On the 10th of January 2023, David Bailey (Executive Director, UK Deposit Takers) and Charles Woods Director (UK Deposit Takers) published an open letter to UK Deposit takers setting out the PRA’s 2023 priorities for UK deposit takers.
We have summarised 5 key priorities below.
Operational Risk and Resilience
In response to increasing digitisation, changes in payment systems and the need to address legacy IT systems, many firms are executing large and complex programmes of IT change. The regulator expects these changes to be well managed with the associated transition and execution risks appropriately mitigated.
The PRA observed a material increase in outsourced services, particularly to cloud providers. Firms are expected to manage the risks from using outsourced cloud services and to work towards full Outsourcing and Third-Party Risk Management compliance as set out in SS2/21.
The PRA also pointed out that the number of firms offering crypto products continues to grow, presenting new challenges for risk management. So, these firms will continue to be monitored, with the expectation that they have fully understood the impact crypto products will have on their Operational Resilience, and have met the PRA supervisory expectations as set out in SS1/21 before engaging with these opportunities in any material way.
Credit Risk
The PRA will assess firms’ credit risk management and will also focus on traditionally higher-risk areas including retail credit card portfolios, unsecured personal loans, leveraged lending, commercial real estate, buy-to-let, and lending to Small- and Medium-sized Enterprises (SMEs).
The regulator will also look at firms’ early warning indicator frameworks given many credit risk metrics are backward looking. Firms should expect increased engagement with the PRA, including targeted requests for enhanced data and analysis.
Financial Resilience
The PRA expects firms to take proactive steps to assess the implications of the evolving economic outlook on the sustainability of their business models. This should include consideration of broader structural changes to the banking sector such as the evolution of new financial technology and competition.
Risk Management and Governance
The PRA expects that firms have learnt from previous crises, and have embedded lessons learnt across the first and second lines of defence. The PRA will continue to assess firms’ risk management and control frameworks through individual and cross-firm thematic reviews. A particular focus will be on firms’ ability to monitor and manage counterparty exposures, particularly to non-bank financial institutions.
Real Time Gross Settlement (RTGS)
The Bank of England is introducing the delivery of ISO 20022 messaging in CHAPS on Monday 19 June 2023 as part of the RTGS Renewal programme. A number of similar ISO migrations are happening in parallel, and firms should be clear on the dependencies between them in their own systems, including in the event of further changes to the timelines for one or more of these events.
As preparations for the move to the renewed RTGS system in 2024 continue, firms should be ready to complete testing and training during 2023, adapting systems and processes as needed to be able to access and use the new system.
The letter also cover a few other areas, including, Data, Climate Change and Diversity and Inclusion. You can read the full letter from the PRA here.
To enquire how our Operational Resilience and Third-Party Risk Management specialists can help your firm, enquire here or book a time with one of our consultants here now
