As calendars are prepared to be turned over to 2021, the PRA have set out their priorities for the upcoming year for UK deposit takers in a letter to CEOs.
Whilst there are no real surprises given the signposting across speeches and policy in 2020, it is a useful takeaway that will allow firms to ensure they are focused, forward-looking, and fully resourced to hit the six head on.
Priority 1 – Financial Resilience
With the assistance of government support and other supervisory measures, deposit takers and lenders have almost been in a ‘calm before the storm’ position, ahead of these measures being rolled back in March 2021.
The PRA have made it clear that they will be focusing on how firms are addressing the impacts of Covid-19 plus the continued adaption of strategies and business models to a low-interest environment.
2021 also sees the PRA re-establish its stress testing after its Covid-19 hiatus.
Challenge for firms:
Priority 2 – Credit Risk
With a Covid-19 impact to the economy driven increase in customers in financial difficulty, arrears, and eventually default, the sector will face a challenging year whilst continuing to seek fair customer outcomes.
Focus will laser-in on risk management, including the characteristics of risk, with this flowing through into firms’ appetites to lend, stress testing and credit criteria.
The PRA has highlighted it will continue its series of thematic reviews across different sub-sets of lending.
Challenges for firms:
Priority 3 – Operational Risk and Resilience
With the six-month Covid-19 deferral to the Policy Statement publication, operational resilience is due to land back at the top of ‘to-do’ lists from January 2021 onwards.
The PRA has made clear that it sees exercises to loosen risk appetite as an extremely high-risk area and this extends into operational resilience impact tolerances, where there is a worry that these could be extended beyond what is reasonable to ensure they remain within green zones.
The PRA will also publish its long awaiting outsourcing final guidelines.
Challenges for firms:
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Priority 4 - Transition from LIBOR to alternative risk-free rates
To quote the PRA, “the time for action is reducing”, and their expectation is for intensive efforts and early progress in 2021.
A focus will be monitoring how firms are managing the risks associated with transition, through regular review meetings with a range of firms and by reviewing the data they collect on firms’ exposures.
Challenge for firms:
Priority 5 - Competition and future regulatory frameworks
One positive development for banks and building societies is the signposting of the new ‘strong and simple’ proportionate approach for regulating new and growing banks, which should allow some scope for them to ease some of the current depth of regulatory delivery pressures.
A further publication on MREL is also set to land in 2021.
Challenge for firms:
Priority 6 - Financial risks arising from climate change
Through 2020, climate change has been a focus on governments and regulators, and the November 2020 publication of HMT’s roadmap for climate risk management disclosures in line with the TCFD highlighted the UK’s upping the ante of this.
Addressing TCFD minimum requirements is crucial and the PRA has been clear since 2019’s supervisory statement that firms should have these not just documented but embedded by the end of 2021.
Challenges for firms:
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