The regulator shared its annual plan and set out how it will deliver strategic goals, identifying three key objectives for the year ahead:
- Retain and build on the strength of the banking and insurance sectors delivered by the financial crisis reforms
- Be at the forefront of identifying new and emerging risks, and developing international policy
- Support competitive and dynamic markets
These objectives are aligned to the ongoing themes that the PRA has previously communicated to the market.
Continuing to strengthen banking and insurance
The pandemic highlighted the resilience of the banking and insurance sectors, as well as the importance of robust standards, which were enhanced following the financial crisis.
The PRA’s plan sets out a programme of work for each sector, which is largely intended to fine tune existing standards rather than make large-scale changes, although it does flag the potential for more significant change to the Solvency II regime for insurance.
Banks
Basel 3.1
This year the PRA will consult on Basel 3.1 implementation, which will change the way banks calculate risk weighted assets (RWAs).
Leverage ratio
It will continue to support work around the UK leverage ratio. The regulator will assess the risks from contingent leverage and will carry out a further exercise to gather information on large firms’ use of such trades.
Stress testing
The annual cyclical scenario (ACS) stress test will return – the Financial Policy Committee (FPC) and Prudential Regulation Committee (PRC) are expected to announce a timeline for the ACS during Q2 2022.
Core assurance work
The regulator will assess whether firms remain adequately capitalised and have sufficient liquidity together with stable funding profiles. The PRA will assess the resilience and vulnerabilities of firms under a range of scenarios and undertake thematic and firm-specific asset quality reviews.
Internal models
The PRA will work with firms to shape their model review processes and update their internal ratings based (IRB) permissions. It also plans to publish a supervisory statement in 2022 that will tie together all PRA expectations, rules, and requirements on model governance, model validation, and general model risk management.
Insurers
Solvency II
The regulator plans to launch its own comprehensive consultation on Solvency II, separate from HMT’s work, which will look to discuss a package of reforms to insurance regulation.
Stress testing
The next insurance stress test is coming in May 2022, examining sector resilience to severe but plausible adverse scenarios. This test will have separate focus points for life and general insurers.
Internal models
The PRA will scrutinise the models used to quantify and manage risks, continuing to monitor internal model drift, and analyse internal model output to support comparisons between firms. It will also invest in its own quantitative and qualitative risk indicator frameworks.
Life insurance
The regulator will focus on collecting market risk sensitivity data for the largest life insurance firms to better understand their solvency and exposure to market movements.
General insurance
The impact of inflation will be a focus, as well as how firms in the sector manage contract uncertainty risk.
Cross-sector
Operational risk and resilience (including critical third-party policy and cyber stress testing)
The PRA will look at whether firms have implemented operational resilience policy expectations on time, including assessing their plans to ensure they will be able to deliver important business services within their impact tolerance before 31 March 2025.
It will also continue to work on the risks posed by critical third-party service providers, as well as supervising cyber risks, and improving the collection of operational incident and outsourcing data.
Governance and risk management
The PRA will assess responses to the default of Archegos Capital Management with a particular focus on the necessary changes that firms need to make to their risk management, governance, and culture.
It will focus on regulatory reporting, including through continued use of skilled persons’ reviews, until there is sufficient assurance around the quality of regulatory data received.
The regulator will also consult on proposals to support diversity and inclusion in the financial services sector, with the final policy to be published during 2023.
Identifying new and emerging risks
The PRA will look to ensure it's responding effectively and allocating resources appropriately to macroeconomic changes and market developments.
Geopolitical conflict
The regulator explicitly mentions the war in Ukraine, noting that it has had to respond to the impact the conflict has on the sector and markets. The PRA will monitor the first and second order effects of the war and assess the potential impact on firms.
Climate change
The PRA will keep climate change as a key priority and expects firms to take a forward-looking approach to managing climate-related financial risks. This coming year, the regulator will start to actively supervise against climate threats.
The largest firms will be asked to prepare a short report on how they have embedded the management of climate-related financial risks into their existing risk management frameworks alongside their 2021/22 ICAAP (deposit-takers) or own risk and solvency assessment (ORSA) (insurers). A sample of other firms will also be asked to prepare a similar report proportionate to their size, complexity, and the extent of the climate-related financial risks that they face.
The PRA will assess whether broader changes are needed to build and tailor the capital frameworks so that firms are better able to capture climate-related financial risks. A research conference is planned for the end of 2022/23.
The results of the 2022 Climate Biennial Exploratory Scenario (CBES) will be published by the middle of 2022 and will shape the PRA’s supervisory priorities.
London interbank offered rate (LIBOR) transition
The PRA will work with other supervisory bodies and international authorities to remove barriers to transition, maintaining engagement through supervisory interactions and proportionate data collection. The regulator will seek to transition away from USD LIBOR by June 2023.
Digitalisation
The PRA will monitor developments in key products and the emergence of new banking business models with payments as a core component. This includes working with other bodies to manage risks arising from digitalisation.
The regulator will also focus on financial inclusion, the understanding of complex technology models and customer outcomes, and oversight of cryptoassets.
Artificial intelligence (AI) and machine learning (ML)
The PRA will publish a discussion paper on AI later this year to build on the work of the AIPPF and broaden engagement to a wider set of stakeholders. The paper will give stakeholders an opportunity to share their views and guide the development of any necessary policy response.
Supporting competitive and dynamic markets
The PRA views competition and responsiveness in markets as a key priority with the UK government having proposed another secondary objective for the PRA – facilitating international competitiveness and long-term growth.
Regulatory change
As part of the government’s Future Regulatory Framework (FRF) review and consultation paper, suggested changes include enhanced accountability and scrutiny mechanisms for the PRA. The latest consultation closes on 9 February and will shape the development of a new Financial Services Bill, expected to go before Parliament later in 2022.
Developing the policy approach
With the FRF close to its final stages, the PRA will consult with stakeholders to understand views on how best to deliver its new responsibilities and meet any new statutory objectives, including by way of a discussion paper later in 2022.
Strong and simple regime
The PRA is working on creating a simpler, but still resilient prudential framework for smaller banks and building societies. In the insurance sector, the regulator will pursue initiatives to enhance competition by simplifying processes and reducing barriers to entry.
Ring-fencing regime
The PRA will work with HMT to examine the recommendations from the Skeoch report and respond to any changes that the government may make.
Ease of entry and exit
The regulator is looking to build a market that firms can easily enter and exit, which will do more to increase confidence that firms can exit the market without disturbing it.
International engagement
The PRA will continue to cooperate and engage with international stakeholders and supervisory bodies. This year, the PRA will take the remaining EU banking and insurance branches in the temporary permissions regime (TPR) through the post-Brexit authorisation process. It will work with the FCA and European authorities to ensure that these firms are fully authorised and can continue to operate safely in the UK at the end of the TPR.
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For more insight and guidance, contact David Morrey.
