Prudential Regulation Authority Rulebook

1.1

The purpose of this supervisory statement is to identify, for the boards^[1] of firms regulated by the Prudential Regulation Authority (PRA), those aspects of governance to which the PRA attaches particular importance and to which the PRA may devote particular attention in the course of its supervision. It is not intended to provide a comprehensive guide for boards of what constitutes good or effective governance. There are more general guidelines for that purpose, for example the UK Corporate Governance Code, published by the Financial Reporting Council.^[2]

1.2

As set out in the PRA approach documents,^[3] the PRA expects the boards and management of regulated firms to run the business prudently, consistent with the firm’s own safety and soundness and the continuing stability of the financial system. The desired outcome from a regulatory standpoint is an effective board, which is one that:

• establishes a sustainable business model and a clear strategy consistent with that model;
• articulates and oversees a clear and measurable statement of risk appetite against which major business options are actively assessed; and
• meets its regulatory obligations, is open with the regulators and sets a culture that supports prudent management.

1.3

Strong and effective governance is an intrinsic element of the Threshold Conditions in Schedule 6 to the Financial Services and Markets Act 2000 and particularly the suitability condition, which requires that an authorised person is fit and proper, having regard to, among other things, the need to ensure that the authorised person’s affairs are conducted soundly and prudently.^[4]

1.4

To be effective a board needs to include individuals with a mix of skills and experience that are up to date and cover the major business areas in order to make informed decisions and provide effective oversight of the risks. This also requires robust and well-targeted management information.

1.5

The specific accountabilities of individual directors established by the Senior Managers Regime are additional and complementary to the collective responsibility shared by directors as members of the board.

1.6

Where the collective responsibilities of directors set out in this supervisory statement relate directly to individual responsibilities in the PRA’s rules and supervisory statements underpinning the regime, the PRA’s expectations of firms and the requirements on individuals should be interpreted as being complementary. For instance, while the PRA recognises that culture is the collective responsibility of the board, it also requires the chair to lead the development of the firm’s culture and standards by the board as a whole.

1.7

The statement applies generally to PRA-regulated firms, including, banks, insurers, designated investment firms, building societies, friendly societies and credit unions, though it is recognised that different governance models may apply depending on the nature and size of the firm and any wider group and that expectations of boards should also be proportionate. Good governance is important for all regulated firms, although the degree of supervisory attention paid to governance issues for particular firms may vary according to the risk profile of the firm and the potential impact of failure. Equally, judgements on the adequacy of governance arrangements may be influenced by the culture, management incentives and business goals of the firm and the extent to which the PRA judges that these may otherwise lead to outcomes inconsistent with the PRA’s statutory objectives.

1.8

The PRA’s expectations of boards will also be influenced by the recovery and resolution strategies for the firm or the group, taking account of the extent to which the PRA would need to be satisfied that the board of a significant PRA-regulated subsidiary is constituted and performs in a way that shows that they are capable of independent action.