FinregE RIG Insights: The PRA Business Plan 2024/25

PRA Business Plan

Publication Date: 2024-04-11 | Regulator: UK PRA 

Title : Prudential Regulation Authority Business Plan 2024/25

PRA Business Plan
Summary

This plan outlines the business plan for the Prudential Regulation Authority (PRA) for the year 2023/24 and sets out the PRA’s strategic priorities for banks and insurers, including priorities on topics such as digitalization, artificial intelligence, machine learning, and crypto assets.

Sam Woods’ foreword emphasizes the importance of the Prudential Regulation Authority’s (PRA) core mission in light of recent events in the banking sector. He highlights the need for strong standards and robust supervision to maintain the resilience of the UK banking and insurance sectors. Woods mentions the progress of post-Brexit reforms and the positive contribution that strong financial regulation can make to wider economic success. He also discusses the upcoming new secondary objective for the PRA, which will focus on facilitating international competitiveness and the growth of the UK economy. Woods emphasizes that there is no contradiction between robust standards and economic growth, and that ensuring the safety and soundness of banks and insurers is crucial for sustainable economic growth. He also mentions the importance of the PRA’s reputation for alignment with internationally agreed minimum standards and its role in maintaining the attractiveness of the UK as a global financial centre.

Priorities for Banking and Insurance sectors
  • Strengthening the risk-sensitivity of risk-weighted asset (RWA) calculations, addressing the variability in firms’ calculation of RWAs, improving the comparability and credibility of firms’ risk-based capital ratios, and enhancing the definition of capital in alignment with international standards.
  • The PRA has published a consultation paper outlining its proposals for the implementation of Basel 3.1 in the UK, and it is seeking feedback on areas where data may be incomplete or sparse, such as for small and medium-sized enterprises (SMEs) and infrastructure lending.
  • The PRA will review the responses to the consultation and publish the final Basel 3.1 rules in a policy statement, considering the proposed implementation date of 1 January 2025. Additionally, the PRA is developing a simpler but equally resilient prudential framework, known as the ‘Strong and Simple’ framework, for smaller, domestic-focused banks and building societies.
  • Removing the Common Equity Tier 1 (CET1) capital deduction requirement for non-performing exposures (NPEs) that are treated as insufficiently provided for by firms. This proposal aims to enhance the definition of capital in alignment with international standards.
  • Removing the associated NPE reporting requirements. This proposal aims to reduce the costs of compliance, monitoring, reporting, and data gathering for firms.
  • Taking a judgement-led approach to the prudential risks associated with NPE under-provisioning. This approach allows the Prudential Regulation Authority (PRA) to assess and manage the risks associated with NPEs based on their individual circumstances.
  • Addressing potential competitive disadvantages for UK firms compared to firms in jurisdictions that are not subject to the NPE deduction. The PRA aims to ensure a level playing field for UK firms by aligning the regulatory requirements with international standards.
  • Risk Retention: The Prudential Regulation Authority (PRA) is considering areas related to risk retention in securitization. This involves determining the appropriate level of risk that originators and sponsors should retain in securitized assets to ensure alignment of interests and mitigate potential risks.
  • Due Diligence: The PRA is also focusing on due diligence requirements in securitization. This involves assessing the adequacy of due diligence processes followed by originators and sponsors to ensure the quality and accuracy of underlying assets being securitized.
  • Disclosure: The PRA is reviewing provisions related to disclosure in securitization. This includes evaluating the transparency and completeness of information provided to investors and other market participants regarding the characteristics and risks associated with securitized assets.
  • Rulemaking: The PRA, in collaboration with the Financial Conduct Authority (FCA), plans to consult on draft rules to restate relevant firm-facing provisions in the securitization regulation and related technical standards. This aims to ensure clarity and consistency in the application of securitization rules.
  • Output Floor: The PRA is reviewing the application of the output floor to securitization exposures. This involves assessing the impact of the output floor requirements on the capital adequacy of firms and considering any necessary adjustments or consultations to address identified issues.
  • Annual Cyclical Scenario (ACS): The Bank and the PRA have returned to the ACS framework to test system-wide financial resilience. The ACS for 2022/23 will test the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices, higher interest rates, and a separate stress of misconduct. The results of the ACS will be published in summer 2023.
  • Exploratory Scenario Exercise: In collaboration with the Bank, the PRA will run a system-wide exploratory scenario exercise for the first time. This exercise will investigate the behaviors of banks and non-bank financial institutions following a severe but plausible stress to financial markets. It will focus on market resilience and its importance for financial stability, rather than testing individual firms’ resilience.
  • Insurance Stress Testing: The PRA will engage with firms to develop an insurance stress testing regime that provides a robust test of resilience and delivers results suitable for publication at the individual firm level. This will involve consulting with firms and considering their participation in regular stress testing exercises prescribed by the PRA.
  • Reinsurance Risk: The PRA is paying close attention to the impact of reinsurance strategies on the protection of UK policyholders. They will review the compliance of reinsurance strategies with the Prudent Person Principle (PPP) and assess the need for further policy proposals or guidance on the use and risk management of reinsurance structures and limits.
