in section 55P of the Act.

26

The PRA does not have to publicise the imposition of requirements if publication would be unfair to the person concerned, prejudicial to the safety and soundness of a firm, or (for insurers) prejudicial to securing the appropriate degree of protection for policyholders.

27

It may be appropriate to use the PRA’s own-initiative variation of permission (OIVOP) power under section 55J of the Act to change the firm’s permissions in certain circumstances, or to agree a voluntary variation of permission with the firm. This can extend as far as withdrawal of authorisation.

28

29

The PRA has the power to take action against individuals through the Approved Persons Regime, which will be reformed in relation to senior managers and a new ‘Certification Regime’, the implementation of which will be consulted on in 2014. While these powers are used on individuals, their use on senior management, including in response to failings in culture, is a potential tool for the supervision of firms.

30

The powers of direction under section 192C of the Act enable the PRA to take steps to direct the parent holding company of PRA-authorised firms to take or not to take specified action if required.  Further details are provided in the statement of policy on The power of direction over qualifying parent undertakings^[15].