Prudential Regulation Authority Rulebook

8.1

Firms should ensure that their existing MA portfolios satisfy the MA eligibility conditions on an ongoing basis. The PRA expects a robust process to assess this to form part of a firm’s risk governance. As part of its supervision of firms, the PRA may periodically review a firm’s ongoing compliance with MA eligibility conditions, including:

• documentation relating to the MA portfolio’s compliance with relevant requirements; and
• management information with regards to the ongoing monitoring of the MA portfolios.

8.1A

Firms with permission to apply the MA are expected to complete the Matching Adjustment Asset and Liability Information Return (MALIR) on an annual basis. With effect from 31 December 2024, this will be a requirement in the PRA Rulebook. The PRA recognises that in some circumstances the requirement to complete a MALIR on an annual basis (as provided under rule 2.5B of the Reporting Part of the PRA Rulebook^[28]) could be unduly burdensome, having regard to the size of the firm or the nature of its MA portfolio(s) and certain sections of the MALIR may not be applicable to all portfolios. If a firm considers this to be the case, it should approach its usual supervisory contact to discuss, on a portfolio basis, potentially applying under section 138A of the Financial Services and Markets Act 2000 for either a waiver of the MALIR reporting requirement as a whole, or a modification in respect of any aspects of the requirement that would be unduly burdensome or would not achieve the purpose for which the rules were made. Applications would be assessed by the PRA on a case-by-case basis, in accordance with its usual practice. The PRA expects that the materiality of the portfolio would be an important factor in considering such an application, although other considerations would also be taken into account, including the size of the firm and the nature of the asset holdings in the portfolio in question.

8.1B

Where a firm is required to reduce the MA for ongoing non-compliance with the MA eligibility conditions, in accordance with Matching Adjustment 13.5, the firm is required to reduce the MA (expressed in bps) by a factor of 10%, commencing immediately two months from the date of non-compliance (subject to paragraph 8.3 below). The firm will be required to continue to reduce the MA by an additional 10% for each further month that it remains non-compliant, where the reduction factor of 10% is applied to the level of unadjusted MA. The PRA notes that the MA referenced in the rule is dynamic; for the purposes of calculating the reduced MA benefit, the PRA expects a firm to use the current level of MA. The PRA will consider the features of the breach of MA eligibility conditions and the firm’s risk management framework on a case-by-case basis. As a result, the PRA may ultimately determine that the MA should be reduced by a factor higher than 10% each month, or, conversely, may be willing to adopt a more flexible approach through the use of its supervisory powers. A reduction of the MA will cease to apply once the firm restores compliance with MA eligibility conditions. The PRA expects that the firm will discuss with its usual supervisory contact whether a particular breach has been satisfactorily resolved before removing a reduction to its MA.

8.1C

In the event of a firm’s MA being reduced by 100%, the PRA expects to revoke the MA permission for that firm. The PRA considers that if a firm is unable to restore compliance with MA eligibility conditions by the time the MA is reduced by 100%, it is likely to have fundamental issues managing its MA portfolio. These issues may include governance, risk management, and the ability to separately organise, identify and manage an MA portfolio. Given such circumstances, the PRA considers that revocation of the MA permission would be likely to be appropriate. The firm should submit a new application to apply the MA again, following the process set out in the SoP – Solvency II: Matching Adjustment Permissions.

8.1D

Matching Adjustment 13.4 and 13.5 provide that firms in breach of MA eligibility conditions will not be required to reduce the MA if compliance is restored within two months. Nevertheless, the PRA expects that a firm will not breach MA eligibility conditions on a regular or frequent basis, and considers that regular or frequent breaches may be evidence of a failure of the firm’s risk management framework.

8.1E

Where the PRA considers that there has been a significant breach of MA eligibility conditions, or where there are regular or ongoing multiple breaches of MA eligibility conditions, the PRA may revoke a firm’s permission to apply the MA. An example of a significant breach is a firm not addressing in a timely manner a PRA notification that it considers a firm to be in breach of MA eligibility conditions.

8.1F

Where a firm has had its MA permission revoked, the PRA expects that any subsequent MA application should include a clear demonstration of how the firm has addressed the issues that led to the previous breach of MA eligibility conditions.

8.1G

Where a firm is required to reduce the MA as a result of a breach of the MA eligibility conditions, the PRA does not expect the firm to recalculate the SCR, or to alter the modelling of management actions in the internal model to take into account this reduction in MA. The loss in own funds over a 12-month horizon should continue to be based on balance sheet movements ignoring any reduction in MA resulting from a current breach of MA conditions.

8.2

Firms should ensure that they have appropriate processes in place to identify and investigate any potential breaches of MA eligibility conditions on a timely basis, and engage with the PRA as early as possible where there is a risk that they have been, or will be, breached.

8.3

The PRA will consider the circumstances of a firm’s possible breach of MA eligibility conditions on a case-by-case basis. In cases where a breach is reasonably only determined after the date it has occurred (eg either identified by the firm or notified to the firm by the PRA), the two month period to remedy a breach of the MA eligibility conditions starts from the point at which the breach is detected or confirmed to have happened. The action(s) required to remedy the breach within that period (and hence, subject to the considerations in paragraph 8.1B above, avoid a reduction in the MA) will also depend on the circumstances of the breach; for example, in the event of assets or liabilities being included in the portfolio that are not covered by the scope of the existing MA permission, the remedy could be to remove the assets or liabilities from the portfolio pending making a new MA application.

8.4

Where more than 10% of the MA benefit claimed for a MA portfolio is attributable to an asset with HP cash flows, either on its own or when taken together with other assets with HP cash flows in the relevant portfolio of assets, this will be a breach of Matching Adjustment 5.2. The PRA expects a firm to take an appropriate approach, consistent with its MA permission, to prevent or remediate such rule breaches. This approach may include the movement of assets between components of the MA portfolio, or between the MA portfolio and non-MA portfolio. The MA attributable to assets with HP cash flows may also be reduced by the application of further FS additions to assets with HP cash flows. However the PRA considers that routinely applying further FS additions to remain within the 10% limit may be evidence of a failure of the firm’s risk management framework.