  • Model Risk Management: The Prudential Regulation Authority (PRA) has consulted on a set of principles for model risk management, which provide an assessment framework for banks. The PRA intends to publish the final supervisory statement on model risk management principles for banks in 2023. This statement will outline the supervisory expectations for model development, validation, and governance practices across various model and risk types.
  • Internal Ratings-Based Approach/Hybrid Models: The PRA has published a range of policy statements on changes to the internal ratings-based (IRB) approach to credit risk. The PRA will continue to work with firms as they progress their model submissions in line with these requirements and expectations. The PRA will specifically focus on the “hybrid” approach to mortgage modeling and the IRB program.
  • Regulatory Reporting: The PRA will continue its program of skilled person reviews of controls over data, governance, and systems for regulatory reporting in 2023. Firms are expected to address the thematic findings set out in the PRA’s communications on regulatory reporting. The PRA has also published a consultation paper on the second phase of changes to regulatory reporting requirements, with a proposed implementation date for all phases by December 31, 2024. A policy statement containing all reporting changes will be published this year, followed by the final taxonomy for firms to implement the reporting changes.
  • Building on the existing liquidity framework: The PRA will continue to develop and enhance the existing liquidity framework for insurers, which is currently based on risk management expectations set out in SS5/19 – Liquidity risk management for insurers. This will involve developing liquidity reporting requirements for insurance firms that are most exposed to liquidity risk.
  • Supervising firms’ liquidity positions: The information collected through the liquidity reporting requirements will be used to supervise firms’ liquidity positions more effectively. The PRA will assess the adequacy of firms’ financial and non-financial resources to manage and mitigate liquidity risks. This will include conducting regular Liquidity Supervisory Review and Evaluation Processes (L-SREPs) across PRA-authorised firms.
  • Producing meaningful peer comparisons: The PRA aims to produce meaningful peer comparisons of insurers’ liquidity positions. This will help identify any gaps or areas of improvement in liquidity risk management frameworks and enable insurers to benchmark their performance against their peers.
  • Exploring the necessity of a minimum liquidity requirement: The PRA will explore the necessity of introducing a minimum liquidity requirement as part of a future policy consultation. This requirement would ensure that insurers maintain a certain level of liquidity to withstand market-wide stresses and disruptions.
  • Informing the design of a lending tool: The PRA’s approach to supervising liquidity will inform the design of a new lending tool that the Bank intends to develop for eligible Non-Bank Financial Institutions (NBFIs). This tool aims to address future episodes of severe dysfunction in core markets that threaten UK financial stability.
  • Evolving credit risk management practices: The PRA will assess how credit risk management practices have evolved and ensure that they remain robust and adaptable to changing conditions. This includes evaluating whether there is appropriate consideration of downside and contagion risks, as well as monitoring and planning for the impacts of customer refinancing.
  • Thematic review of smaller firms’ credit risk management frameworks: The PRA will undertake a thematic review of credit risk management frameworks specifically for smaller firms during the 2024/25 period. This review aims to ensure that these firms have effective credit risk management processes in place.
  • Monitoring changes to firms’ business mix and credit exposures: The PRA will closely monitor changes to firms’ business mix and credit exposures. This includes monitoring vulnerable segments such as cyclical sectors and key international portfolios, as well as traditionally higher-risk portfolios like buy-to-let, credit cards, and unsecured personal loans.
  • Focus on insurers’ credit risk management capabilities: Insurers’ capabilities in credit risk management will remain a key focus for the PRA. This is particularly important given the commitment to invest in assets that contribute to the productivity of the economy and the transition to net zero. The PRA will assess the effectiveness of insurers’ credit risk management capabilities and ensure that their internal credit assessments appropriately reflect the risk profile of their asset holdings.
  • Review of internal credit assessment validation plans and approaches: The PRA will review the suitability of firms’ current and forward-looking internal credit assessment validation plans and approaches. This review aims to provide further assurance that firms’ internal credit assessments are accurate and in line with the PRA’s supervisory expectations.
  • Balance of minimum requirements and capital buffers (modelling): The PRA will focus on finding the right balance between minimum capital requirements and capital buffers. This involves assessing the impact of different modeling approaches on funding costs and determining the most effective and efficient way to conserve capital.
  • Capital framework complexity (impact on funding costs): The PRA will examine the complexity of the capital framework and its impact on funding costs for banks. This includes evaluating the usability of capital buffers and assessing the incentives for banks to use these buffers.
  • Effective and efficient capital conservation (costs for bank funding & benefits for lending): The PRA will analyse the costs associated with capital conservation for bank funding and the benefits it brings to lending activities. This involves assessing the trade-offs between capital requirements and the ability of banks to support lending activities.
  • Usability of capital buffers (impact of MDAs on incentives to use buffers): The PRA will evaluate the usability of capital buffers, specifically the impact of Maximum Distributable Amounts (MDAs) on incentives for banks to use these buffers. This includes assessing the effectiveness of MDAs in promoting the use of capital buffers during stress periods.
  • Impact of Basel 3 on wholesale activity / financial market intermediation (empirical): The PRA will conduct empirical research to understand the impact of Basel 3 regulations on wholesale activity and financial market intermediation. This involves analysing the effects of Basel 3 on market liquidity and the functioning of financial markets.
