Prudential Regulatory Authority

The Prudential Regulatory Authority (PRA) plays an important role in the UK financial system, supervising 1,500 banks, investment firms, insurers, building societies, and credit unions. This article unpacks the PRA’s responsibilities, jurisdiction, powers, and history. We also explain how the PRA works alongside the FCA to promote a stable and secure environment for online traders and retail investors.

What Is The Prudential Regulatory Authority?

The Prudential Regulatory Authority’s statutory remit is to promote the soundness and safety of the firms it supervises, with a focus on the harm these institutions could cause to the stability of the UK financial system.

Where applicable, it also looks to secure a degree of protection for consumers. To do so, the financial watchdog works alongside the Financial Conduct Authority (FCA), the chief regulator of retail brokers and trading firms in the UK.

The supervision a firm receives will depend on its size, volume and activity. For example, there may be statutory requirements that a firm must meet such as sufficient capital and liquidity, as well as competent management and transparent advertising.

Through regulation, the PRA ultimately set standards, policies and measures which firms are expected to meet. This helps ensure firms are financially resilient and prevents them from threatening the stability of the UK financial system and consumers’ money.

History

Both the PRA and FCA were established by the Bank Of England. They were created following the closure of the former regulatory agency, the Financial Services Authority (FSA).

The FSA was a judicial body responsible for the regulation of the financial services industry between 2001 and 2012 in the United Kingdom. It was originally founded as the Securities and Investment Board (SIB) in 1985. It also operated independently from the government.

The FSA was shut down due to perceived regulatory failings during the 2008 financial crisis. Its responsibilities were subsequently divided between the Financial Conduct Authority and the Prudential Regulation Authority.

Often referred to as the twin peaks model, the new system saw a number of changes introduced, most notably, the fact that a firm could be dual-regulated.

Powers

Through the Financial Services and Markets Act 2000, the PRA has several levers that it can pull to ensure that standards are met, including:

• Setting capital and liquidity requirements
• Changing a registered firm’s permissions to undertake regulated activities
• Mandating that a firm undertake or stops a specific action
• Changing management including actuaries and risk managers
• Applying fines and if needed, court actions

The PRA is fairly active. In 2022 alone, it had 17 open investigations, 6 against firms and 11 against specific individuals. However in most cases, the PRA will seek approval from the FCA before taking action.

PRA Vs FCA

As outlined above, the UK financial services industry is regulated by two key bodies: Financial Conduct Authority (FCA) and Prudential Regulation Authority (PRA).

The FCA works to ensure a fair outcome for consumers. It monitors the conduct of companies, such as brokers, and the products and services they provide to consumers.

Rules that the FCA enforce to protect online investors include limits on the leverage licensed brokers can offer to retail traders (1:30), restrictions on misleading financial incentives, mandatory risk warnings to show the percentage of traders that lose money with a broker, and negative balance protection to ensure investors cannot lose more than their deposit.

Importantly, when it comes to retail investing and online trading, the FCA is the main body that monitors operations and ensures that standards are met. It aims to enhance the integrity of the UK financial system, maintain market competitiveness and protect consumers.

In contrast, the PRA is concerned with the safety and soundness of large firms that pose a risk to the country’s financial stability, such as major banks like Lloyds, HSBC and Barclays. The PRA will closely scrutinise a firm’s prudential risk and can intervene more quickly if needed.

It is also possible for a firm to be regulated by both regulators. Retail-facing financial firms in the UK will be regulated by the FCA whilst banks and larger trading organisations will be dual-regulated. The two work in conjunction to ensure firms and the financial sector are stable and that the interests of consumers are protected.

Bottom Line On The PRA

The Prudential Regulatory Authority plays an important role in ensuring the stability of the UK financial industry. The PRA monitors the operations of large financial firms, including banks and insurers, to ensure they are resilient. The financial watchdog also has far-reaching powers, from changing the permissions of authorised firms to imposing capital and liquidity requirements.

But importantly, most reputable brokers in the UK will be regulated by the FCA. This is the watchdog that is primarily concerned with financial products offered to British traders.

FAQ