PRA releases 2023/24 Business Plan

The UK PRA released its Business Plan 2023/24 on 2 May 2023.  The plan sets out the PRA's planned activities grouped under four strategic priorities:

• maintaining and building on the safety and soundness of the banking and insurance sectors, and ensuring continued resilience;
• being at the forefront of identifying new and emerging risks, and developing international policy;
• supporting competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors the PRA regulates; and
• running an inclusive, efficient and modern regulator within the central bank.

The plan also includes an overview of the PRA's budget for 2023/24.  Overall, there are no surprises, the plan is very much a continuation from the previous year with perhaps an uptick around work towards the Future Regulatory Framework (FRF).  The PRA's publication follows on from the FCA releasing its Business Plan on 5 April; t highlights some areas of joint and/or coordinated working, for example, on transforming data collection, operational resilience and diversity and inclusion (D&I).

In this blog post, we look at some of the key activities the PRA plans for the year ahead.

2023/24 strategic priorities

The strategic priorities are slightly revised from 2022/23.

'Maintaining and building on the safety and soundness of the banking and insurance sectors, and ensuring continued resilience,' has grown out of last year's 'Retain and build on the strength of the banking and insurance sectors delivered by the financial crisis reforms'. The inclusion of 'continued resilience' appears to reflect – at least in part – the PRA's role in ensuring operational as well as financial resilience in the sector; it may also reverberate with recent developments in the global banking sector. The 2023/24 version could also be seen as more forward looking as it leaves behind the 'financial crisis'.  However, while the words may have changed, the lessons of 2007/08 are still very much front of mind for the PRA CEO Sam Woods as his remarks in the foreword to the plan convey:

There is no contradiction between robust standards and economic growth. The best thing we can do for the UK economy is make sure that banks and insurers are safe and sound: as we learnt in the financial crisis of 2008, economic growth based on excessive leverage and weak regulation is ultimately unsustainable and self-defeating.

In 2022/23, the PRA's third strategic priority was to 'support competitive and dynamic markets in the sectors [the PRA] regulates'. This has evolved to now include the facilitation of 'international competitiveness and growth', capturing the PRA's new secondary objective as set out in the Financial Services and Markets Bill (FSM Bill) which is currently progressing through Parliament.

Delivering the 2023/24 strategic priorities

Below we list key activities which the PRA has planned as part of its delivery of each of the strategic priorities.

'maintaining and building on the safety and soundness…'

The PRA has a number of themes under this objective which we set out below with a list of planned activities.

Financial Resilience - Banks

• Implementation of Basel 3.1, the final set of post-crisis reforms:
  • The PRA will publish final rules and feedback on PRA Consultation Paper 16/22 (CP16/22) issued in November 2022 which set out  proposals that will require banks to significantly change how they calculate risk-weighted assets (RWAs), and on the proposed 1 January 2025 implementation date.
  • It will continue to work on the development of the 'strong and simple' framework for smaller banks and building societies.
• Non-performing exposures:
  • In mid-March 2023, the PRA issued CP6/3 on the non-performing exposures capital deduction; responses are requested by 14 June 2023.  A policy statement (PS) is expected in Q4 of 2023, with the changes coming into force on the following calendar day.
• Securitisation:
  • Noting that HM Treasury (HMT) has prioritised securitisation regulation as an area of focus in the FRF process, the PRA will issue a joint consultation with the FCA in 2023/24.
  • The PRA is also considering feedback on the application of the output floor to securitisation which it has received in response to CP16/22, and may consult further on this. (For more on the FRF, see our post here.)
• Bank stress testing:
  • The Bank of England (BoE) and PRA expect to publish stress test results in the summer. The 2022/23 Annual Cyclical Scenario (ACS) presents banks with 'deep simultaneous recessions in the UK and global economies, large falls in asset prices and higher interest rates, and a separate stress of misconduct'.
  • The BoE and PRA will also run a system-wide exploratory scenario looking at the behaviours of banks and non-banks following a severe stress to financial markets; this test will look at drivers and consequences of behaviours.
• Model risk management, internal ratings-based (IRB) approach/hybrid models and regulatory reporting:
  • The PRA intends to published a Supervisory Statement (SS) on model risk management principles in 2023.
  • It will increase focus on management's understanding of complex models as the model risk management principles are embedded.
  • The regulator will continue to work with firms, carrying forward from 2022 the focus on the 'hybrid' approach to mortgage modelling and on the IRB programme.
  • The PRA will continue the programme of skilled persons (or 'section 166') reviews of data controls, governance and systems for regulatory reporting.  (For more information, see the PRA's Dear CEO letter of September 2021).

