Key challenges for UK deposit takers, insurers and international banks in 2022

This article provides a summary of the key challenges firms need to focus on in 2022 according to the Prudential Regulation Authority.

Produced by the Risk, Regulatory and Compliance (RRC) segment of Be | Shaping the Future UK.

Introduction

On the 12th of January 2022 the Bank of England published three letters to the CEOs of PRA-regulated firms to provide an overview on the Prudential Regulation Authority’s (PRA) 2022 priorities for:

1. UK Deposit Takers
2. International Banks
3. Insurers

The aim of this article is to provide a summary of the key challenges firms need to focus on in 2022 according to the PRA.

 

A. UK Deposit Takers Supervision: 2022 priorities

1. Financial resilience

• • Firms will need to proactively assess the implications of the changing economic environment on the sustainability of their business models;
  • Firms are expected to enhance their own internal stress testing and scenario development capabilities in response to the current environment and to broad structural changes (i.e. digitalisation);
  • Firms need to consider the issue of concentrated and leveraged exposures and to improve counterparty risk management. As demonstrated by the default of Archegos Capital Management last year, there are still many deficiencies in firms’ risk management governance and frameworks.

2. Credit risk and model risk

• • Assess the robustness of firms’ credit risk management practices; four risk-based thematic reviews are currently underway by the regulator: wholesale problem debt management, unsecured personal loans, buy-to-let and IFRS 9 retail models;
  • The implementation of the PRA policy on several models highlighted weaknesses in firms’ model risk management (MRM) frameworks; including in development, testing, validation, change management, and governance;
  • In 2022 the regulator will continue to focus on the implementation of international ratings based (IRB) hybrid mortgage models and the IRB roadmap for non-mortgage portfolios.

3. Operational risk and resilience

• • Firms need to test their resilience against increasing operational risk, like cyber security issues as already pointed out by the regulator in the Supervisory Statement (SS) 1/21[1];
  • By Thursday 31 March 2022, firms needs to address the regulator’s expectations by: identifying and mapping their important business services; setting impact tolerances for the identified business services and initiate a programme of scenario testing;
  • The PRA introduced new expectations on outsourcing and third-party risk management (as set out in SS2/21) to facilitate greater resilience of services provided by third parties, including the cloud and other technologies.

4. Financial risk arising from climate change

• • Climate change is a key priority for the PRA which “expects firms to take a forward-looking, strategic and ambitious approach to managing climate-related financial risks”;
  • The PRA will take ‘particular attention to how firms quantify climate related risks and incorporate those risks into business strategies, decision-making, and risk-taking’.

5. Regulatory reporting and data quality

• • The PRA expects that all firms will consider improving their governance, controls, and data related to regulatory reporting;
  • In 2022 the PRA will continue to expand its programme by using skilled person’s reviews to verify the accuracy of regulatory returns.

6. Diversity and inclusion

• • The PRA encourages diversity and inclusion within firms because they support the PRA objectives of improving the resilience of the financial services sector.

Other areas of supervisory focus

• • The PRA expects firms to continue in the transition process to risk-free rates by removing any remaining dependencies on LIBOR, including synthetic LIBOR;
  • The Bank, as resolution authority, and the PRA, continue to prioritise resolution as this is an important component of ensuring that the UK has a resilient, efficient and competitive banking system.

B. International banks active in the UK: 2022 priorities

1. Financial resilience

• • Firms need to closely monitor credit risk and traded risk within their portfolios, as official sector support schemes are withdrawn;
  • Firms need to consider concentrated and leveraged exposures and to improve counterparty risk management.

2. Operational risk and resilience

• • The PRA expects firms to develop their security controls and capabilities to manage the increasing risk of cyber threats, as set out in SS1/21;
  • By Thursday 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;
  • Firms need to address the new expectations on outsourcing and third-party risk management (SS2/21);
  • SS1/21 applies to subsidiaries but third country branches in the UK are also expected to be able to demonstrate how they will deliver operationally-resilient outcomes.

