PRA 2024 Priorities – Prudential Focal Points for UK Firms

International banks and designated investment firms

UK deposit takers

Insurance firms

Robust Governance, Risk Management, and Controls: There is a need for strong governance, risk management, and controls at firms to effectively identify, assess, and mitigate risks in a challenging and changeable operating environment. Boards and executives should continuously challenge themselves to ensure they have appropriate structures, processes, capabilities, and information in place within their governance and risk management frameworks.

Robust governance, risk management, and controls: There is a focus on the need for strong governance, risk management, and controls at firms to effectively identify, assess, and mitigate risks in a challenging operating environment. Boards and executives are expected to continuously challenge themselves and ensure they have appropriate structures, processes, capabilities, and information in place within their governance and risk management frameworks.

Climate-related financial risks: The PRA expects firms to manage climate-related financial risks and increase their efforts in this area. Firms should assess climate risks across both sides of their balance sheet and demonstrate how they are responding to the PRA’s expectations. The PRA will update supervisory statement 3/19 to include effective practices and developments in regulatory thinking.

Risk Management and Controls: Recent thematic reviews have highlighted that firms often consider risk management in silos without considering the implications for other businesses. Firms are urged to address the issues highlighted in previous letters on equity financing and fixed income financing and consider how other businesses may be affected. The Prudential Regulation Authority (PRA) will conduct cross-firm thematic reviews and coordinate with international regulatory authorities to assess firms’ risk management practices.

Financial resilience: Firms should manage their financial resilience to ensure the continued support of businesses and households. This includes reflecting on events in the global banking sector and considering the interaction between capital and liquidity risks, changes in depositor behaviour, and forthcoming changes in funding and liquidity conditions.

Operational resilience: Firms are expected to meet the Operational Resilience expectations by March 2025. They should have a clear plan to identify and remediate vulnerabilities that could impact their ability to deliver important business services. This includes running tests using severe but plausible scenarios, including cyber-related disruptions, and actively overseeing the operational resilience program.

IT infrastructure transformations and outsourcing: Firms undergoing large and complex transformations of their IT infrastructure, including utilizing third-party providers, should ensure these transformations are well-managed and execution risks are appropriately mitigated. Firms should also meet the expectations for outsourcing and third-party risk management and consider the impact of changes on their important business services.

Financial resilience: The Prudential Regulation Authority (PRA) is focusing on credit risk and liquidity risk in light of the challenging economic environment. Firms are expected to understand their risk exposures and respond swiftly to novel risks and changes in risk correlations. The PRA will assess firms’ credit risk management capabilities and internal credit assessment framework throughout 2024.

Operational resilience: Firms are required to implement the PRA’s operational resilience expectations by March 2025. This includes demonstrating the ability to remain within impact tolerances for all important business services (IBS) and conducting tests using severe but plausible scenarios, including cyber-related disruptions. Boards and senior management are responsible for overseeing the delivery of their firms’ operational resilience programs.

Counterparty Credit Risk and Secured Financing Risks: Counterparty credit risk and secured financing risks, particularly exposures to non-bank financial institutions (NBFI) across all business lines, will remain key priorities in 2024. The PRA will assess firms’ counterparty risk management capabilities and look for improvements in their ability to identify and assess correlations across financing activities with multiple clients, taking market depth into account.

Credit risk management: Firms need to be prepared to manage credit risks proactively and prudently while supporting their customers. The assessment of firms’ credit risk management will focus on how practices have evolved in light of uncertainties over growth, inflation, interest rates, and geopolitical tensions. Vulnerable segments, counterparty credit risk, and exposures to non-bank financial institutions will also be monitored.

Climate-related financial risks: The PRA expects firms to manage climate-related financial risks and increase their efforts in this area. Firms should assess climate risks across both sides of their balance sheet and demonstrate how they are responding to the PRA’s expectations. The PRA will update supervisory statement 3/19 to include effective practices and developments in regulatory thinking.

Risk Culture and Senior Managers Regime: Firms are expected to operate with an appropriate risk culture to promote safety and soundness. The PRA expects individuals within the Senior Managers Regime to lead the risk culture of their organizations. Encouragement to speak up, challenge, and question is seen as supporting prudent decision-making and risk management practices.

Risk culture and senior management accountability: Firms are expected to operate with an appropriate risk culture to promote safety and soundness. Individuals within the Senior Managers Regime are expected to lead the risk culture of their firms. Firms should also have appropriate succession plans in place to maintain strong governance, risk management, and controls in the event of personnel changes.

Regulatory reform: The PRA is working on regulatory reforms to implement Solvency UK. Final policy statements will be published in 2024, and the changes are expected to be completed by the end of the year. The PRA is also considering the most efficient and proportionate way to implement the changes and will provide clarity on matters such as the matching adjustment and internal model review processes.

Novel Risks from New Technologies: Firms are urged to consider the novel risks that may arise from the growing use of new technologies. They are expected to be forward-thinking and imaginative in the scenarios they consider, capturing extreme tail events and the risk management challenges they may present.

Novel risks from new technologies: Firms are expected to consider the risks that may arise from the growing use of new technologies. They should be forward-thinking and imaginative in the scenarios they consider, capturing extreme tail events and the risk management challenges they may present.

Ease of exit: The PRA aims to increase confidence that insurers can exit the market in an orderly way. Firms will be required to prepare plans for an orderly solvent exit as part of their business-as-usual activities. The PRA intends to consult on the requirements for these plans and the ability to execute them.