Prudential Regulation Authority Rulebook

9.1

This chapter sets out the PRA’s expectations of firms in relation to changes to their MA portfolios after MA permission has been granted. It should be read in conjunction with the SoP – Solvency II: Matching Adjustment Permissions. Paragraph 9.6A below is also relevant for initial MA applications.

9.1A

MA portfolios are typically managed on a going concern basis. As a result, a firm that has an MA permission should also be allowed to use the MA to value future insurance or reinsurance obligations to the extent that those obligations, and the assets matching them, possess the same features as the obligations and assets included in its most recent MA permission and the firm continues to meet the MA eligibility conditions. The MA asset eligibility conditions should be clearly reflected in the firm’s investment mandates for its MA portfolios, and the firm should apply a screening process when it is considering new asset purchases in order to enable it to identify any new asset features.

9.2

A firm should consider the implications of any proposed change to its MA portfolio(s), including whether such a change will require an application to vary its MA permission. The circumstances under which a firm should consider whether it needs to apply to vary its existing MA permission include, but are not limited to:

• the introduction of new asset types, for example assets with HP cash flows, into the MA portfolio(s);
• the introduction of assets with new combinations of features for which permission has already been secured (across different asset types) in different combinations, only where those combinations give rise to material risks resulting from dependencies and/or interactions not considered as part of the existing MA permission;
• changes to any safeguards or exposure limits;
• changes to the approach used to determine the additions to the FS for assets with HP cash flows;
• the introduction of new types of liability;
• restructures, mergers or disposals;
• the entry into new, or changes to existing, reinsurance and other risk transfer arrangements;
• changes to the way the firm maintains and manages its MA portfolio(s); and
• other changes to the scope of the MA portfolio(s), including the removal of MA asset types or liabilities and changes to the features of any MA asset or liability covered by the original application.

9.3

In the first instance a firm should form its own judgement on whether a change to its MA portfolio(s) requires it to apply for a variation of its MA permission. The PRA expects a robust process to be in place to assess such a change.

9.4

The PRA expects that any material change to the management or scope of an MA portfolio after permission has been granted will require a variation of the MA permission. In assessing whether a change is material such that a variation of MA permission is required, it will be necessary for a firm to consider (among other things) the scope of the firm’s existing MA permission, including whether proposed new assets or liabilities have the same features as those included in the existing MA portfolio. The PRA considers that in cases where a firm invests in a new asset type, or seeks to include assets or liabilities with more bespoke characteristics, it may be more difficult to demonstrate this.

9.5

Examples of circumstances in which assets and liabilities may have new features compared to those of assets and liabilities covered by the existing MA permission, and for which the PRA expects that a new application is likely to be needed include (but are not limited to):

• bulk purchase annuities with collateralisation where any existing bulk purchase annuities within the MA portfolio are not collateralised;
• assets with HP cash flows where existing assets do not have HP cash flows or where new features are present;
• assets involving restructuring, pairing or grouping as referred to in the asset restructuring section in Chapter 2 of this SS (paragraphs 2.52 to 2.61A); and/or
• assets with a different form of early repayment compensation clauses to those already included in the MA portfolio (for example, assets with modified Spens clauses when existing assets in the MA portfolio only have full Spens clauses).

9.6

The PRA also notes that reinsurance arrangements are often bespoke. For this reason, the PRA expects that it is unlikely that new reinsurance arrangements will have the same features as assets covered within the scope of an existing MA permission. In most cases, the PRA expects that the inclusion of a new reinsurance arrangement in an MA portfolio will require PRA approval to vary the firm’s MA permission.

9.6A

The PRA recognises that the frequency with which a firm’s board meets may result in submitting an MA application to the PRA taking longer than would otherwise be the case if full board sign-off were not required. The PRA considers that the board of a firm may delegate authority for approval and submission of initial MA applications and applications to modify the scope of existing MA permissions to a suitable sub-committee of the board or to approved senior managers.

9.7

[Deleted]

9.8

[Deleted]

9.9

[Deleted]

9.10

Where a firm considers that a change to its MA portfolio will not require a variation of its MA permission, the PRA expects the firm to be able to demonstrate the basis for its determination if required. The PRA may also ask the firm to demonstrate that the MA portfolio meets the criteria set out in paragraph 9.1A above.

9.11

If a firm makes changes to its MA portfolio without obtaining approval from the PRA to vary its MA permission, and if these changes are outside the scope of what is contemplated in paragraph 9.1A above, this would constitute a breach of Matching Adjustment 2.1, in respect of which the PRA would consider exercising its supervisory powers. If changes made to the MA portfolio result in a breach of the MA eligibility conditions, then the firm will need to restore compliance with the relevant condition(s) within two months in order to avoid a reduction to the MA.

9.12

The PRA expects a firm making a change to its MA portfolio without first making an application for an MA permission to have appropriate contingency plans in place to mitigate the implications of a subsequent determination that a variation of its MA permission was required. The PRA may require that the firm suspends the effect of the changes to the MA portfolio pending consideration of a new application by the firm to vary its MA permission.