On 1 April 2013, the Prudential Regulation Authority (PRA) published a policy statement on its power of direction over qualifying parent undertakings, incorporating feedback from a consultation on this power.
The power of direction over parent undertakings is a statutory power under the Financial Services and Markets Act 2000 (FSMA) (as amended by the Financial Services Act 2012) which allows the PRA to issue directions to an unregulated parent company of a “qualifying authorised person” (a UK-incorporated body corporate that is a PRA-authorised firm or an investment firm). The power, its scope and procedure are contained in s192A-192N FSMA, and apply to “qualifying parent undertakings” (insurance holding companies, financial holding companies and mixed financial holding companies, which are incorporated or have a place of business in the UK). The power will apply equally to ultimate parent companies as to intermediate holding companies.
In response to queries raised during the consultation, the PRA said that it does not consider the power of direction to be a last resort. It also confirmed the right of an entity against which the power has been used, to make representations and appeal to the Tribunal. In response to a query about regulatory arbitrage to avoid the power, the PRA said that it did not foresee groups restructuring for this purpose, but that it was “empowered to act to counter” such actions. However, it did not explain what it means by this, and its assertion is likely to be without merit on some facts. Fears about inconsistent application of the power where firms are regulated by both the PRA and the FCA were addressed by reference to s192F FSMA, which requires the two regulators to consult before either gives an entity notice of a direction under the power (the FCA’s policy statement on this and other matters may be found here).
The policy statement itself restated the provisions of the statute, setting out (as above) the entities to which the power would apply, the fact that either the general condition (that the PRA considers it desirable to give the direction in order to advance any of its objectives) or the consolidated supervision condition (that “(i) the PRA is the competent authority for the purpose of consolidated supervision … in relation to some or all members of the group of a qualifying authorised person, in pursuance of any of the relevant EU directives; and (ii) the PRA considers that the giving of the direction is desirable for the purpose of the effective consolidated supervision of the group”) must be satisfied to use the power, the factors to which the PRA must have regard in deciding to use the power, and the content of directions under it. It also elaborated on the statute, referencing the PRA’s general objective (“to promote the safety and soundness of PRA authorised firms”) and insurance objective (“contributing to the securing of an appropriate degree of protection for those who are or may become policyholders”), listing risks of being part of a group which may require consolidated supervision and listing examples of circumstances where the PRA would consider using the power over a parent company rather than approaching the regulated entity directly.
Of particular note are:
- paragraph 17 (directions will tend to support authorised firms “in complying with their obligation to ensure that their … group complies with consolidated requirements, but it will not absolve them of this obligation”);
- paragraph 18 (several factors, which on their own are not sufficient to merit the exercise of the power, may cumulatively make it desirable);
- paragraph 24 (even though directions cannot apply to shareholders, they can mandate the company to “facilitate” shareholder actions by requiring it to call a general meeting and propose a motion); and
- paragraph 26 (which concerns expiry and revocation of directions).
Annexed to the policy statement are non-exhaustive lists of “possible scenarios in which the PRA may consider exercising the power of direction” and “possible directions which the PRA may consider making”. Examples of the former include:
- Insufficient quantity or quality of funds or assets made available to an authorised firm to meet its solo requirements, or being available to meet consolidated group requirements;
- Intra-group transactions and allocation of risks (e.g. large exposures, arrangements for the mitigation of risk such as reinsurance) which do not meet the standards expected by the PRA;
- Group-wide remuneration policies which do not meet the PRA’s standards;
- Complex or opaque group structures which hinder risk management by the PRA or the authorised firm; and
- Systems and controls to manage group risks which do not meet the PRA’s standards.
Possible directions the PRA may make include:
- A restriction on dividend payments or other payments on capital instruments;
- a requirement for the group to be restructured;
- a requirement to raise new capital; and
- a requirement to take steps to facilitate the removal from office of directors of the parent undertaking who the PRA considers are not fit and proper to direct a holding company.
In some senses, this is a very “ordinary” list, because the FSA was able to achieve almost all of these things using its unamended OIVOP power. However, we anticipate that the power may actually be used in a much more controversial fashion over time. Whether we are correct will be seen as the new regulator finds its feet and begins to flex its statutory muscle.