• PRU 10 PRU 10 SUPERVISORY REVIEW AND EVALUATION PROCESSES

    • Introduction

      • Guidance

        1. This Chapter deals with the regulatory requirements arising out of the need for Authorised Persons to carry out a self-assessment of their risk which can be reviewed and assessed by the Regulator. This Chapter details the Rules stipulating the need to complete internal risk assessments by Authorised Persons in defined frequencies and the Regulator's role in reviewing the results of such assessments. In the case of Authorised Persons facing financial risks, the requirements in this Chapter mandate completion of an Internal Capital Adequacy Assessment Process. The Regulator will review the results of such internal risk assessments. This Chapter also sets out how the Regulator may impose an additional Capital Requirement on a firm-specific basis in addition to the minimum requirement specified in Chapter 3 of these Rules to address higher-than-normal risk.
        2. App11 provides detailed guidance on the various components of the Supervisory Review and Evaluation Process and explains the role of the different parties in completing the required processes.

    • PRU 10.1 PRU 10.1 Application

      • PRU 10.1.1

        This Chapter applies to an Authorised Person in Category 1, 2, 3A, 3B, 3C or 5 as follows:

        (a) Sections 10.1, 10.2, 10.3 and 10.5 apply only to an Authorised Person in Category 1, 2, 3A, 3B, 3C or 5; and
        (b) Sections 10.4 and 10.6 apply only to an Authorised Person in Category 1, 2, 3A or 5.

      • PRU 10.1.2

        Where an Authorised Person to which this Chapter applies is part of a Financial Group, this Chapter applies on a consolidated basis in relation to all the entities within the Financial Group.

      • PRU 10.1.3 PRU 10.1.3

        In implementing the requirements prescribed in this Chapter, an Authorised Person must give due and appropriate regard to the provisions in App11.

        • Guidance

          If an Authorised Person is part of a Financial Group which is already subject to requirements similar to those prescribed in this Chapter, the Regulator may consider a request for a waiver or modification in relation to the requirements of this Chapter.

    • PRU 10.2 PRU 10.2 Overview

      • Guidance

        1. These Rules are designed to implement key aspects of Pillar 2 of the revised framework of capital adequacy, commonly known as Basel III, published by the BCBS.

      • Internal Risk Assessment Process (IRAP)

        2. An Authorised Person in Category 1, 2, 3A, 3B, 3C or 5 is required to carry out an IRAP as detailed in Section 10.3, which is proportionate to the nature, size and complexity of its business activities and risk profile. An IRAP is a comprehensive internal risk evaluation as detailed in Section 10.3. More detail on the establishment of an IRAP and the manner of carrying out an IRAP assessment is provided in App11.

      • Internal Capital Adequacy Assessment Process (ICAAP)

        3. An Authorised Person in Category 123A or 5 is also required to carry out an ICAAP as detailed in Section 10.4, which is proportionate to the nature, size and complexity of its business activities and risk profile. This process enables such an Authorised Person to determine and maintain an adequate amount and quality of Capital Resources, relative to its risk profile. More detail on the establishment of an ICAAP and the manner of carrying out an ICAAP assessment is provided in App11.

      • Supervisory Review and Evaluation Process (SREP)

        4. The documented results of IRAP and ICAAP assessments are required to be submitted to the Regulator. The Regulator then applies a process known as the SREP as detailed in Section 10.5. As part of the SREP, the Regulator will evaluate the quality, completeness and consistency of the IRAP and, where applicable, the ICAAP of the Authorised Person, to form a view on the overall risk profile of the firm and whether the capital held by the firm is sufficient to deal with the risks. More detail concerning the SREP is provided in App11.
        5. Following review of the IRAP and ICAAP of an Authorised Person, the Regulator may engage in a dialogue with the firm to evaluate the assessment of risks and where relevant, additional capital which the Regulator considers that the firm should hold resulting from the IRAP, ICAAP or SREP.

      • Individual Capital Requirement (ICR)

        6. Upon completing the SREP, the Regulator may impose an Individual Capital Requirement on an Authorised Person in Category 123A or 5 as detailed in Section 10.6. The ICR may be imposed where the Regulator concludes that the firm should hold more capital to provide for its overall risks.

    • PRU 10.3 PRU 10.3 IRAP

      • PRU 10.3.1

        This Section applies to an Authorised Person in Category 123A3B3C or 5.

