The Prudential Regulation Authority (PRA) has set out its strategy for the oncoming year in the face of the challenges from Covid-19 and leaving the EU. This article summarizes the key areas of the plan and links to ICAEW resources to help you understand and meet the challenges.
Covid challenges include key person risk and staff shortages, access to the right tech and data, operational risks, and dependencies on external parties.
Key work for the PRA this year will include:
- engagement with supervised firms on creating a simpler framework for smaller non-systemic banks and building societies
- working closely with HM Treasury
- engaging with the industry on the review of Solvency II for insurers
- Capital Requirements Regulation II will be published in the second half of 2021
- The PRA will consult on the implementation of Basel 3.1, which begins at the start of 2023
- Continuing work on the move away from Libor to Sonia.
The PRA is working to recommendations from the Prudential Regulation Committee (PRC) considering government policy to achieve a net-zero economy by 2050 under the Climate Change Act 2008. It aims to further embed the financial risks from climate change into routine supervision to ensure that firms see it as a priority this year.
This year will also see the PRA looking at prudential frameworks for stablecoins and cryptocurrencies as part of the BoE’s efforts in the crypto space.
It will also resume stress testing, which will help it manage any potential impact of consolidation in the banking and insurance sectors.
The PRA will continue its focus on the credit risks resulting from Covid-19 across both commercial and retail activities.
Commercially, thematic and firm-specific asset quality reviews will continue to be targeted to key vulnerable sectors (e.g. aviation, hospitality and leisure, retail), asset classes (eg small and medium-sized enterprises and mid-corporates), and the assessment of banks’ risk management capabilities, with particular focus on problem debt.
It will also look at corporate real estate lending, which captures loans written by major bank and insurance participants.
For retail credit, the Authority will continue to focus on the expiry of the remaining Payment Deferrals and will closely monitor firms’ arrears and forbearance levels over the coming months.
The PRA published guidance this year on operational resilience. The policy requires firms to identify important business services, set impact tolerances for those important business services, and take action to deliver their important business services during severe but plausible disruptions.
In 2021/22, the PRA will assess whether firms can meet the policy expectations by the time they come into force on 31 March 2022.
Recovery and resolution
The PRA’s key target this year is to ensure that banks and insurers have credible plans in place to enable them to recover from stress events, as the government financial support from Covid changes.
Firms should work to remove barriers to their resolvability to support the management of failure – proportionate to the firm’s size and systemic importance – in an orderly manner.
The PRA has a greater rule-making role following the departure from the EU, meaning that it will have to manage change to regulatory regimes with the EU this year.
This includes managing 270 EEA firms that were previously ‘inward passporting’ are now supervised under the Temporary Permissions Regime (TPR) (the TPR allows EEA firms that were formerly using a passport to operate in the UK for a limited period while they seek authorisation from the PRA).