You wouldn’t give money to someone you didn’t trust, would you? Making a deposit into a bank or building society account is like giving your trust to that organisation. You trust that it will look after your money and, when you want to access that money again, it will be there. Also, if you buy a policy with an insurer, you would expect it to pay out when you need it.
Banks, as well as other financial services such as insurers and building societies, are all businesses. Their success is measured in the same way as other businesses, including the profit they make.
However, these are the companies (firms) that hold your money for you so that you can make payments and control your financial life. There is a responsibility that comes with that. That’s where the PRA comes in. As part of the Bank of England it is our role to ensure that firms act safely and reduce the chance of getting into financial difficulty.
What do we do?
We are prudential regulators. We create policies for firms to follow as well as watch over aspects of the business – we call this supervision. We want to ensure that the financial services and products that we all rely on can be provided in a safe and sound way.
We were established as part of a new wave of regulation in financial services after the financial crisis of 2007. We now supervise around 1,500 financial institutions including banks and insurance companies.
Also, we make sure there are systems in place to support what your bank / insurer has offered you.
We do this through:
- Tailored supervision: Each firm is supervised according to its needs and the impact it would have on the economy – should it fail. One size does not fit all. Tailored supervision allows us to spot when things are going wrong.
- Being forward looking: Things might be going well today, but what about in an unexpected event? We test stressful scenarios on firms to see how they would respond to unexpected events. From there, we work with these firms to develop strategies to help build resilience in crisis situations. We also encourage firms to hold adequate financial resources – specifically capital and liquidity – to keep things ticking.
- Looking at the bigger picture: Not surprisingly, if banks stopped working, the entire economy would grind to a halt. Similarly, if an insurer was unable to pay out on policies, this could affect a number of people and businesses. Our aim is to ensure that the entire financial system continues to work in a safe and sound way. If things do end up going wrong, we try to ensure this happens in an orderly way.
Who are the UK regulators?
We already know what the PRA do but how does that compare to the FCA? The PRA and the FCA are two separate entities – although we do work closely with the FCA on certain issues/firms.
The main difference is that the FCA works with firms to ensure fair outcomes for consumers. One of its responsibilities is regulating and ensuring fair practice in consumer credit. This comes into play when you take out a loan or use a credit card for example. Also if you want to check if a firm is legitimate or report a possible scam for example, the FCA is the go-to contact.
Inside the Bank of England
PRA and Financial Policy Committee (FPC)
Both the PRA and the Financial Policy Committee (FPC) are part of the Bank of England. The way they work is like a jigsaw puzzle. The PRA looks at the detail in each individual puzzle piece and makes sure that it is placed where it’s supposed to be (known as microprudential regulation). The PRA’s most important microprudential decisions are made by the Prudential Regulation Committee (PRC). The FPC has a view of the bigger picture – the complete puzzle (known as macroprudential regulation).