​PRA updates to its approach to banking supervision and insurance supervision

The ​Prudential Regulation Authority (PRA) has today published updates to its approach to banking supervision and insurance supervision.

According to the report on banking supervision, the PRA has two primary objectives: a general objective to promote the safety and soundness of firms; and an objective specific to insurance firms, to contribute to ensuring that policyholders are appropriately protected. This latter objective is discussed in the approach document for insurance. The PRA also has a secondary objective to facilitate effective competition in relevant markets, in so far as is ‘reasonably possible’, when pursuing its primary objectives.

The PRA is required to pursue its general objective primarily by seeking to avoid adverse effects on financial stability resulting from the way firms run their business, and by preventing
disorderly failure. In discharging this, the PRA will focus, in particular, on the risk of disruption
to the continuity of supply of critical economic functions. Seeking to minimise the adverse effect of the failure of a firm does not require the PRA to take steps to avoid any and all such adverse eff
ects or to prevent all instances of failure. The statute is explicit that it is not the PRA’s role to ensure that no firm fails. Firm failures happen, but the PRA seeks in particular to ensure that they do not result in significant disruption to the supply of critical economic functions, including depositors’ ability to make payments. Containing the impact of firm failure is ensured by developing feasible and credible resolution plans and requiring firms to have structures that allow continuity of access to critical banking services in the event of a firm failure. The PRA, working with the Resolution Directorate (RD), treats this as a core PRA supervisory priority for its work on the banking sector. The PRA’s ability to ensure firm failure is orderly depends on both the efficacy of the UK’s statutory resolution regime and ensuring that firms are structured and operate in a way that is compatible with the Bank’s preferred resolution strategy. With respect to its secondary objective, the PRA must, while advancing its primary objectives, so far as ‘reasonably possible’, facilitate effective competition in relevant markets.
The PRA’s primary and secondary objectives are normally fully aligned. Nevertheless cases may
exist where some options within a range available to the PRA may not deliver the maximum
benefits to safety and soundness, but would deliver significantly greater benefits to
competition. The secondary competition objective means that the PRA should consider (but is
not required to adopt) those options which may deliver greater benefits to competition.
The ‘reasonably possible’ condition also recognises that the PRA may have limited policy choices, for example where the PRA is bound by other domestic or European law.
Both PRA reports can be found here.