  • Matching Adjustment (MA) Reforms: The PRA will publish its final policy on the MA reforms outlined in CP19/23 – Review of Solvency II: Reform of the Matching Adjustment. These reforms will take effect from end-June, allowing PRA-authorised firms to take immediate advantage of new investment opportunities.
  • Solvency II Reporting Reforms: The PRA (Prudential Regulation Authority) will publish a finalised single taxonomy package in 2024 Q2, which will include the proposals in CP14/22 and CP12/23, as well as deletions published in PS29/21. This package will outline the new reporting requirements that will come into force from 31 December 2024. The PRA will engage with firms, including through industry roundtables, to help them prepare for these new reporting requirements.
  • Solvency II Transfer: The PRA will publish a Consultation Paper (CP) in the first half of 2024 (2024 H1) that will detail how it plans to transfer the remaining Solvency II requirements from assimilated law into the PRA Rulebook and other policy material, such as supervisory statements or statements of policy. This transfer aims to provide a more comprehensive Rulebook and make it easier for firms to access and navigate the rules that apply to them.
  • Regular and concurrent stress testing: Major life insurers participate in regular and concurrent stress testing prescribed by the PRA. This helps assess and identify vulnerabilities in the life insurance sector to a range of risks in different scenarios.
  • Individual results publication: For the first time, the PRA will publish the individual results of the largest annuity-writing firms. This aims to inform stakeholders about the level of firms’ resilience in the stress test scenarios and strengthen market discipline.
  • Engagement with the industry: The PRA will continue to engage with the industry on the technical, operational, and communication aspects of the stress test. This ensures collaboration and understanding between the regulator and insurance firms.
  • Exploratory scenario: The 2025 stress test will include an exploratory scenario to assess exposure to the recapture of funded reinsurance contracts. This scenario will provide insights into potential risks and vulnerabilities in the insurance sector.
  • Dynamic stress test for general insurers: In 2025, the PRA will run its first dynamic stress test for general insurers. This represents a significant change from previous exercises and will involve simulating a sequential set of adverse events over a short period of time.
  • Disclosure of results: The results of the stress tests will be disclosed at an aggregate industry level. This allows for transparency and market awareness of the overall resilience of the insurance sector.
  • Robust risk management: The PRA notes it is important to have a strong risk management framework in place to effectively identify, assess, and mitigate cyber underwriting risks. This involves implementing controls, processes, and policies to manage and monitor these risks.
  • Risk appetite-setting: The PRA notes that establishing a clear risk appetite for cyber underwriting risk is crucial. This involves defining the level of risk that the financial institution is willing to accept and ensuring that it aligns with the overall risk tolerance of the organization.
  • Stress testing: The PRA notes that conducting stress tests specific to cyber underwriting risk is essential to assess the resilience of the financial institution’s capital and exposure management capabilities. These tests simulate adverse scenarios and evaluate the impact on the firm’s financial position and ability to manage cyber underwriting risks effectively.
  • Monitoring and assessment: The PRA will focus on monitoring and assessing cyber underwriting risk, particularly for firms with significant exposures. This includes sharing aggregate findings from thematic projects focused on cyber underwriting risk with the industry, evaluating the industry’s solvency and liquidity resilience to adverse scenarios, and assessing the effectiveness of insurers’ risk management and management actions following such scenarios.
  • Supervisory response: The PRA will use the information gathered from monitoring and assessment activities to inform its supervisory response in the event of a market-wide adverse scenario. This may involve implementing additional regulatory measures or providing guidance to ensure the resilience of the financial system.
  • Scrutinizing internal models: The PRA will continue to scrutinize the internal models used by insurers to calculate capital requirements and aid risk management. This includes identifying potential trends in the strength of firms’ calibrations and assessing the effectiveness of firms’ risk management.
  • Addressing systemic trends: The PRA will address perceived systemic trends that may weaken the robustness of models used across the market as a whole. This involves identifying and addressing potential challenges to ensure the models remain effective.
  • Focusing on specific model drift within individual firms: The PRA will also focus on specific model drift within individual firms. This includes improving the effectiveness of internal model validation so that firms can self-identify and address potential challenges.
  • The key priorities under Funded Reinsurance, as stated in the PRA’s letter on ‘Insurance supervision: 2024 priorities’, include finalizing and implementing policy expectations for UK life insurers that use funded reinsurance arrangements. These policy expectations will cover how firms should manage risks associated with funded reinsurance at both the individual transaction and aggregate level.
  • One of the expectations is that firms should place limits on their activities to ensure sound risk management. This means that firms should establish and enforce controls and processes to manage the risks associated with funded reinsurance, such as setting limits on the amount of risk they are willing to take on and ensuring that the risks are adequately monitored and mitigated.
  • The PRA is particularly focused on the risk of an erosion in standards for assets used as collateral in funded reinsurance transactions. This means that firms should ensure that the assets used as collateral meet the necessary standards and are of sufficient quality to protect policyholders and maintain UK financial stability.
