FS regulatory affairs newsletter – Q4 2023
In this instalment of the FS regulatory affairs newsletter, our experts present their analysis of regulatory developments of the fourth quarter of 2023.
Expect to see the focus turn to Basel 3.1 final rules for credit risk, Strong & Simple final rules for capital, Solvent Exit and Model Risk Management as we head towards the middle half of this year. PRA Priorities Letter 2024PRA Priorities Letters for 2024 covering domestic and international banks respectively were published in January. Common themes across both included financial resilience, operational resilience and data risk. Financial resilience: Acknowledging the ongoing weakness of the UK economy and wider uncertainties associated with the global macroeconomic picture the PRA gives increased focus to financial resilience in this set of 2024 regulatory priorities letter. The PRA flags the fact that recent market events including the failure of Credit Suisse have brought the importance of managing credit and counterparty risk into focus for the regulatory authority. Both will be subject to increased scrutiny from the PRA in 2024. In addition to this, the failure of Silicon Valley Bank is also alluded to when highlighting the PRA’s requirement that firms ensure approaches to treasury management are robust and the interlinkages between capital and liquidity risk are sufficiently understood. Operational resilience: The PRA reminds firms that March 2025 is the rapidly approaching date for firms to meet new operational resilience expectations relating to ‘impact tolerance’ and set out in Supervisory Statement 1/21. The PRA appears to be especially focused on firms undertaking major technology transformation programs or those that increasingly leverage third-party providers to provide them with back-office capabilities such as cloud computing. Data risk: The PRA once again has reiterated the fact that 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 control framework to preserve data integrity. |
What management should considerFirms should ensure that their senior management team is able to talk about how their firm is responding to these focus areas at their upcoming meetings with the PRA. From an Operational Resilience perspective, it is important that senior management can articulate the difference between Impact Tolerance and Risk Appetite which continues to be misunderstood. Fundamentally, Impact Tolerance assumes a risk has crystalised. While risk appetite is a BAU metric. Firms must ensure that their data – especially those that contribute to regulatory reporting – are being managed in line with regulatory expectations. This entails a clear view of data lineage, comfort over source data, and accuracy of data processing (both regulatory as well as computational). |
PS17/23 – Basel 3.1 Near-final rules part 1 policy statementPS17/23 contains Basel 3.1 near-final policy materials for market risk, credit valuation adjustment (CVA) risk, counterparty credit risk and operational risk. Below we outline the key amendments, based on the relevant responses to CP16/22. The PRA has also released a comparison document detailing all changes between the draft rules set out in CP16/22 and near-final rules. For further information on PS17/23 and all other aspects of Basel 3.1, please visit the our Basel 3.1 hub page. PRA CP18/23 – Diversity and Inclusion (D&I)CP18/23 promotes D&I in PRA-regulated firms in three ways: improvement of D&I for the board and senior management; increase in individuals’ ability to raise issues concerning firms’ business and risk profile; and increase in accountability at the firm and individual levels. The proposals in this CP have different scopes of application, depending on firms’ business models, as follows:
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What management should considerFirms should assess their current D&I policies and practice against the proposed rules. It is important that firms make the necessary changes to current D&I policies, and where needed develop new policies as well as governance and oversight practices in response to the PRA’s proposals. For larger firms, there is a significant emphasis on D&I data, and firms can take this time to consider system and operational changes needed to meet the regulatory reporting and disclosure requirements. |
PS16/23 – Remuneration: Enhancing Proportionality for Small FirmsPS16/23 was published in December 2023. It contains amendments to the PRA rulebook and the Remuneration supervisory statement. Several key changes have been implemented as part of this policy statement including the following:
The consultation proposals include amending the definition of a small firm in line with the PRA’s simpler regime size threshold and other selected criteria. Consequently, the revised small CRR firm threshold contains two conditions:
Firms also cannot be part of a group containing another firm that is subject to the remuneration rules and has average total assets exceeding £20bn (up from £13bn). Firms which meet the amended definition of a small firm will no longer be required to comply with malus and clawback rules (which set out approaches to remuneration adjustment). In addition to the removal of Malus and Clawback smaller firms no longer have to comply with the rules about deferred bonus award buyouts when recruiting new employees. |
What management should considerSmaller firms should take the opportunity to consider whether to take advantage of the relaxation in regulation. However, they need to be cognisant of the fact that while they no longer have to comply with specific rules, both the FCA and PRA will look to ensure that firms remuneration structures are aligned with regulatory principles for remuneration. Firms should look to ensure that they continue to meet the expectations set out in regulatory publications that support the Renumeration Part of the PRA Rulebook (for example, SYSC 19D and SS2/17). |
CP26/23 – Operational Resilience: Critical Third Parties to the UK Financial SectorIn December 2023, the PRA, FCA and BoE published CP26/23 on ‘Operational Resilience and Critical Third Parties (CTPs)’. This consultation paper outlines the proposed requirements and expectations for CTPs. The BoE has performed ongoing monitoring of the potential systemic risks posed by CTPs and identified a growing concentration in the provision of third-party services to firms and FMIs as a key risk driver in the UK Financial System. CP26/23 will be of particular interest to financial services entities that may gain CTP designation: The intended scope of the CTP regime will designate firms as CTPs where:
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What management should considerFor potential CTPs: Assess whether your firm may meet the CTP designation criteria. Management should also perform a robust gap analysis against this consultation paper. Finally, consideration should be given to updating and improving policies, procedures, and controls where gaps exist and to appropriately reference the new requirements throughout the documentation. For firms and FMIs: Be cognisant that the consultation paper does not detract from fulfilling your existing regulatory obligations on operational resilience and third-party risk management. You should also be aware that CTP designation should not be interpreted as meaning that the CTP is preferred by the regulator or that they are inherently more resilient. |
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