Tunde Koleoso
Policy Co-ordination Team

Prudential Regulation Authority

20 Moorgate
London
EC2R 6DA

13 March 2014

Dear Tunde,

AFM Response to CP2/14,PRA Handbook

  1. I am writing in response to this discussion paper, on behalf of the Association of Financial Mutuals. The objectives we seek from our response are to:
  • Respond to some of the points raised in the consultation.
  1. The Association of Financial Mutuals (AFM) represents 53 member companies, most of which are owned by their customers. Between them, AFM members manage the savings, protection and healthcare needs of over 20 million people, and have total funds under management of £120 billion. The nature of their ownership and the consequently lower prices, higher returns or better service that typically result, make mutuals accessible and attractive to consumers, and have been recognised by Parliament as worthy of continued support and promotion.
  1. The general approach to constructing the PRA handbook as a stand-alone document is, we think, worthwhile, and we therefore support the approach adopted in this consultation. We comment further on chapters 3 and 6.

Chapter 3: The Fundamental Rules

  1. We support the development of the Fundamental Rules. Those drawn from the previous Principles for Business do not create any new or different implications. As such we accept that the additional costs of meeting the FRs may not be significant, though it is surprising that the PRA has not set out a reasonable basis for estimating the costs, as this limits the potential for post-implementation review.
  1. We make the following specific comments concerning the FRs:
  2. FR8 relates to resolution. As the document states, there is no resolution regime for insurers or credit unions in the UK. With regard to very small insurers, it is unclear why the same proportionality principles adopted for credit unions is not proposed. For other insurers, it is not clear from the passage in paragraphs 3.32 what specific actions should be undertaken (leaving aside the systematically significant insurers explored in 3.33, of which none are within AFM membership).

The text appears to implement a pseudo-resolution regime, based on preparing for the event of insolvency of an insurer. This is not wholly appropriate to insurance. Further, if the intent is for insurers to model the maintenance of payment systems in the event of failure, we are concerned that the mutuality impact statement in paragraph 1.11 may require further evidence to demonstrate there are no particular or specific issues for mutuals. It is also not clear what mechanism there is to ensure the FSCS has sufficient understanding of systems used in our sector, as we are not aware that they have investigated this area of mutuals.

  1. The ordering of the FRs at present appears to jump between rules relevant to the operation of the firm (FR 1,2,3,4,5,6 and 8), and rules relating to the firms relationship with the PRA (FR 7 and 9). We would suggest that the rules are re-ordered to make the different nature more obvious- i.e. that current FR8 is moved above the current FR7.
  2. In FR9, it is not clear what added value there is to the sense of the rule by including the phrase “in a material particular”.

Chapter 6: Use of Skilled Persons

  1. We accept the additional requirements from Skilled Persons work will better enable the PRA to discharge its responsibilities, and we can see that they are consistent with the FRs. We consider that the extra requirements will add further cost to firms where they are required to employ a skilled person, but this appears not to have been considered.
  1. We are disappointed that in reviewing the requirements for Skilled Persons the PRA has not considered the issue more broadly: in particularthe nature of the PRA’s limited panel provides a disproportionate cost on smaller firms. FCA has accepted this and widened its approach, and we would like to see the PRA set out how its regime for Skilled Persons is consistent with proportionality requirements: for example by not requiring all panelists to be experts in all product areas as this biases against small and specialist consultants. This is exacerbated by the one-month timescale, which means firms are charged a premium rate.
  1. As the consultation does not provide background to the proposals, or discuss options considered and does not ask specific questions, it is not clear whether there are any specific issues you need to test further. We would be pleased to discuss further any of the issues raised by our response.

Yours sincerely,

Chief Executive

Association of Financial Mutuals

AFM response to CP2/14, PRA Handbook / 1