Banking Q1 - 2023

1. PRA Priorities letter from January 2023
2. CP4/23 – The Strong and Simple Framework: Liquidity and Disclosure Requirements
3. CP5/23 – Renumeration: Enhancing Proportionality for Small Firms
4. FCA’s observations on the implementation of IFPR

PRA Priorities letter from January 2023

PRA priorities for 2023 sets out priorities for branches and subsidiaries that operate in the UK. These priorities include risk management and governance; operational risk and resilience; and data management.

Risk management and governance: The PRA is asking firms to tighten up their 2^nd line frameworks with a clear focus on counterparty due diligence, pricing, and stress testing. The latter has emerged to be a key theme across several PRA’s messages in Q1 meaning that it is highly likely that this area will be scrutinised with increased rigour. Firms must therefore ensure that they increase their focus stress testing and ensure that their ICAAPs and ILAAPs include a robust account of the same.

Operational risk and resilience: The PRA has indicated that they will focus on identifying and mapping their Important Business Services (IBS), setting and monitoring of impact tolerances, and scenario testing programmes. The PRA will also scrutinise the alignment of firms’ outsourced functions in line with SS 2/21 on third-party risk management. Firms should review and remediate any shortcomings across these areas.

Data management: Firms must invest in their data management capabilities. The PRA has been vociferous about firms’ weaknesses in data management since their Dear CEO letter in 2021, and according to the PRA these weaknesses continue to exist. Firms must establish clear data lineage and ensure that there is a functional controls framework to preserve data integrity.

A more in-depth article can be found on our regulatory insights page linked below.

CP4/23 – The Strong and Simple Framework: Liquidity and Disclosure Requirements

CP4/23 on The Strong and Simple Framework sets out a number of simplified liquidity, disclosure and reporting measures (previously discussed in DP 1/21) that’ll apply to simpler regime firms. In summary, the PRA is proposing that:

• NSFR will be disapplied where banks where retail funding accounts for >50% of their total funding.
• Pillar 3 disclosures will be disapplied for unlisted banks and streamlined for listed, however, banks would still be allowed to make voluntary disclosures if they so wish.
• Some ALMM reporting requirements will be removed.
• Pillar 2a add-ons are set to be removed, but supervisors will retain discretion on this matter.

CP5/23 – Renumeration: Enhancing Proportionality for Small Firms

Running in parallel to the implementation of the Strong and Simple regime are the PRA’s proposed changes to Renumeration for smaller firms.

The definition of ‘small firms for remunerations’ will change to align closer with the definition of simpler-regime firms, such that by virtue of being a simpler-regime firm, firms will automatically be considered small for remunerations purposes. While the proposed definition of ‘small firms for remunerations’ aligns with the Strong and Simple framework, the PRA considered three of the simpler-regime criteria immaterial for remunerations purposes; specifically, domestic activity, IRB approvals, and location of parent company. These criteria are necessary in the Simpler regime, to prevent internationally active banks from departing from the Basel standards. However, for the purposes of remunerations, they are not suitable.

This means more firms will be considered a “small firm for remuneration” rather than those that fall within the scope of a “simpler regime” firm. For example:

• Clearbank cannot be considered a simpler regime form as it is a direct member of payment schemes; but that does not exclude it from being considered a small firm for remuneration.
• Similarly, Principality Building Society cannot be a simpler regime firm as it has IRB approval, but that does not exclude it from being a small firm for remuneration.

Small firms for remuneration will no longer be required to apply malus, clawback, and buyout rules; all other parts of the Remunerations part of the PRA Rulebook will continue to apply to small firms, as usual. They will be required to inform the PRA of any major changes in their remunerations structure.

FCA’s observations on the implementation of IFPR

As part of this publication the FCA have outlined their initial observations on how firms have conducted their implementation of IFPR. The main feedback is as follows:

Group ICARAs did not always consider firm-specific risks for firms which were part of that investment group.  Firms fell short of independently assessing the risks, harms and financial resource requirements of individual firms in the group, as required by MIFIDPRU.

There was an absence of unified and integrated assessments. The FCA notes that assessments made as part of the ICARA process should be cohesive and also fully integrated with the firm’s approach to managing financial resources. This is not always done. For example, firms are not integrating wind-down planning into their assessment of own funds, other firms do not use reverse stress testing to help inform their wind-down plan even when it is highly relevant.

Firms where there had been a significant reduction in own funds required compared to the previous regimes had not adequately explained the reasons for this reduction.

The FCA also identified a lack of comprehensive framework for own funds and liquid asset triggers and limits. Firms’ risk appetite levels had weak links with idiosyncratic understanding of the risks that they were exposed to. Some firms were not clear on whether their interventions points would lead to discussions, trigger specific actions, or immediately set in motion tougher measures such as invoking the wind-down plan.

Wind-down planning assessments remain weak in terms of scope and quantification. For example, many firms have conducted their wind down planning based on estimates that do not have an underlying stress event which is when most wind-down events take place. This means that is likely firms are underestimating wind-down costs.

The FCA noted inconsistent and inaccurate data submitted in regulatory reports. This is not a new concern for the FCA, they previously communicated via two ‘Dear CEO’ letters in February 2018 and February 2021.

Get in touch

If you require support or would like to know more, please get in touch via the button below.

Contact us