  • Additionally, the PRA is concerned about individual and sectoral concentrated exposures to correlated, credit-focused counterparties. This means that firms should assess and manage their exposures to counterparties, particularly those that are highly correlated or have a focus on credit-related activities. Firms should have processes in place to monitor and mitigate these exposures to ensure that they do not pose a significant risk to policyholder protection and financial stability.
  • Monitoring Claims Inflation: The PRA expects a continued lag in the emergence of claims inflation in the data. Insurers should be alert to this risk and continue to monitor the ongoing impact. The PRA will also monitor this risk through the regulatory data collected and supervisory activities throughout 2024.
  • Addressing Excessive Optimism: The PRA has identified excessive optimism with respect to reserving, pricing, and capital and reinsurance planning. Insurers should be cautious and avoid excessive optimism in their assessments. The PRA may consider further focused work if its assessment of this risk changes.
  • Sound Risk Management: The PRA expects firms to place limits on their activities to ensure sound risk management. This includes managing risks associated with funded reinsurance at both individual transaction and aggregate levels. Firms should follow the policy expectations set by the PRA in managing these risks.
  • The key priorities under the Critical Third Party (CTP) regime are to assess and strengthen the resilience of services provided by CTPs to regulated firms and financial market infrastructures (FMIs). This is done to reduce the risk of systemic disruption in the UK financial sector. The PRA along with other authorities such as the Bank of England and the Financial Conduct Authority (FCA), is working on developing the final policy and oversight approach for the CTP regime in 2024.
  • The PRA’s focus is on ensuring that CTPs, which are designated as critical if their services, if disrupted or subject to failure, could cause financial stability concerns or risks to the confidence in the UK’s financial system, meet the necessary resilience standards. This involves assessing the ability of CTPs to prevent, respond to, recover from, and learn from operational disruptions, including cyber threats.
  • To achieve these priorities, the PRA, Bank of England, and FCA have jointly published CP26/23 – Operational Resilience: Critical Third Parties to the UK Financial Sector. This document proposes how the regulators’ new powers can be used to assess and strengthen the resilience of services provided by CTPs. The PRA will continue to work with other authorities to finalize the policy and oversight approach in 2024.
  • In addition to the CTP regime, the PRA is also developing regulatory expectations on incident reporting, which will be aligned with its operational resilience expectations. This is to ensure that regulated firms promptly report any operational disruptions or incidents that may impact their resilience or the stability of the financial system.
  • Conducting enforcement investigations promptly and efficiently: The PRA is committed to conducting enforcement investigations as quickly and efficiently as possible. This ensures that any breaches of regulations or standards are addressed in a timely manner.
  • Introducing the Early Account Scheme (EAS): The EAS is a new path for early cooperation and greater incentives for early admissions. It aims to reach outcomes more quickly in specific cases by encouraging individuals to cooperate and admit any wrongdoing at an early stage.
  • Holding individuals accountable: The PRA is committed to holding individuals accountable when they do not meet regulatory requirements and expectations. This includes taking appropriate regulatory and/or enforcement action against those individuals who breach the PRA’s standards.
  • Reviewing and updating enforcement policies: The PRA regularly reviews and updates its enforcement policies to ensure they remain effective and aligned with its regulatory objectives. This review process helps to ensure that the PRA has credible mechanisms in place to hold regulated firms and individuals accountable.
  • Understanding D&I position: All in-scope firms are required to understand their current diversity and inclusion position within the organization.
  • Developing appropriate strategies: Firms need to develop appropriate strategies to make meaningful progress in enhancing diversity and inclusion within their organization.
  • Monitoring and reporting progress: Firms are expected to monitor and report on their progress in implementing D&I initiatives. This includes tracking key metrics and providing regular updates on the progress made.
  • Flexibility and tailored approach: The proposals for D&I in PRA-regulated firms are flexible and carefully tailored to recognize that firms are at different stages of their work on D&I. This allows firms to develop their own solutions that are best suited to their specific circumstances.
  • Contribution to secondary objectives: The PRA highlights that the proposals for D&I in CP18/23 contribute towards its secondary objectives of ensuring effective competition and facilitating competitiveness and growth. Enhanced diversity and inclusion can help support greater innovation and make firms more attractive in the labour market.
  • Continuously monitoring and analysing the external environment: The regulatory compliance expert needs to stay updated on the latest trends, developments, and emerging risks in the financial industry. This includes monitoring global economic conditions, technological advancements, geopolitical events, and regulatory changes in different jurisdictions.
  • Conducting horizon scanning: The regulatory compliance expert should proactively scan the horizon for potential risks and threats that may impact the financial institution. This involves identifying emerging risks, regulatory arbitrage (exploiting regulatory gaps or inconsistencies), and potentially dangerous practices that could pose a risk to the stability and integrity of the financial system.
  • Assessing the impact of emerging risks: Once identified, the regulatory compliance expert needs to assess the potential impact of these emerging risks on the financial institution and the broader financial system. This includes evaluating the likelihood and severity of the risks, as well as understanding their interconnectedness and potential cascading effects.
  • Developing and implementing risk mitigation strategies: Based on the assessment of emerging risks, the regulatory compliance expert should work with relevant stakeholders to develop and implement appropriate risk mitigation strategies. This may involve updating existing policies and procedures, enhancing risk management frameworks, and implementing new controls and processes to address the identified risks.