Financial Resilience – Insurers

• Regulatory reforms:
  • Subject to Parliament's enactment of relevant legislation, the PRA will issue a number of consultations aimed at delivering Solvency UK. The measures to be proposed will include:
    • streamlining the rules for internal model approvals;
    • widening the range of assets eligible for the matching adjustment (MA);
    • reducing the risk margin (RM);
    • enabling the application of voluntary add-ons to the fundamental spread (FS) applied to assets held in MA portfolios;
    • setting out how senior managers should approach the required attestation on the adequacy of the FS and level of the resulting MA; and
    • raising the threshold at which firms are required to enter the UK Solvency regime.
  • The PRA will also consult on the second phase of changes to regulatory reporting requirements. It will publish a PS later in 2023 and a final taxonomy for firms to start work on implementation.
• Insurer Resolution Regime (IRR):
  • The PRA will support HMT's work to create the IRR.
• Insurance stress testing:
  • The PRA will work on designing a longer-term strategy for insurance stress testing.
  • It will announce the timings for the next stress test in H2 of 2023.
  • Noting HM Government's (HMG's) intention that the PRA be able to publish individual firm results of regular stress tests, the PRA will engage with firms in scope of the insurance stress tests on this aspect.
• Reinsurance risk
  • The PRA highlights its focus on 'the impact of the continued high level of reinsurance of longevity risk in new annuity business, and the emergence of the more complex "funded reinsurance" in the UK life market'.  It will consider how reinsurance strategies comply with the Prudent Person Principle (PPP), and may issue policy proposals or guidance.
• Impact of claims inflation in general insurance (GI)
  • The PRA will continue to focus on claims inflation, and will assess how firms have responded to its October 2022 letter setting out the findings of its thematic review. Of particular interest will be the impact which claims inflation has had on 2022 year-end claim and premium provisions, and firms' processes for responding to the continuing impact of claims inflation.

Operational risk and resilience (including critical third party (CTP) policy and cyber stress testing)

• With the UK regulators' operational resilience policies in force since March 2022, the PRA will focus on assessing firms' progress to the 2025 compliance deadline. (For more information on the regime, see our post here.)
• The PRA will continue to monitor threats to firms' resilience, including with regard to dependencies on third parties.
• The PRA will work with HMT on the development of the CTP regime which is set out in the FSM Bill.  (For more information on the proposed UK regime, see our post here and for a comparison between the UK and EU proposals, see our post here.)
• It will also continue to focus on cyber threats, using CBEST and the cyber questionnaire (CQUEST) and engaging in various fora with industry and peers.

Governance and risk management (including remuneration reforms)

• The PRA highlights its joint consultation with the FCA on removing the bonus cap – CP15/22 – published at the end of 2022.  A PS is expected in Q2 of 2023. (For more information, see our post here.)
• The PRA has also issued CP5/23 setting out proposals on making remuneration requirements more proportionate for smaller banks; the final policy will be issued in 2023.

Senior Managers and Certification Regime (SMCR) reforms

• The PRA highlights the publication of DP1/23 by the PRA and the FCA and of a call for evidence (CfE) by HMT on reform of the regime as part of the broader Edinburgh Reform package. (For more on the SMCR proposals, see our post here.)

Trading book controls

• In light of the Archegos default, the PRA engaged with other regulators on cross-jurisdictional reviews of firms' risk management. The PRA comments that the regulatory response is being considered at the international level, and adds that it intends to start a regulatory review in 2023 to assess the policy framework for trading book risk management, culture and controls.

D&I in firms

• Commenting that it 'considers diversity and inclusion in firms to be an important part of corporate culture, with a direct impact on the way a firm manages its risk', the PRA will publish a joint CP with the FCA on D&I in regulated firms in 2023. A PS will follow in 2024.

'being at the forefront of identifying new and emerging risks…'

The PRA's themes under this priority largely reflect current hot topics in the industry.

Influencing international change

• The PRA will continue to engage with international standard setting bodies such as the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS).
• The PRA will continue to secure memoranda of understanding (MoUs) with other jurisdictions.

Digitalisation

• The PRA will continue to monitor firms' use of new technology; it also highlights as a supervisory concern, the potential for capital and profit erosion in firms which are slower to adopt new technologies.
• The PRA will contribute to the BCBS' work on the digitalisation of finance and the deep dive analysis on the supervisory implications of Banking as a Service (BaaS).

Artificial intelligence (AI) and machine learning

• The PRA refers to the 2022 survey and DP5/22 which will assist regulators with developing their responses to AI and machine learning.  The PRA also notes other developments, including the engagement on AI between other UK regulators via the Digital Regulatory Cooperation Forum (DRCF).

