On 15th April, the PRA published it’s 2019/20 business plan.
The plan includes a foreword by the Chief executive, Sam Woods, who highlights that the “PRA is moving out of the one phase and into another”. A phase where Brexit brings uncertainty. Reflecting on the highlights of last year he points out the successes of ring fencing and Solvency II.
The PRA’s budget 2019/20 is £273 million and will be used to focus on the areas summarised below.
Robust prudential standards and supervision
The PRA’s work this year will cover:
- structural reform – post-implementation monitoring and embedding
- Solvency II – making improcements without eroding prudential standards
- financial stability
- accountability – embedding and evaluating the governance regime for banks and insurers
Adapt to market changes and horizon scanning
The PRA continues to identify areas which can lead to unintended behaviour in the market. The following areas are currently of interest.
- Brexit
- climate change
- new firms seeking authorisation in the UK (particularly as a result of Brexit)
- operational resilience will be assessed in light of developments in technology (particularly in relation to cyber resilience, crypto-assets, fintech)
- firms’ response to regulation
- consolidation of defined benefit pension schemes
Financial Resilience
A number of initiatives have been identified:
- capital adequacy and liquidity will be assessed through a range of measures.
- credit risk and asset quality will be assessed and stress testing conducted
- for insurers – balance sheet risks from complex products and asset exposures will be a focus as well as SCR risk appetites
- for life insurers – asset reviews will continue, equity release mortgage supervisory statement will be implemented and focus will be on life insurance reserving
- for general insurers – focus will be on business plan optimism, reserving and underwriting oversight for specialist general insurer business models.
- internationally, they will work with the IAIS to develop the ICS v 2.0
- a focus will continue on IFRS 9
Operation Resilience
This continues to be a key priority for the PRA. From a micro-prudential perspective, this means continuing the development of the supervisory approach, tools and firm engagement and building on the joint discussion paper with the Bank and FCA from July 2018. A consultation paper is expected by the second half of 2019 setting out their proposed policy on operational resilience.
The PRA plans to support enhancement of the financial sector’s collective cyber incident response tools, threat information sharing and risk management. In addition, they plan to support the FPC with is cyber agenda, including planned stress test and setting impact tolerances.
Recovery and Resolution
The PRA has confirmed that it does not operate a zero-failure regime – firms are allowed to fail but should learn from it.
They will work with the Bank’s Resolution Directorate to ensure firms develop capabilities to wind down their trading and derivatives business in an orderly manner, and collaborate with international regulators to ensure a coordinated and effective approach.
fir insurers, the PRA will contribute to the FSB’s resolvability assessment process for the two G-SIIs.
Competition
This year the PRA will:
- assess the competition implications of its policies and check for any unintended distortions to competition
- continue to implement policies to facilitate internal-rating based model applications from smaller banks, and refine the Pillar 2A capital framework
- further refine the framework to facilitate the issuance of Insurance Linked Securities (ILS) through ISPVs in the UK with a planned consultation
- complete new bank authorisations where relevant, and ensureg the application of a proportionate approach within the UK banking sector;
- continue to support the New Bank Start-up Unit, and the New Insurers Start-up Unit;
- develop in a proportionate manner their approach to operational resilience in our prudential framework;
Brexit
The focus will be on:
- monitoring and mitigating risks
- providing a clear legal and regulatory framework
- authorisations for EEA firms
- supervisory co-operation with the EU
- providing evidence to the TSC on the future of the UK’s financial services sector
Efficiency and effectiveness
This will revolve around:
- embedding the plan for PRA technology
- monitoring and mitigating risks to the delivery of the PRA business plan
- preparing for unforeseen events
- monitoring execution risks
- identifying and working through the PRAs dependencies