On 12 January 2022, the PRA published a Dear CEO letter that it had sent to international banks active in the UK setting out its supervisory priorities for 2022.
The priorities in the Dear CEO letter are intended to complement the PRA’s ongoing supervision and feedback that international banks have received following their most recent Periodic Summary Meeting. The priorities are:
- Financial resilience. The PRA states that the economic recovery is likely to be uneven across sectors, so firms will need to closely monitor credit risk and traded risk within their portfolios, particularly as official sector support schemes are withdrawn. In addition, assessing the risk culture and the incentives structures in place at firms, and the alignment of remuneration with risk management practices will be a key priority of PRA supervisory work with firms engaged in equity finance and the broader prime brokerage business. In addition, global regulatory cooperation will continue to be a theme in 2022.
- Operational risk and resilience. Enhancing the operational resilience of the financial sector remains a strategic priority for the PRA. The PRA will continue to assess firms’ progress in developing dynamic, effective operational risk and control frameworks to manage the threat of operational disruptions. By 31 March 2022, firms must have identified and mapped their important business services; set impact tolerances for these; and initiated a programme of scenario testing. Impact tolerances provide a standard which boards and senior management should use for prioritising investment and making recovery and response arrangements. The PRA will continue to review firms’ programmes and their implementation. It also reminds firms that Supervisory Statement 1/21 ‘Operational resilience: Impact tolerances for important business services’ applies to subsidiaries, but it also expects third country branches in the UK to be able to demonstrate how they will deliver operationally-resilient outcomes. The PRA will look to work with firms and with their home state supervisors to understand how they will deliver these outcomes. The PRA has also observed a material increase in the services being outsourced, particularly to cloud providers, and it expects firms to manage the risk arising from this accordingly.
- Financial risks arising from climate change. Climate change remains a key PRA priority. It expects firms to take a forward-looking, strategic and ambitious approach to managing climate-related financial risks. From this year, the PRA will incorporate supervision of climate-related financial risks into its core supervisory approach. The PRA will pay particular attention to how firms quantify climate related risks and incorporate those risks into business strategies, decision-making, and risk-taking. The PRA also adds that whilst the expectations in Supervisory Statement 3/19 ‘Enhancing banks’ and insurers’ approaches to managing the financial risks from climate change’ apply to UK-incorporated firms, it is important that branches of international firms also focus on climate change, which the PRA sees as a vital element of sound risk management. The PRA will continue to increase its engagement with home state supervisors on this issue.
- Diversity and inclusion. The PRA reports that it has received positive feedback from industry on the proposals in its earlier Discussion Paper. While it recognises that change takes time, it expects firms to consider the themes set out in the Discussion Paper and challenge themselves to understand their gaps and consider where they can make progress.
- Risk-free rate transition. Although the transition to risk-free rates was reached at the end of 2021, the PRA expects firms to continue making best efforts to actively transition LIBOR referencing contracts wherever possible. Together with the FCA, the PRA will be closely monitoring actions to remove any remaining dependencies on LIBOR, including synthetic LIBOR.
- Other areas of supervisory focus. The PRA adds at the end of the letter that the submission of complete, timely, and accurate regulatory returns continues to be the foundation of effective supervision, so it expects all firms to continue to take action to ensure the integrity of their returns.