PRA 2024/25 Business Plan

April 2024

The PRA's latest Business Plan, covering 2024/25, was published on 11 April. The programme of work is intended to maintain the resilience of the UK's banking and insurance sectors and deliver against the same four strategic priorities as last year. The key areas of focus, as expected, are financial and operational resilience, enforcement policies, and diversity and inclusion. Emerging risks called out include the financial risks of climate change, the impacts of artificial intelligence and machine learning, and digital money and innovation.

There is nothing inherently new or surprising in the Business Plan for firms as it follows relatively soon after the 2024 supervisory priority letters for international banks, UK deposit takers and insurers. However, it is interesting to note the PRA's ongoing concerns about the potential impacts of NBFIs on financial stability and its continuing ambition to become a more dynamic and responsive regulator.

Competitiveness and growth

This will be the first full year in which the PRA operates under the Financial Services and Markets Act (FSMA 2023), which expanded its rulemaking responsibilities and gave it a new secondary growth and competitiveness objective (the SGCO) in the UK. A significant portion of the plan considers how the PRA will balance the SGCO with its primary commitments to safety and soundness of the banking and insurance sectors.

The following key initiatives underpin the PRA's work to promote UK competitiveness and growth:

The 'Strong and Simple' (SDDT) regime

simplifying regulatory requirements for smaller, non-systemic banks banks and building societies, in order to reduce compliance burdens without compromising on robust prudential standards.
Reforms to bank ring-fencing

following the independent Skeoch Review.
The 'Solvency UK' reforms of insurance capital standards

aiming to reduce bureaucracy in the regulatory regime, while allowing insurers to invest in a wider range of productive assets.
Insurance special purpose vehicles (ISPVs)

consulting on reforms to allow a wider range of transaction structures in the UK regime, improve the speed of the application process, and clarify expectations of UK insurers who cede risks to ISPVs.
Improvements to the authorisation processes

building on progress in improving the speed and efficiency of authorisations. Also, introducing a new 'mobilisation' regime to facilitate entry and expansion for new insurers from 31 December 2024.

Strategic Priorities

The PRA's four strategic priorities (SPs) are to:

Maintain and build on the safety and soundness of the banking and insurance sectors and ensure continuing resilience.
Be at the forefront of identifying new and emerging risks, and developing international policy.
Support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that it regulates.
Run an inclusive, efficient, and modern regulator within the central bank.

SP1 — Maintain and build on the safety and soundness of the banking and insurance sectors and ensure continuing resilience.

Basel 3.1 — implementation is due to start in 1 July 2025, with a transitional period of 4.5 years to 1 January 2030. This is in line with the previously communicated timeline. The second near-final policy statement, on the remaining elements of credit risk, the output floor and Pillar 3 disclosure and reporting requirements, will be published `in due course'. The PRA expects both sets of near-final rules to be made final later in 2024, once the relevant parts of the Capital Requirements Regulation (CRR) have been revoked.

Stress testing — in 2024 the Bank of England (BoE) will carry out a desk-based exercise, supported by the PRA. The BoE and PRA will also review and update the framework for concurrent stress testing. Stress tests based on firm submissions will resume in 2025.

Exposures to non-bank financial institutions (NBFI) — particularly private equity financing and private credit — the PRA will look for further improvements in firms' ability to identify and assess correlations across financing activities with multiple clients.

Model risk management (MRM) — banks are expected to embed and implement the expectations set out in SS1/23 which takes effect on 17 May 2024. The PRA will also focus on the `hybrid' approach to mortgage modelling, the IRB repair programme and continued assessment of the adequacy of post-model adjustments (PMAs).

Liquidity risk management — the PRA will follow up on how firms are responding to lessons learned from market events. It will continue its engagement on authorised firms' access to the BoE Sterling Monetary Framework and monitor closely how how firms consider changes in depositor behaviour and future changes in bank funding and liquidity conditions.

Credit risk management — focus will be on the evolution of credit risk management practices, whether they can be `robust and adaptable' in changing conditions, whether there is appropriate consideration of downside and contagion risks, and firms' monitoring and planning for the impacts of customer refinancing. There will be a thematic review of smaller firms' credit risk management frameworks. The PRA will monitor changes to firms' business mix and credit exposures and exposures to vulnerable segments (e.g. cyclical sectors, key international portfolios, and traditionally higher-risk portfolios such as buy-to-let, credit cards, unsecured personal loans, small to medium-sized enterprises, leveraged lending, and commercial real estate). It will also continue to assess whether the policy framework for trading book risk management, controls, and culture is adequate, robust and accessible.