  • Engaging in international policy development: The regulatory compliance expert should actively participate in international forums and collaborate with regulatory bodies from other jurisdictions to develop and influence international policies. This includes sharing best practices, contributing to the development of global regulatory standards, and advocating for the interests of the financial institution and the industry.
  • Collaborating with internal and external stakeholders: The regulatory compliance expert should collaborate with various internal stakeholders, such as senior management, risk management teams, and legal departments, to ensure a coordinated approach in identifying and addressing emerging risks. Additionally, they should engage with external stakeholders, such as industry associations, regulatory bodies, and international organizations, to exchange information, share insights, and contribute to the development of effective risk management practices and international policies.
  • Being at the forefront of identifying new and emerging risks: The PRA will actively monitor and analyse global financial markets to identify any new and emerging risks that may impact the financial institution. This includes staying updated on international regulatory developments and trends.
  • Developing international policy: The PRA will actively participate in international forums and collaborate with other regulatory bodies to develop and influence international policies and standards. This involves contributing to the development of global regulatory frameworks that promote stability, transparency, and fairness in the financial sector.
  • Supporting competitive and dynamic markets: The PRA will work towards creating an environment that fosters competition and innovation in the sectors they regulate. This includes promoting market efficiency, ensuring a level playing field for all participants, and facilitating international competitiveness and growth.
  • Ensuring continuing resilience: The PRA will prioritize the resilience of the financial institution and the broader financial system. This involves implementing and monitoring controls, processes, and policies that mitigate risks and ensure the stability and soundness of the institution.
  • Running an inclusive, efficient, and modern regulator: The PRA will strive to create a regulatory environment that is inclusive, efficient, and modern. This includes adopting effective regulatory processes and engagement, facilitating the accessibility of regulatory requirements, and reducing the operating costs for regulated firms.
  • Effective international collaboration: The PRA recognizes that effective international collaboration is crucial in addressing global risks and maintaining UK financial stability. It aims to collaborate with international regulators through supervisory colleges and other channels to ensure the safety and soundness of internationally active firms and reduce regulatory arbitrage.
  • Clear expectations for firms branching into the UK: The PRA sets out clear expectations for firms that want to establish branches in the UK. This helps ensure that these firms operate in compliance with regulatory requirements and contribute to the safety and openness of the UK financial sector.
  • Maintaining and expanding Memoranda of Understanding (MoUs): The PRA maintains existing MoUs with international regulators and, if necessary, seeks to expand the number of jurisdictions with which it has MoUs. These MoUs facilitate the supervision of international groups and enhance the safety and openness of the UK for financial services activities.
  • Supporting international collaboration activities: The PRA supports Her Majesty’s Treasury (HMT) through its international collaboration activities. This includes activities related to agreements such as The Berne Financial Services Agreement and assessments of other jurisdictions. These efforts aim to facilitate safe access to overseas markets for UK firms and provide other benefits.
  • Targeted refinements to the PRA’s approach: The PRA plans to consult on targeted refinements to its approach to banks branching into the UK. This is in response to lessons learned from the failure of SVB (Supervisory College) to ensure that the PRA’s framework for assessing branches captures activities of potential concern. The aim is to ensure that the PRA’s framework is robust and effectively captures potential risks.
  • Responsible open jurisdiction: The PRA is committed to maintaining the UK as a responsibly open jurisdiction for branches. The vast majority of branch business is expected to be unaffected by any changes. This commitment is important for maintaining the safety and openness of the UK for financial services activities.
  • Clarifying expectations for group entity senior manager functions (SMFs): The PRA intends to consult on clarifying expectations for SMFs within group entities. This is to ensure that senior managers within these entities understand their responsibilities and obligations in relation to the PRA’s regulatory requirements.
  • Expectations of booking arrangements: The PRA also plans to consult on clarifying expectations for booking arrangements. This is to ensure that banks understand the PRA’s expectations regarding the booking of activities and transactions, particularly in relation to potential risks and regulatory compliance.
  • Implementation of Basel 3.1 standards: This is a major priority for the PRA and involves completing the long process of post-financial crisis regulatory reform. The implementation of these standards will play a vital role in maintaining consistency in risk measurement across firms and jurisdictions, which is crucial for the bank capital regime.
  • Ensuring firms have adequate standards of operational and cyber resilience: Following the Financial Services and Markets Act (FSMA) 2023, the PRA has new powers to oversee the services provided to regulated firms by critical third parties. The institution will be implementing a regime to ensure that firms have sufficient operational and cyber resilience. This is important to prevent and mitigate risks to the financial system that may arise from cyber incidents.
  • Full implementation of wider operational resilience policy: In March 2025, the PRA aims to reach an important milestone by fully implementing its wider operational resilience policy. This policy is designed to ensure that firms have robust processes and controls in place to maintain operational resilience and effectively manage any disruptions or incidents.
  • Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change: The PRA expects firms to make further progress and demonstrate how they are responding to the PRA’s expectations. Firms are required to set out the steps they are taking to address barriers to progress.
