The Principle of Fundamental Rule
God ordered the world with 10 commandments, the FSA thought it would take 11 Principles and, perhaps in a statement of its omnipotence, the PRA has taken on the challenge with just 9 "Fundamental Rules".
Buried deep in a PRA consultation paper issued last month was a proposal to replace the PRA's Principles for Business with nine new so-called "Fundamental Rules" (FRs).
Six of these are re-workings of the current PRA Principles (albeit with tweaks). Three however are brand new.
The new name itself is noteworthy. "Fundamental Rule" certainly sounds more important than a mere "Principle". We can only assume the PRA will be pushing ahead with "Fundamental Rule-based" regulation, relying on these to fill in gaps and overrule the interpretation of specific rules as it sees fit.
What's the significance of the new FRs?
- The first (FR 3) states: "A firm must act in a prudent manner"
- The second (FR 8) states "A firm must prepare for resolution so, if the need arises, it can be resolved in an orderly manner with the minimum disruption of critical services"
- The third (FR 9) states: "A firm must not knowingly or recklessly give the PRA information that is false or misleading in a material particular"
The first in particular is eye-catching. In the accompanying text, the PRA acknowledges this FR has a greater potential to direct firm behaviour and so could possibly limit competition, for example "where a firm wishes to engage in operative but risky financial products or where a firm wishes to compete where aggressively to gain market share". In such instances it is the PRA's view that compliance with FR 3 will discourage irresponsible behaviour rather than prevent sensible competitive conduct. This is a moot point. To cynical eyes, this could be read as (and used as a weapon to enforce) a requirement for a firm to act in a risk averse fashion. It is certainly the nearest that we have seen to this from the PRA and seems to work hand in hand with the FCA's new product intervention powers.
The second new FR is also going to raise some interesting arguments as to the manner in which a firm may go about resolution proceedings. What are these critical services, and to what extent will a firm's options be reduced by the requirement to ensure a "minimum disruption" thereto? How will this interplay with insolvency law and a director's duties to shareholders.
The third new FR is effectively copied across from the requirement at s.398 of FSMA. However it has a slightly wider effect given that it does not necessarily relate to compliance with a regulatory requirement.
It is also noteworthy that the draft handbook text supplied with the CP does not include any of the more descriptive material around the purpose of the FRs, or the consequences of breach. Will this allow the PRA a greater flexibility to apply them as they wish?
All of these questions and more may be put to the PRA before the window for consultation closes on 14 March 2014.