On 12 January 2022, the PRA published a Dear CEO letter that it had sent to UK deposit takers 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 deposit takers have received following their most recent Periodic Summary Meeting. The priorities are:
- Financial resilience. Among other things the PRA notes that the operating environment for all firms remains challenging and uncertain and broad structural changes – such as an acceleration of digitalisation in the banking sector – could amplify challenges faced by individual firms as they recover from the impact of Covid-19. 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.
- Credit risk and model risk. The PRA notes that the full impact of Covid-19 on credit portfolios is yet to be seen, and recovery is likely to be uneven across sectors as official sector support schemes are withdrawn. Firms will need to closely monitor credit risk within their portfolios and the impact on provisioning. The PRA will also continue to engage with firms to assess the robustness of their credit risk management practices. The PRA’s assessment of firms’ credit risk will continue to be a risk-based blend of thematic and firm-specific reviews.
- 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. 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.
- Regulatory reporting and data quality. Overall the PRA has been disappointed to find significant deficiencies in a number of firms’ processes for delivering accurate and reliable regulatory returns. The PRA expects all firms to consider recent thematic findings on regulatory reporting and any work they may need to do to improve their governance, controls, and data related to regulatory reporting. The PRA expects the regulatory reporting process to receive no less care, diligence, and rigour than financial reporting. The PRA is expanding its programme of using skilled person’s reviews to verify the accuracy of regulatory returns, which will continue in 2022.
- 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.
- Other areas of supervisory focus. 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.