  • Updating SS3/19: In 2024, the PRA will commence work to update SS3/19, which sets out expectations and guidance for banks and insurers in managing the financial risks emanating from climate change. This update will incorporate new insights and findings from supervisory processes and exercises.
  • Quantifying the impact of climate risks on expected credit losses: The PRA will publish thematic findings on banks’ processes to quantify the impact of climate risks on expected credit losses. This will help banks better understand and manage the financial risks associated with climate change.
  • Collaborating with industry and international partners: The PRA, alongside the FCA, will continue to work with industry through the Climate Financial Risk Forum to produce practical guides and tools that help financial firms embed the financial risks from climate change into their operations. The PRA will also engage with domestic and international partners, including international standard-setters, to ensure consistent approaches to managing climate-related financial risks.
  • Conducting a joint survey: The PRA and FCA intend to conduct the third edition of the joint survey on machine learning in UK financial services in 2024 Q2. This survey aims to gather responses from firms to further explore how best to address the issues and risks posed by AI/ML in a way that aligns with the PRA’s and FCA’s statutory objectives.
  • Monitoring compliance: The PRA will continue to monitor firms’ compliance with its expectations, as set out in SS1/23. This indicates that the PRA has established specific expectations for firms regarding the use of AI/ML and will ensure that these expectations are being met.
  • Exploring updates: The PRA will seek to explore further updates where necessary. This suggests that the PRA is open to adjusting its expectations and requirements regarding AI/ML as new developments and risks emerge.
  • Identifying and responding to opportunities and risks: The PRA aims to be at the forefront of identifying and responding to opportunities and risks faced by PRA-authorised firms as they use technology in innovative ways to attract and retain customers, reduce costs, and increase efficiencies.
  • Monitoring external context and business risk: The PRA recognizes that external context and business risk are important facets of its approach to supervision. It monitors developments, with specialist input from the Bank’s Fintech Hub, to identify risks such as fragmentation of the value chain, novel outsourcing arrangements, and concentration risks across and within firms.
  • Adapting supervisory approach: The PRA takes a responsive and responsibly open approach to digitalisation. It considers policy proposals to respond to digitalisation and adapts its supervisory approach accordingly. This ensures that the PRA can effectively supervise and regulate firms in the digital era.
  • Engaging with applicant firms: The PRA engages with applicant firms that have novel uses of technology through its New Bank Start-up and Insurer Start-Up Units. This engagement allows the PRA to understand and assess the risks associated with new technologies and ensure that appropriate controls and processes are in place.
  • Collaboration with domestic and international partners: The PRA works closely with domestic and international partners, as well as industry and stakeholders, to take a proactive approach to digital innovations within the financial sector. This collaboration helps in sharing best practices, exchanging information, and coordinating efforts to address digitalisation-related risks.
  • Contribution to international standard-setting fora: The PRA is a significant contributor to discussions on digitalisation in international standard-setting fora. It supports the work of the Basel Committee on Banking Supervision (BCBS) on the developments in the digitalisation of finance and the implications for banks and supervisors. The PRA also actively participates in the International Association of Insurance Supervisors (IAIS) Fintech Forum.
  1. Enhancing market integrity: The UK government has published a consultation and Call for Evidence on the future financial services’ regulatory regime for crypto assets, with a focus on enhancing market integrity. This indicates that one of the key priorities is to ensure that digital money and innovation in the financial sector are conducted in a transparent and secure manner.
  2. Custody requirements: The document also highlights that the consultation and Call for Evidence on the regulatory regime for crypto assets includes a focus on custody requirements. This suggests that ensuring proper custody and safeguarding of digital assets is another key priority in the context of digital money and innovation.
  3. Transparency: The document mentions that the UK government has plans for its legislative approach to the regulation of stablecoins, and one of the priorities is to enhance transparency in this area. This indicates a focus on ensuring that digital money instruments are subject to appropriate disclosure and reporting requirements.
  • The PRA’s approach to rule-making in relation to the key priorities under regulatory change is focused on adopting effective regulatory processes and engagement. This includes providing for the efficient handling of regulatory processes such as authorizations and data collections, as well as facilitating the accessibility of the PRA Rulebook to reduce the operating costs of firms.
  • The PRA also takes a responsive and responsibly open approach to UK risks and opportunities. This means making rules that account more effectively for the needs of the UK and responding faster to emerging risks and opportunities in the UK financial sector. The PRA uses regulatory tools to support innovation safely and reduce barriers to innovation that the industry faces.
  • To gather stakeholders’ views on reducing barriers to innovation, the PRA will hold a pilot roundtable in 2024. This demonstrates the PRA’s commitment to engaging with industry stakeholders and considering their perspectives in the rule-making process.
  • Overall, the PRA’s approach to rule-making aligns with its strategic priorities, which include maintaining and, where appropriate, strengthening or updating prudential standards, being at the forefront of identifying new and emerging risks, and ensuring that banks and other financial institutions can continue to provide essential services. By considering regulatory principles and engaging with stakeholders, the PRA aims to create effective and efficient regulations that support the stability and resilience of the banking and insurance sectors.