3. Financial risks arising from climate change

• • Firms needs to take a forward-looking, strategic and ambitious approach to managing climate-related financial risks according to the PRA’s supervisory expectations (as set out in SS3/19);
  • The expectations in SS3/19 apply to UK-incorporated firms, but branches of international firms are also encouraged by the regulator to focus on the climate change challenge.

4. Diversity and inclusion

• • Firms are encouraged to support inclusion and diversity to avoid group thinking and create a culture of open discussion and challenge.

5. Risk-free rate transition

• • The PRA expects firms to continue making best efforts to actively transition LIBOR-referencing contracts wherever possible.

Other areas of supervisory focus

• • The PRA expects all firms to continue to take action to ensure the integrity of their regulatory returns.

C. Insurance Supervision: 2022 priorities

1. Financial resilience

• • All firms, in life and general insurance, will need to closely monitor credit risk within their portfolios, the impact on provisioning and exposure to credit and concentration risk;
  • The PRA expect insurers to monitor risks around economic inflation and understand the impact this may have on their cost of claims;
  • Firms are expected to engage fully in the exercise of the Insurance Stress Test (IST) 2022. Stress testing is an important tool in helping supervisors and firms understand the impact of real-world scenarios on their balance sheets.

2. Operational risk and resilience

• • The PRA expects firms to develop their security controls and capabilities to manage the increasing risk of cyber threats, as set out in SS1/21;
  • By Thursday 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;
  • Firms need to address the new expectations on outsourcing and third-party risk management (SS2/21).

3. Financial risks arising from climate change

• • The PRA’s supervisory approach on climate-related financial risk will be informed by information gathered from the 2021 Climate Biennial Exploratory Scenario (CBES);
  • Firms should take a forward-looking, strategic and ambitious approach in managing climate-related financial risks across their business, including in both underwriting and investment.

4. Regulatory change

• • The PRA continues to work with the Government on the review of Solvency II to deliver a package of reforms that reduces the regulatory burden on firms and has incentives aligned with prudent risk management and with Government priorities;
  • The PRA is also working with the Government to develop a targeted resolution regime for the insurance sector;
  • Firms are expected to assess the effectiveness and capacity of their change management functions to implement the planned regulatory changes.

5. Third-country branches seeking authorisation in the UK

• • The PRA expect to process c.150 third country branch applications from insurers currently in the Temporary Permissions Regime (TPR) throughout 2022-23;

6. Diversity and inclusion

• • Firms are expected to challenge themselves to understand their gaps and consider where they can make progress in encouraging inclusion and diversity within their institutions.

In summary

The PRA objectives for the three categories of entity are mainly focused on financial resilience, operational resilience and climate change impacts to financial risks.

There is a similarity of key themes for supervisory activity in 2022, in particular across credit risk, model risk management, operational resilience, cyber, regulatory returns, climate, diversity and inclusion.

Critical expected developments over the next months are in the space of climate risk management, Solvency II and resolution regime.

 

Contact us

For more information on how we can help simplify your organisations’ risk framework, please get in touch.

Alessandro Vecci

Partner – Head of UK Risk, Regulatory and Compliance services

With many years of experience in the international financial services industry, Alessandro has a wealth of experience in risk, regulation and compliance, gained through international roles, both as a consultant as well as a banker, and including CRO roles in UK and CH.  His experience ranges from strategy and governance, AI/ML risk applications, risk transformation, system implementations to compliance and regulatory assurance.

E: a.vecci@be-tse.com

 

 

 

About us

Be | Shaping the Future UK (Be UK) is a subsidiary of Be | Shaping the Future, a well-established management and technology consultancy with over 1,700 consultants located across 11 European countries.

 

We work with the leading financial services organisations to shape their future through our transformation consultancy and advisory services, covering the following sectors:

 

• Cards and Payments
• Retail and Commercial Banking
• Capital Markets
• Finance
• Risk and Compliance

 

We take pride in building relationships with our clients and we work collaboratively to drive change for a bigger and better future.

The Risk and Compliance team at Be UK is composed of specialists and advisors.  Our key service areas include:

• Enterprise risk management
• Recovery and resolution planning
• Capital management and optimisation
• Financial crime
• Operational resilience
• Climate risk

 

[1] March 2021: SS1/21 Operational resilience: Impact tolerances for important business services