Changes to the Regulatory Framework for RPs in England
The HCA has recently updated its approach to regulation. While adhering to the principles of the original 2012 ‘Regulating the Standards’ paper, in that it is assurance and risk based, the revision published in January introduced some key changes. The Regulator states that there is a requirement for a “refocused regulatory methodology” in light of the increasingly complex nature of the sector and the challenging operating environment.
The main updates come in the form of revised viability grades and an updated risk assessment methodology. The definitions of the V3 and V4 viability grades have been made more consistent with those of the governance grades and make clear the Regulator’s description of non-compliant viability judgements. The changes are shown in the table below.
Regulating the Standards (2012) 2014 update
V3 The provider’s financial viability is of concern and, in agreement with the Regulator, it is working to improve its position. The provider does not meet the requirements on viability set out in the Governance and Financial Viability standard. There are issues of serious regulatory concern and, in agreement with the Regulator, the provider is working to improve its position.
V4 The provider’s financial viability is of serious concern and it is subject to regulatory intervention or enforcement action. The provider does not meet the requirements on viability set out in the Governance and Financial Viability standard. There are issues of serious regulatory concern and the provider is subject to regulatory intervention or enforcement action.
The Regulator has also updated its risk assessment methodology. The result is an approach that is focused on identifying and assessing those providers that are more complex or exposed to greater risks. There are two key elements to the Regulator’s risk assessment methodology. The first is a data-driven model that assesses providers’ financial strength, size and cash requirements, and sector risk exposures. The Regulator emphasises the requirement for providers to submit timely and accurate data returns. Where providers fail to do so, the Regulator may take this into account in arriving at its published judgements.
The second element of the methodology involves a more nuanced approach which takes account of the further information the Regulator has that may not be captured by the data-driven model. Such areas include:
The current regulatory judgement and attendant issues which the Regulator is engaging on with an RP
Serious emerging issues – where there is a potential material financial impact, or is of such severity that it may cause a failure to meet the standards
Significant financial risks where the provider may have an unusual risk exposure
A fundamental shift in the strategic direction of an organisation
Significant regulatory risk introduced by an RP with novel characteristics.
These additional factors enable the Regulator to differentiate its engagement with the 250 largest providers in a more refined way, ensuring that regulatory activity is focused on the riskiest and most complex providers.
Matt McCormack Evans is a Business Analyst. He can be contacted on 07931 752786 and email: firstname.lastname@example.org