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PRA keeps sight of 2021 targets despite coronavirus

16 April 2020: UK bank regulator the Prudential Regulation Authority (PRA) has acknowledged the disruption that coronavirus is likely to cause into 2021, but expects its ‘business-as-usual’ work to continue. ICAEW Financial Services Faculty commissioning editor Brian Cantwell reports.

The PRA is set to continue to focus on its regulatory agenda and pre-coronavirus risks.

In its 2020/21 business plan, which sets out the financial service regulator’s strategy, workplan and budget, PRA CEO Sam Woods identified the EU withdrawal as a key challenge, noting the PRA’s remit would increase as the number of European bank branches and subsidiaries grows after the end of the transition period.
This would also include a review of elements of the current regimes that were “suboptimal” for the UK market, including the level and complexity in regulation for small firms.
As for other risks, Woods said: “Climate change is one, and operational resilience another – work on these will continue even if the scheduling has to flex a bit in response to COVID-19 pressures.”

Seven years, eight goals

In the seventh year since its inception from the Financial Services Authority, the PRA said it had eight strategic goals it wanted to address in the coming year.
They are to:

  • Maintain robust prudential standards including holding firms and directors to account
  • Adapt to market changes and mitigate risks to the regulator’s objective
  • Ensure that firms are adequately capitalised and have enough liquidity for financial resilience
  • Develop its supervision of operational resilience
  • Ensure that banks and insurers have good recovery and resolution plans from stress events
  • Stimulate competition in the banking sector
  • Deliver a smooth transition for banking regulation as the UK leaves the EU withdrawal transition period
  • Manage its resources efficiently.

The regulator identified within those eight goals key events that it was managing this year.
2020 is a key year for the transition away from the London Interbank Offered Rate (LIBOR), and the PRA said it would work closely with the BoE and the FCA via its Working Group to manage a smooth transition.
The PRA said that it would continue to expect firms to submit complete, timely and accurate regulatory returns in 2020/2021 following the Zelmer Review, and it had written to CEOs on this topic previously, and taken enforcement action.
However, in light of COVID-19, the regulator said it would pause the skilled persons s.166 reviews relating to the reliability of banks’ regulatory reviews that were announced in October 2019.
‘In doing so we will have regard to the flexibility provided under the relevant regulatory regimes, for example in the Capital Requirements Regulation and Solvency II, and continue to closely coordinate our supervisory work on COVID-19, wherever possible, with the FCA and other authorities,’ it wrote.

Forthcoming risks

The PRA’s regulatory risk horizon and identification looked busy as it identified new risks to the UK financial system across 2020 and 2021.
It said climate change posed significant risks, and that it would work through the Climate Financial Risk Forum (CFRF) to build the best response to the financial risks of climate change.
This will include prepping for the next biennial exploratory scenario (BES) which will test the resilience of the largest banks, insurers, and financial system to climate risks.
It said FinTech regulation and the Bank of England’s work on RegTech would be a key working part of its activities, including planning the industry outlook over the next decade in coordination with banks and insurers.
There will be a continuation in the oversight of AI and machine learning within financial services and its evolution, said the PRA.

Financial resilience 

The Bank said its annual stress test, the ACS, has been cancelled considering coronavirus, but that it would make efforts to oversee bank liquidity through supervision at firm and sector level.
This year the PRA will finalise policy on the capital requirements for credit unions and will also clarify its final approach to PRA buffers for new banks.
It will work on its internal model ‘drift’, and on the data for such models, so that it could continue to advise insurers about capital liquidity as accurately as possible, which should prove challenging as the information regarding coronavirus and climate change evolves. 
The Prudential Regulation Committee wrote: “We will continue to assess the effects of COVID-19 on our capacity as an organisation and on the capabilities of the firms we regulate.
“We will actively revise elements of this Business Plan as may become necessary in order to keep working as effectively as possible towards the delivery of our objectives – to promote the safety and soundness of the firms we regulate, to contribute to ensuring that insurance policyholders are appropriately protected, and to facilitate effective competition in the markets for services provided by PRA-regulated firms.”