      • PRU 10.3.2

        (1) An Authorised Person must establish and maintain an IRAP which details the processes and procedures by which the firm will identify, assess, aggregate and monitor the risks faced by it.
        (2) The firm must conduct the IRAP assessment at least annually giving due regard to the Guidance in Section A11.1 of App11.
        (3) The IRAP assessment conducted by the firm pursuant to (2) must be approved by its Governing Body and then submitted to the Regulator within four months from the end of the firm's financial year.
        (4) In addition to (2), the firm must conduct an IRAP assessment:
        (a) whenever there is material change to the business, strategy, nature or scale of the activities of the firm which may have a significant impact on its risk profile or adequacy of its Capital Resources or Adjusted Capital Resources, as applicable; or
        (b) as and when required by the Regulator.
        (5) An IRAP assessment conducted by the firm pursuant to (4) must be approved by its Governing Body and then submitted to the Regulator within two months, or such other period as may be specified by the Regulator, from the date of such material change or requirement.

      • PRU 10.3.3

        The results of an IRAP assessment must be documented by the Authorised Person in writing and include details of:

        (a) the risks identified;
        (b) the firm's strategies and plans to deal with those risks;
        (c) the firm's assessment of the adequacy of its Capital Requirement as calculated under these Rules to address all the risks identified by its IRAP;
        (d) the details of any stress testing and scenario analysis carried out and the resultant impact on the Capital Requirement; and
        (e) any other relevant information, giving due regard to the Guidance in App11.

      • PRU 10.3.4

        An Authorised Person must retain the records of an IRAP assessment for at least six years.

    • PRU 10.4 PRU 10.4 ICAAP

      • PRU 10.4.1

        This Section applies to an Authorised Person in Category 123A or 5.

      • PRU 10.4.2

        (1) An Authorised Person must implement and maintain an ICAAP which details the processes and procedures by which the firm will assess and maintain adequate Capital Resources in relation to the risks faced by it.
        (2) The firm must conduct an ICAAP assessment at least annually giving due regard to the Guidance in Section A11.2 of App11.
        (3) The ICAAP assessment conducted by the firm pursuant to (2) must be approved by its Governing Body and then submitted to the Regulator within four months from the end of the firm's financial year.
        (4) In addition to (2), the firm must conduct an ICAAP assessment:
        (a) whenever there is material change to the business, strategy, nature or scale of the activities of the firm which may have a significant impact on its risk profile or adequacy of its Capital Resources or Adjusted Capital Resources, as applicable; or
        (b) as and when required by the Regulator.
        (5) The ICAAP assessment conducted by the firm pursuant to (4) must be approved by its Governing Body and then submitted to the Regulator within two months from the date of such material change or requirement.

      • PRU 10.4.3

        An Authorised Person must ensure that an ICAAP assessment is documented in writing and includes details of:

        (a) the calculations and models used in the determination of the level of Capital Requirements which it considers will be adequate to cover all the risks identified by its ICAAP assessment;
        (b) the firm's strategies and plans to ensure availability of the level of capital determined by the ICAAP;
        (c) specifications of any models used in the ICAAP, including the underlying assumptions, parameters, and results of back-testing; and
        (d) any other relevant information, giving due and appropriate regard to the Guidance in App11.

      • PRU 10.4.4

        An Authorised Person must retain the records of an ICAAP assessment for at least six years.

    • PRU 10.5 PRU 10.5 SREP

      • Guidance

        1. The Regulator may conduct a SREP to review and evaluate the assessments carried out by an Authorised Person under its IRAP (relevant to firms in Categories 123A3B3C or 5) and ICAAP (relevant to firms in Categories 123A or 5). Section A11.3 of App11 contains guidance in relation to a SREP.
        2. The Regulator may engage with a firm in Categories 123A or 5 in a dialogue where, following an SREP, the Regulator considers that it is or may be appropriate to impose an Individual Capital Requirement on the firm.
        3. It is important that a firm cooperates in an open and co-operative manner with the Regulator in the course of its conduct of the dialogue.

    • PRU 10.6 PRU 10.6 Imposition of an Individual Capital Requirement

      • PRU 10.6.1

        (1) This Section applies to an Authorised Person in Category 123A or 5.
        (2) The Regulator may, subject to (3) and (4), at any time by written notice to an Authorised Person:
        (a) impose an Individual Capital Requirement; or
        (b) vary or withdraw an Individual Capital Requirement.
        (3) The Regulator may act under (2) on its own initiative where the Regulator forms the view that the Capital Requirement of the Authorised Person is insufficient to address adequately all its risks.
        (4) The Regulator will, where prescribing an Individual Capital Requirement, also specify in the notice the types and amounts of Capital Resources required to meet the Individual Capital Requirement.
        (5) If the Regulator decides to exercise its power under (2) after a Financial Services Permission has been granted, the Authorised Person may refer the matter to the Court for review.

      • PRU 10.6.2

        An Authorised Person must have and maintain, at all times, minimum Capital Resources of the types and amounts specified in the notice issued to it under Rule 10.6.1 to meet its Individual Capital Requirement.