On 2 May, the PRA published its 2023/24 Business Plan setting out the workplan for its four strategic priorities. Three of these priorities are unchanged since last year — the fourth has been updated to reflect recent market events and regulatory developments, with Sam Woods, PRA CEO, stressing the importance of strong standards and robust supervision in the banking sector.

Financial and operational resilience continue to be key, alongside ongoing monitoring of potential emerging and developing risks to financial stability such as climate risk, crypto assets and artificial intelligence (AI) and machine learning (ML). The plan also addresses the Financial Services and Markets Bill (FSMB), currently being considered in Parliament, and the impact of the proposed new secondary objective to facilitate international competitiveness and medium to long term growth of the UK economy.

There is nothing inherently surprising in the business plan. Insurers were expecting the establishment of UK Solvency, although the PRA does provide helpful clarification on the likely timeline. Similarly, for banks, the PRA reconfirms that the implementation of Basel 3.1 will be a major area of focus. Both Solvency and Basel 3.1 present an opportunity to tailor financial regulation to the UK market — it remains to be seen how the PRA will balance its primary function of maintaining financial resilience with embracing its new secondary ‘competitiveness’ objective.

The PRA’s four strategic priorities (SPs) for 2023/24 are to:

  1. Maintain and build on the safety and soundness of the banking and insurance sectors and ensure continuing resilience.
  2. Be at the forefront of identifying new and emerging risks, and developing international policy.
  3. Support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that it regulates.
  4. Run an inclusive, efficient, and modern regulator within the central bank.

SP1 — Maintain and build on the safety and soundness of the banking and insurance sectors and ensure continuing resilience

Financial resilience focus areas for banks include the implementation of Basel 3.1 by 1 January 2025, development of the 'Strong and Simple' prudential framework for non-systemic domestic banks and building societies, non-performing exposures, securitisation, stress testing (via the annual cyclical scenario and a system-wide exploratory exercise), model risk management, the internal ratings-based approach/hybrid models and regulatory reporting.

For insurers, the priorities include the review of Solvency II with further consultations expected and a target implementation date of 31 December 2024 for changes to regulatory reporting. The PRA will continue to consider how best to take forward its work on a resolution regime for insurers, and in H2, insurers can expect an announcement on the next insurance stress test. Reinsurance risk is also on the radar, particularly for life insurers that transfer longevity risk on their annuity business or use funded reinsurance. The PRA will also be monitoring insurers' compliance with the Prudent Person Principle (PPP), offshored counterparty concentration risk, firms' ability to recapture reinsurance risk where large concentrations to a small number of counterparties exist and the impact of claims inflation on general insurers.

Under the banner of operational resilience, the PRA will continue to assess firms' progress against the policies that came into force in March 2022. There is more to be done to develop the policy and oversight approach for critical third parties (once the FSMB delivers new powers to the supervisory authorities) and to manage cyber threats. The PRA will continue working with HMT in 2023 on how to develop a supervisory approach for these entities. The CBEST exercises, to assess firms' ability to manage cyber risks, will continue and the PRA will focus on strengthening the sector's resilience capabilities and will engage with multiple fora, such as the Authorities Response Framework, the Cross Market Business Continuity Group, the Cross Market Operational Resilience Group, and the G7 Cyber Expert Group.

Governance and risk management (including remuneration reforms) will also remain firmly on the agenda, with the PRA reaffirming its commitment to continue using Skilled Person reviews on data, governance and regulatory reporting. Reforms to the Senior Managers and Certification Regime (SM&CR) will be considered jointly with the FCA, with further policy proposals possible. In response to the default of Archegos Capital Management in 2021, and the subsequent cross-jurisdictional findings about risk management deficiencies, the PRA will commence a review of its own regulatory policies to assess the framework for trading book risk management, controls and culture.

The plan also notes that some governance and remuneration regimes for banks and insurers can be streamlined now that the UK has left the EU. In 2023, the PRA will publish final policy statements following on removing the bonus cap and on making the remuneration regime more proportionate for smaller banks, building societies and designated investment firms.

The PRA reiterates the importance of diversity and inclusion in firms and their impact on corporate culture. It will publish a joint consultation paper with the FCA later this year, with final policy expected in 2024.

SP2 — Be at the forefront of identifying new and emerging risks, and developing international policy

The PRA will seek to influence international change through continued active participation in global standard-setting bodies, such as the Basel Committee on Banking Supervision (BCBS) and the International Association of Insurance Supervisors (IAIS), and support for the Bank of England's (BoE's) work at international policy fora such as the Financial Stability Board. Engagement over the next year will focus on identifying and addressing emerging risks in priority areas such as climate change, bank-issued stablecoins and operational resilience, and promoting the consistent implementation of international standards such as Basel 3.1, alongside existing international engagements via supervisory colleges, equivalence assessments and supporting HMT on trade agreements.

The PRA will take a proactive approach to digital innovation in financial services, will consider policy proposals to respond to digitalisation, and will adapt its supervisory approach accordingly. It will work with the BoE's Fintech Hub to monitor firms' involvement in new technologies and asset tokenisation — noting that firms that are slower to adopt new technologies may face capital and profit erosion. The PRA will continue to consider responses to its 2022 discussion paper on whether risks from AI and ML can be managed via the existing regulatory framework or whether a new approach is needed. It will also work with other regulators through the Digital Regulation Cooperation Forum to consider the wider AI and ML policy debate.

Following HMT's consultation on the future financial services regulatory regime for cryptoassets, the PRA will work to develop a regulatory framework that is ready for technological innovations, such as stablecoins and tokenised deposits. It will also work with international partners to develop a standard for the prudential treatment of banks' cryptoassets exposures and will begin work on changes to existing UK rules to incorporate the BCBS's work in this space.

The PRA expects firms to continue to take a forward-looking, strategic and ambitious approach to managing climate-related financial risks. It also expects firms to take a proportionate approach, noting the complexity, scale and concentration of risk in their operations. Climate risk management will be assessed as part of the usual supervisory cycle. Although considerable progress has been made, further improvements are needed by all firms.

SP3 — Support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that we regulate

Under the Future Regulatory Framework, the PRA will be more responsive and proactive in how it advances it objectives. A consultation paper on its approach to rulemaking will be published this year. The PRA will also consider the ways it can facilitate competitiveness and growth, with further work planned to integrate the new secondary objective into internal processes including: research to understand the impact its historic actions have had on UK competitiveness and growth and hosting an international conference in September 2023 to deepen understanding of the links between prudential regulation, international competitiveness, and growth.

HMT and the PRA are currently working together to migrate retained EU laws on financial services regulation to the PRA Rulebook. The PRA expects to make significant progress on banking and insurance policies throughout the next year.

Other activities for 2023/24 include:

  • Support for potential market entrants via the PRA's New Bank and New Insurer Start-up Units.
  • Consultation in 2023 on proposals for solvent exit planning for non-systemic banks and building societies, providing an orderly exit route that would not rely on insolvency or resolution. And a consultation in H2 2023 on requirements for insurers to prepare exit plans.
  • Further work on HMT's proposed ring-fencing reforms, focusing mainly on the scope of firms that should be ring-fenced. The PRA will submit its first review of the ring-fencing rules to HMT by 31 December 2023 (as required every five years).
  • Establishing a panel to help the PRA understand the costs and benefits of its policy proposals and ensure that they reflect the requirements of the UK financial system.
  • Processing remaining authorisation applications in 2023 from EU bank and insurance branches that currently sit under the Temporary Permissions Regime (TPR). Branches not seeking authorisation, or whose applications are rejected, will leave the TPR before the end of 2023 and may enter supervised run-off.

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