PRA reveal their six priorities for UK deposit takers in 2021

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:

  • Ensuring available resource and focus on stress-testing and modelling, with the continued demands on credit risk modellers and functions from Covid-19 forecasting and data collection, and new scenario analysis requirements for climate risk and operational resilience.

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:

  • Model maintenance and review in an extremely volatile and fast-moving environment, including continued use of overlays and manual adjustments
  • Capacity of the credit risk function with several conflicting priorities

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:

  • Capacity of senior leaders and Risk teams to remain fully engaged with the development process
  • Avoiding complacency from resilience successes during Covid-19 – the PRA has made clear that future stressed scenarios will not be as gradual and straight line as this

For more on Operational Resilience, download our Insights Deck here> or visit our Operational Resilience page here>

 

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:

  • Model validation for those models impacted by the LIBOR transition – as detailed previously, expert modellers will be the in-demand resource of 2021. Finding capacity for them to support on another high priority regulatory deadline will be an ongoing headache 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:

  • Managing the assumed benefits of more proportionate frameworks with the reality that prudential regulation requirements and Board appetites mean the change to firms may not be as dramatic as expected

 

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:

  • Use of already under-pressure modellers in a year of stress testing across a number of risk areas
  • Engagement with Board and ensuring the appropriate time on stacked agendas
  • Obtaining specialists to support with an outside-in lens

For further insights on Climate Change Financial Risk, download our Insights Deck here> or visit our Climate Change Challenge page here>

For any questions on the above or to set up a no-obligations chat with our Risk Consulting Director, Ross Molyneux, please schedule a call below

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Topics: Featured, Client Assets (CASS), Risk Management, Investment Management, operational resilience

December 15, 2020
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Ross Molyneux
Written by Ross Molyneux

Ross leads our Risk Consulting proposition and specialises in risk management and regulation. He has worked extensively across non-financial and financial risk management engagements in his time in consulting in both the UK and New Zealand. After starting his early career in industry working across different financial services institutions, Ross moved into consulting in 2011 with Deloitte, primarily leading and performing financial risk engagements including capital adequacy, liquidity, credit risk, and recovery and resolution planning. Following time in Aviva’s Internal Audit function, Ross moved to help build EY’s North of the UK extended assurance practice, leading and performing a range of engagements across both financial and non-financial risk, including extensive engagement with large banks, asset managers and investment firms as they continued to face into the challenges of revisions to existing regulation and new requirements, such as the Senior Manager & Certification Regime (SMCR). In 2017 Ross made the decision to spend time overseas, joining KPMG New Zealand’s Auckland Consulting practice. Joining as an Associate Director, Ross was quickly promoted to Director and co-led the firm’s response to emerging conduct and culture challenges arising from the Australian Royal Commission (ARC) and new operational resilience requirements arising from the Reserve Bank of New Zealand’s (RBNZ) Outsourcing Policy. Working with a range of entities since being in New Zealand, Ross has led engagements ranging from internal audit co-source support to preparing entities for acquisition through ensuring they meet licensing conditions via uplifts of frameworks and policies. Choosing to return home in 2020, Ross is looking forward to supporting FourthLine’s clients as they face into current and future risk and regulatory challenges.