FS regulatory affairs newsletter – Q2 2023
In continuation of our previous FS regulatory affairs newsletter, this edition highlights the key regulatory updates from the second quarter of 2023.
Summary of SS1/23 – Model Risk ManagementThe PRA published its Supervisory Statement (SS1/23) on Model Risk Management (MRM) earlier this summer. The SS1/23 is broadly aligned with the PRA’s consultation on this matter (CP6/22) but is a lot more specific on the requirements that eligible firms – those with IRB permissions – should abide by. The four key takeaways are as follows: Five principles The PRA sets out a supervisory expectation that firms meet five model risk management principles which have been designed to cover all elements of the model lifecycle. These principles are as follows:
Model inventory Based on the findings of recent Section 166 (s166) reviews on MRM, model inventories are closer to a living workflow management tool for the salient features of the model risk lifecycle, as opposed to a semi-static list of models with associated information. It is our understanding that the PRA expects inventories to:
Governance, roles, and responsibilities SS1/23 lays out clear responsibilities for the Board, model users, model testers and model developers. These are required to be clearly articulated across 8 mandatory MRM policies that the PRA requires firms to develop and implement. SS1/23 also indicates the main responsibilities of the 1st, 2nd and 3rd line, including the key outcomes that their involvement is expected to achieve. Proportionality Whilst SS1/23 formally applies only to IRB firms, the PRA requires the management of non-IRB firms to "consider” these requirements. The SS doesn’t explicitly specify what these expectations are, but CP6/22 provides some intel. It states that all elements of Principle 1 and the subsequent elements of Principle 2 should be followed: board responsibilities and accountability, clearly drafted policies and procedures, and IA oversight. The CP also states that where “material” models exist, non-IRB firms should also apply Principles 3, 4 and 5 in respect of those models specifically, as opposed to the entire MRM ecosystem. |
What management should consider Management of IRB firms should undertake a gap analysis against the SS1/23 and remediate any deficiencies. This is especially important in areas where s166s have been undertaken. Namely, model inventory and the link between model risk appetite and KPIs. Non-IRB firms should do the same against Principles 1 and 2 and remediate any deficiencies identified. |
Summary of CP 10/23 - solvent exit planning for non-systemic banks and building societiesCP10/23 includes a draft supervisory statement (SS) that details the Prudential Regulation Authority’s (PRA) expectations for non-systemic UK banks and building societies to prepare, as part of their business-as-usual (BAU) activities, for an orderly ‘solvent exit’. The SS applies to all non-systemic UK banks and building societies, regardless of how unlikely or distant a potential solvent exit may seem to the firm. This SS sets expectations for both the preparations for and execution of a solvent exit. This includes expectations on producing a ‘solvent exit analysis’ and ‘solvent exit execution plan’. The SS complements the PRA’s guidance on Recovery Planning (SS9/17) and wind-down planning. Solvent Exit Analysis Firms must produce a ‘solvent exit analysis’ document that should include, at a minimum: • Solvent exit actions and indicators. • Potential barriers and risks to an orderly exit. • Resources and costs required for an orderly exit. • Communication plan during the solvent exit. • Governance and decision-making with regard to a solvent exit. • Assurance over the analysis. Firms are encouraged to draw on and adapt existing work carried out under other (similar) existing regulatory requirements to perform this analysis. This may include leveraging recovery planning, resolution planning and wind-down planning. Solvent Exit Execution Plan The solvent exit execution plan should be an extremely up-to-date plan that is produced when a solvent exit becomes a reasonable prospect for a firm or when the firm is requested to by the PRA. As a starting point, the firm should use its ‘solvent exit analysis’ prepared during BAU for its ‘solvent exit execution plan’. Similar to the expectations around Solvent Exit Analysis, this plan should set out actions and timelines, identify and detail plans to mitigate barriers and risks to execution. It should also provide a communication plan for stakeholders impacted, produce a detailed action plan, develop an assessment of required resources. Finally, it also needs to outline organisational structures, the operating model and other internal processes. |
What management should consider Firms should ensure they have sufficient time and resources to produce a solvent exit analysis within the first year of the SS being officially published (expected in Q3 2025). In conjunction with this, firms should first ensure that their Recovery Plan and Wind-down Plan will be accurate and up to date so that the firm can ensure consistency with these documents and leverage information from these documents when developing their own solvent exit analysis and solvent exit execution plan. This should be performed in H2 2024 or H1 2025. In addition, firms should consider who would be best placed as the accountable SMF responsible for solvent exit planning. This should include understanding whether assurance over solvent exit planning could be performed internally or if external help would be required. |
Summary of PS5/23 - Risks from Contingent LeverageFollowing the publication of the consultation paper on the risks that may arise from contingent leverage, the PRA has released its policy statement on the issue. The aim is to provide guidance on contingent leverage and to provide a robust understanding of the risks associated with such positions. In this update, we have discussed the key elements of the policy statement.
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What management should consider Firms should consider developing robust strategies and processes to support the identification, quantification, and management of new and existing risks arising from contingent leverage. Firms should also consider reviewing the revised data requirements against their existing data infrastructure to identify gaps and areas for remediation/uplift. |
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