Capital — the PRA will review its Pillar 2A methodologies once the Basel 3.1 rules are finalised and aims to consult on proposed changes in 2025.

Securitisation regulation — simultaneously with the FCA, the PRA will publish final rules to replace or modify the relevant firm-facing provisions in the Securitisation Regulation and related Technical Standards. It also intends to consult on draft PRA rules to replace firm-facing requirements, subject to HMT making the necessary legislation.

Solvency UK implementation — the PRA is consulting on how to transfer remaining Solvency II requirements from assimilated law into the PRA Rulebook. It will also streamline internal model and matching adjustment approval processes, supported by the establishment of dedicated, specialised teams, and publication of templates to facilitate firms' implementation of new requirements.

Matching adjustment (MA) reforms — publication of final policy in June 2024. The bulk of the reform will take effect at end-June, with the remainder on 31 December 2024. This staggered approach is in response to insurers' concerns about ability to produce attestations in time for mid-year results. The PRA will also explore creating 'sandboxes' to allow for either self-certification or further expansion of MA-eligible assets.

Single regulatory reporting insurance taxonomy — this will be published in Q2 2024, followed by industry roundtables to support implementation by year end.

Stress testing — the next stress test will take place in 2025. This will be the first time that the PRA publishes the individual results of the largest annuity-writing firms and the first time an exploratory scenario will be included to assess exposure to the recapture of funded reinsurance contracts. In 2025, the PRA will run its first dynamic stress test for general insurers — details will be published in 2024.

Cyber underwriting risk — there will continue to be supervisory focus on cyber exposure. The PRA is monitoring the risk landscape, including contract uncertainty.

Model drift — in 2024, the PRA will address perceived systemic trends that may weaken the robustness of internal models across the market as a whole, and continue to address firm-level model drift.

Funded reinsurance — this continues to be a key policy and supervisory area of concern. In 2024, the PRA will finalise and implement its policy expectations. Assessing resilience of funded reinsurance arrangements is also part of the 2025 life insurance stress test.

Impact of claims inflation — the PRA will continue to monitor data throughout 2024 to assess if further work is needed. Concerns remain around optimistic assumptions.

Liquidity risk management — following market events, the PRA will develop liquidity reporting requirements for insurance firms most exposed to liquidity risk.

Credit risk management — as insurers' exposure grows, the PRA will monitor how firms' credit risk management evolves as a result. Areas of focus are concentrations in exposure to internally valued and rated assets.

Operational risk and resilience — the PRA will continue working with the FCA to assess firms' progress on their ability to deliver important business services within defined impact tolerances during severe but plausible scenarios (no later than March 2025).

Critical third parties to the UK financial sector — the PRA will continue working with other authorities to develop a final policy and oversight approach in 2024 on CP26/23 (Operational resilience: critical third parties to the UK financial sector).

Review of enforcement policies — following the principles of PS1/24 (Bank of England's approach to enforcement).

Diversity and inclusion in PRA-regulated firms — the PRA will continue industry engagement and provide a further update in due course.

SP2 — Be at the forefront of identifying new and emerging risks, and developing international policy

International engagement and influencing regulatory standards — participating actively in bodies such as the BCBS, IAIS and FSB.

Promoting supervisory co-operation — via colleges and existing memoranda of understanding (MoUs).

Overseas bank branches — consulting on targeted refinements to its approach to banks branching into the UK, reflecting lessons from the failure of SVB.

Operational and cyber resilience — continuing its work on the G7 Cyber Expert Group and other similar bodies.

Managing the financial risks of climate change — publishing thematic findings in 2024 on banks' processes to quantify the impact of climate risks on expected credit losses and commencing work to update SS3/19.

Artificial intelligence and machine learning — the third joint PRA/FCA survey on machine learning in UK financial services will be conducted in Q2 2024.

International policy on digitalisation and managing associated risks.

Digital money and innovation — continuing to work with HMT and the FCA on issues such as a regulatory regime for crypto-assets, and wholesale payments/ settlements and their interaction with retail payments.

SP3 — Support competitive and dynamic markets, alongside facilitating international competitiveness and growth (in the sectors that it regulates)

Regulatory change — embedding its approach to rulemaking, using its new powers under FSMA 2023 to repeal and replace assimilated law relating to financial services.