PRA Business Plan: a focus on financial resilience

In many ways the FCA's Regulatory Initiatives Grid has taken over from the annual FCA and PRA business plans as the "go to" for finding out what's in the regulators' diaries for the year to come. However even if you're up to date with the Grid, there's a few highlights worth noting from the PRA's business plan, published yesterday:

Financial Resilience

- Implementation of Basel 3.1 standards in the UK moves forward: the PRA will be reviewing the feedback from its consultation in the course of this year, and hints that the unpopular 1 January 2025 implementation date may be moved back - watch this space.

- Work on the "Strong and Simple" framework (a simplified capital framework for smaller, domestic banks) continues and feedback on PRA's proposal will follow this year as part of the Basel 3.1 implementation package. 

- Risk to the UK's financial stability is monitored by the PRA in many ways, including through a horizon-scanning programme which identifies emerging external risks, regulatory arbitrage, potentially dangerous practices, and which highlights features of the regulatory regime that are not yet delivering the desired results.

Stress testing

Stress testing continues to be an important tool:

- Results of the Annual Cyclical Scenario framework will be published in the summer. This scenario tested the resilience of the UK banking system to deep simultaneous recessions in the UK and global economies, large falls in asset prices and higher interest rates, and a separate stress of misconduct.

- Scenario testing to investigate the behaviours of banks and non-bank financial institutions following a severe but plausible stress to financial markets will be launched. This will be a test of market, and not individual firms, resilience. More detailed information on the exercise will be published in Q2.

- Increasing reliance on scenario analysis and a parallel increase in the sophistication of the modelling techniques used are acknowledged. A new supervisory statement on model risk management principles for banks will be published during 2023 to update expectations in this area. 

Operational resilience

- The PRA has conducted an initial assessment of firms’ implementation of its operational resilience policy and provided feedback of the results. 

- In the rest of 2023, the PRA will work closely with the FCA to assess firms’ progress, with a particular focus on their ability to deliver important business services within impact tolerances through severe but plausible scenarios within a reasonable time frame and by no later than March 2025.

Trading book controls

- Following the regulators' review of the Archegos default, the PRA will now review its own regulatory policies in light of these findings to assess whether its policy framework for trading book risk management, controls and culture is adequate, robust, and accessible, with the potential for more rules in this space.

Ring fencing

- The PRA is required to carry out a review of its ring-fencing rules every five years and the first of these reviews will be submitted to HMT by 31 December 2023.

- This will be a technical review, separate to the PRA's work on the Skeoch review.

Skilled persons reviews

- The PRA will continue with its programme of skilled person reviews of controls over data, governance, and systems for regulatory reporting in 2023, and expects firms to take steps to address the thematic findings set out in its communications on regulatory reporting.

Diversity and Inclusion

- Following the joint regulators discussion paper on D&I in the financial sector, there will be a consultation paper in 2023 with proposals on diversity and inclusion in regulated firms.

- The final policy is expected to be published in 2024.

Finally, if you missed the FCA's Business Plan in April, here's our client note setting out its key themes.