Cryptoassets

• The PRA will continue to contribute to the BoE's work on cryptoassets, including through the Cryptoassets Taskforce, and will continue to engage on bank-related developments in crypto markets.
• The PRA will start work on changes to its rules to implement the BCBS prudential standard on cryptoassets in 2023.

Climate change

• The PRA will maintain its expectation that firms take 'a forward-looking, strategic, and ambitious approach to managing climate-related financial risks'.
• Through supervisory engagement, the PRA will assess firms' ability to meet its expectations.

'supporting competitive and dynamic markets…'

Under this priority, the PRA sets out a number of themes which link into its rulemaking.

Regulatory change – developing the PRA's approach to rulemaking

• The PRA will consult in 2023 on proposals outlined in DP4/22, issued in September 2022. The CP will cover: the new secondary competitiveness and growth objective; international engagement; and a new user-friendly online rulebook.

Competitiveness

• The PRA will look at ways to provide firms with more predictability about changes.
• It will integrate the new competitiveness and growth objective into its internal processes.
• To help build its understanding of the links between prudential policy and competitiveness, the PRA will host an international conference in September.

Developing the PRA's approach to rule making – rule review

• The PRA will consult on how it plans to approach the requirements set out in the FSM Bill that it keep its rules under review.

Repealing and replacing direct regulatory requirements in the PRA Rulebook

• The PRA is working with HMT on the transfer of a number of direct firm-facing rules into the PRA Rulebook, and expects to make 'significant progress' in 2023.

Strong and simple regime

• The PRA is developing a tailored regime for smaller, domestically-focused banks and building societies. To this end, it has already published a number of CPs and expects to progress work on the Strong and Simple framework in 2023/24.

Ease of entry and exit

• The PRA will continue to operate the new bank and new insurer start-up units. It will continue to use a 'mobilisation stage' for newly authorised banks, allowing them to operate with restrictions while they finalise their set ups, and will introduce a comparable regime for insurers as part of the Solvency II review.
• The PRA will work with applicants to apply the changes to the authorisation of insurance special purpose vehicles (ISPVs) and will embed the accelerated authorisation pathway for wholesale insurance market applicants with credible track records.
• The PRA will consult on: solvent exit planning for non-systemic banks and building societies; and on requiring insurers to prepare exit plans in H2 of 2023.

Ring-fencing regime

• While HMG is progressing with both near-term reforms and considering the longer-term benefits of the ring-fencing regime following the outcome of the independent review it commissioned, the PRA will undertake a technical review of the regime (as required by statute every five years) and report to HMT by 31 December 2023.

Cost benefit analysis (CBA) panel

• The FSM Bill will introduce a new statutory CBA Panel; this will require the PRA to collect more data to inform its policymaking. The PRA will set out a Statement of Policy (SoP) on panel members' appointments, set up the panel, and then consult on the CBA framework.

Authorisation of EU branches: banks and insurers

• In 2023, the PRA will determine the applications of EU banks and insurance branches in the temporary permissions regime (TPR).

'inclusive, efficient and modern regulator…'

This section focuses on operational matters for the PRA which nonetheless have implications for its regulated community.

Operational efficiency on regulatory transactions

• To enhance transparency, the PRA will publish quarterly reports of its performance metrics.
• The PRA says it will 'return to a position of reliably determining applications' under the Senior Managers Regime (SMR) within three months by mid-2023.

Diversity, equity and inclusion at the PRA

• The PRA is implementing the recommendations of the BoE Court's review into ethnic diversity and inclusion (reported in July 2021).

Data and technology

• Work continues, with the FCA, on the transforming regulatory data collection programme, with work in 2023 to include redesigning how the PRA collects data on commercial real estate and designing incident, outsourcing and third party reporting (IOREP).
• The PRA is also working on its own capabilities, and sets out three goals to be achieved by 2026:
  • 'all supervisors have access to the data they need via a single customisable dashboard;
  • the PRA has the data and tools it needs to rapidly identify and probe emerging issues, risk and policy questions; and
  • the PRA only collects data that it needs from firms, thereby reducing unnecessary burdens on firms.'
• Complementing the transforming regulatory data collection programme, the PRA has launched a Banking Data Review (BDR) which looks at improving the data collection from banks.
• The PRA highlights that while technology and data are a key area of focus for 2023/24, 'there is a risk that the PRA may be unable to deliver its intended technology capability to support these projects because of availability of technology resources given the congested change agenda across the [BoE]'.

International Monetary Fund (IMF) Financial Sector Assessment Programme

• The PRA will continue to work on addressing the recommendations made in the IMF Financial Sector Assessment completed in February 2022.

Supervisory approach

• The PRA will update its supervisory approach documents in 2023.