  • Ensuring continuing resilience: The PRA aims to maintain the resilience of the financial services sector by implementing and monitoring controls, processes, and policies that promote strong prudential frameworks. This includes setting prudential requirements and conducting stress tests to assess the resilience of firms.
  • Identifying new and emerging risks: The PRA strives to be at the forefront of identifying and understanding new and emerging risks in the financial services sector. This involves conducting research and analysis to stay informed about evolving risks and developing appropriate policies and regulations to address them.
  • Developing international policy: The PRA recognizes the importance of aligning its policies and regulations with international standards to ensure the competitiveness and growth of the UK economy. It actively participates in international forums and collaborates with other regulatory bodies to develop and implement effective international policies.
  • Supporting competitive and dynamic markets: The PRA aims to support competitive and dynamic markets within the sectors it regulates. This involves creating an environment that encourages innovation, competition, and market efficiency while ensuring the stability and integrity of the financial system.
  • Facilitating international competitiveness and growth: The PRA seeks to facilitate the international competitiveness and growth of the UK financial services sector. It does this by implementing policies and regulations that promote a level playing field for domestic and foreign firms, attract investment, and enhance the UK’s position as a global financial hub.
  • Running an inclusive, efficient, and modern regulator: The PRA is committed to being an inclusive, efficient, and modern regulator within the central bank. This includes adopting best practices in regulatory processes, leveraging technology to enhance efficiency, and promoting diversity and inclusion within its operations.
  • Simplifying prudential requirements: The PRA aims to simplify the prudential requirements for smaller, domestically focused banks and building societies while maintaining their resilience. This involves creating a simpler but equally resilient prudential framework that reduces the costs associated with these requirements for non-systemic banks and building societies.
  • Maintaining financial resilience: The Strong and Simple framework is designed to ensure the financial resilience of banks and building societies operating in the UK. This means that while the prudential requirements are being simplified, the framework still aims to maintain the necessary level of financial resilience for these institutions.
  • Reducing costs: One of the objectives of the Strong and Simple framework is to reduce the costs associated with prudential requirements for non-systemic banks and building societies. By simplifying these requirements, the PRA aims to make compliance more cost-effective for smaller institutions.
  • Finalizing and implementing the framework: In the upcoming year, the PRA plans to move further towards finalizing and implementing the Strong and Simple prudential framework. This includes implementing the simplifications to liquidity requirements that were introduced in Phase 1 and finalizing the rules for the Interim Capital Regime.
  • Consultation on simplified capital regime: The PRA intends to consult on a simplified capital regime for smaller, domestically focused banks and building societies in the second quarter of 2024. This consultation will seek input from industry participants and stakeholders to ensure that the proposed regime is effective and appropriate.

The key priorities under the Insurance Special Purpose Vehicles (ISPV) regime are to improve the regime and increase its usage. The Prudential Regulation Authority (PRA) has been in discussion with industry participants to understand the areas of the regime that require changes. The PRA expects to consult on a package of reforms to the UK ISPV regime. These reforms are intended to address the shortcomings of the current regime and make it more effective in providing guidance for parties seeking authorization as an ISPV or insurers and reinsurers using UK ISPVs for risk mitigation in accordance with Solvency II.

  • Ensuring that key decision-makers and material risk-takers at PRA-regulated firms have the right incentives and can be held accountable.
  • Removing the bonus cap and making changes to the rules to enhance proportionality for small firms.
  • Allowing a wider range of transaction structures in the UK regime.
  • Improving the speed of the application process and reducing costs for applicants.
  • Clarifying the PRA’s expectations of UK insurers who cede risks to ISPVs (Insurance Special Purpose Vehicles), regardless of their location.
  • Reviewing the effectiveness, scope, and proportionality of the regime: The PRA and FCA jointly published a review of the SM&CR, seeking views on its effectiveness. The feedback received from stakeholders will be considered, and potential policy options for reform will be explored.
  • Consultation on proposed changes: Based on the comments received during the review, the PRA, in collaboration with the FCA and HMT, intends to consult on proposed changes to the SM&CR in the first half of 2024. This consultation will provide an opportunity for stakeholders to provide further input and feedback on the proposed reforms.
  • Ensuring effectiveness and proportionality: The objective of the changes to the SM&CR is to ensure that the regime is effective and proportionate to the UK’s financial sector. The PRA will consider potential policy options that address the identified issues and enhance the regime’s effectiveness while maintaining its overall structure and objectives.
  • Maintaining international standards: The remuneration regime’s structure and objectives are based on internationally agreed FSB principles and standards. Any changes to the regime will need to align with these international standards to ensure consistency and maintain the UK’s reputation as a global financial centre.
  • Supporting potential market entrants: The PRA will continue to support potential market entrants in navigating the authorization process. This includes providing clear online guidance and industry engagement to build awareness of expectations and seek feedback on firms’ experience of the process.
  • Pre-application stage: The PRA offers potential applicants the opportunity to meet with staff through a structured pre-application stage. This allows firms to iterate and develop their proposition to support a better-quality application.
  • Mobilization stage for newly authorized banks: The PRA will continue to make use of the mobilization stage for newly authorized banks, where appropriate. This allows them to operate with restrictions while they complete their set-up before starting to trade fully.
  • Introduction of a new ‘mobilization’ regime for insurers: In line with the Review of Solvency II: Adapting to the UK insurance market, the PRA will introduce a new ‘mobilization’ regime for new insurers from 31 December 2024. This regime will facilitate entry and expansion for new insurers, similar to the mobilization stage for new banks.
  • Benefits for newly authorized insurers: Newly authorized insurers in mobilization could be offered the option of using a set period of extra time to build up systems and resources while operating with business restrictions, proportionate regulatory requirements, and lower minimum capital requirements. This aims to support their growth and development in the UK insurance sector.
  • Implementing the recommendations of the Independent Review of Ring-fencing and Proprietary Trading led by Sir Keith Skeoch. This includes working closely with HMT (Her Majesty’s Treasury) to give effect to the recommendations and aligning with proposed legislative changes.
  • Consulting on potential changes to the ring-fencing regime identified by the Rule Review. This will involve conducting a fuller exploration of costs and benefits before making any changes.
  • Providing technical advice and support to HMT in finalizing legislative changes and considering responses to the Call for Evidence on longer-term reforms.
  • Updating the PRA’s policy and rule Instrument once the legislative changes are brought into force. This will include updating SS8/16 – Ring-fenced bodies (RFBs) to reflect the changes.
  • Conducting a review of the ring-fencing rules every five years and providing a report to HMT. The first review was completed on 12 December 2023, and the resulting report was laid before Parliament on 25 January 2024.

Wholesale Insurance Accelerated Authorisation Pathway: The PRA, in collaboration with the Financial Conduct Authority (FCA), has developed the Wholesale Insurance Accelerated Authorisation Pathway. This pathway provides an accelerated route for the authorisation of a subset of London market wholesale applicants, streamlining the authorisation process for these specific applicants.

  • Transforming Data Collection: The PRA aims to build on digital regulatory reporting to achieve the objectives of the TDC (Transforming Data Collection) program for 2026. This includes having the necessary data and tools to rapidly identify and probe emerging issues, risks, and policy questions. The goal is to integrate this data into a single customizable supervisory dashboard.
  • Reducing Burdens on Firms: The PRA aims to only collect the data it needs from firms, thereby reducing unnecessary burdens on them. This is in line with the goal of streamlining data collection and focusing on the most useful and relevant information through initiatives like the Banking Data Review.
  • Data and Analytics Agenda: The PRA recognizes the potential of its data and analytics agenda to create new opportunities for improving how it works. This indicates a focus on leveraging data and analytics capabilities to enhance regulatory processes and decision-making.
  • Improving psychological safety: The PRA aims to create a working environment where all staff feel safe to express their opinions and ideas without fear of negative consequences. This is achieved through initiatives such as the “speak my mind” initiative, which promotes employees’ ability to voice their opinions.
  • Ethnic and gender representation: The PRA is committed to improving representation and diversity within its workforce, particularly in terms of ethnicity and gender. This includes implementing the recommendations of the Bank’s Court review into ethnic diversity and inclusion, embedding inclusive recruitment practices, and advancing talent development opportunities.
  • Disability disclosure: The PRA recognizes the importance of creating an inclusive environment for individuals with disabilities. They aim to promote disability disclosure and provide support and accommodations to ensure that all staff can thrive in their roles.
  • Employee networks: The PRA benefits from the Bank’s excellent employee networks that cater to diverse groups such as disability, LGBTQ+, social mobility, gender, age, carers, and different ethnicities. These networks provide a platform for employees to connect, share experiences, and support each other.
  • The PRA plans to build on its research efforts in 2024/25 and ensure timely delivery of high-quality research, expertise, and critical evaluation to senior decision-making activities.
  • The PRA Research agenda for 2023+ captures the research priorities, which are focused on delivering research that supports the PRC, FPC, and other senior decision-making activities.
  • The PRA also aims to track the quantity, quality, and impact of its research through research metrics and the PRA Research Annual.
  • Additionally, the PRA will produce impact cases to track the lifespan and evaluate the total policy/social impact of key research projects.
  • The organization will also initiate new capacity-building projects on models, tools, and data, and reinforce external collaborations with research departments at other central banks, regulatory authorities, research institutes, or universities.
  • People: The document states that attrition levels reduced and there was an improvement in recruitment into key roles in the previous year. However, looking ahead to 2024/25, the headcount required to deliver the business plan is forecast to remain broadly flat. This could pose a risk if there is a lack of sufficient resources or expertise to execute the plan effectively.
  • Technology: Access to the right technology and data is highlighted as a key area of focus in 2024/25. The document mentions a multi-year investment to ensure that the PRA’s technology capabilities support its strategic priorities. However, there is a risk that the PRA may be unable to deliver its intended technology ambition due to a congested change agenda across the Bank. This challenge is being managed through careful prioritization and scoping of key projects, including delaying some lower-priority activities.
  • Dependencies: The interconnected nature of the global financial system means that the PRA is dependent on external parties such as the FCA, HMT, and overseas regulators. The document states that policy development, authorization processes, and supervision activities are contingent on these external parties. Any disruptions or delays in coordination with these parties could present a risk to the delivery of the business plan.
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