The PRA published its Business Plan for 2018/2019 on 9 April 2018. The Business Plan, structured around the PRA’s eight core strategic goals, is cross-sectoral, outlining the work the PRA intends to undertake for the upcoming year across both banking and insurance sectors.The plan sets the stage for the PRA to pivot its focus from implementation of the post-crisis reforms to the “bread and butter” of day-to-day supervision of firms. Unsurprisingly, the PRA is clear that it will look to maintain robust prudential regulation for both banking and insurance sectors in the UK. In the same vein, the PRA sees its role as being to defend the post-crisis regulatory architecture while signalling a willingness to seek improvements where post-crisis rules don’t work as originally intended (in a way consistent with international standards).
A welcome pledge for the UK’s insurance sector is the PRA’s clear statement of intent that it will continue with its programme of improvements for Solvency II implementation in the UK, and a strong message that the PRA will “tackle the problems with the risk margin”. On the risk margin, David Rule (PRA’s Executive Director for Insurance Supervision) has previously said that the PRA will not be changing the risk margin, rather it will be for firms to go to the PRA with proposals. He said these proposals could involve “a number of things that firms can do in their modelling or in their use of management actions, for example, which could have the effect of reducing the amount of capital that results from that calculation”.1
It was interesting to note that in contrast to last year’s Business Plan, the PRA’s work to deliver against its secondary competition objective is now included as one of the eight core strategic goals this year, with clear deliverables outlined for the year ahead. This may reflect the recent scrutiny into PRA’s secondary objective, which includes the Treasury Committee’s recommendation to the government that it should review the PRA’s approach to its competition objective, and at least for insurers, consider giving the secondary competition objective equal primacy with the PRA’s other statutory objectives.
Another area of high priority for the PRA will be preparation for UK’s withdrawal from the European Union, where the PRA sees the risk that over time the UK financial system may become more complex as firms’ legal structures adapt to the new relationship. The PRA will also develop its supervisory approach to operational resilience and expects to publish its thinking on the level of operational resilience it will expect from firms this year. In his introduction, Sam Woods notes that “nowhere in the world is there an overarching prudential standard for operational resilience” which makes this subject “a top priority for the PRA”.
The PRA’s strategic goals for 2018/19 are:
- have in place robust prudential standards comprising the post-crisis regulatory regime;
- continue to adapt to changes in the external market and to hold regulated firms, and those who run them, accountable for meeting PRA’s standards;
- ensure that firms are adequately capitalised, and have sufficient liquidity, for the risks they are running or planning to take;
- develop PRA’s supervision of operational resilience in order to mitigate the risk of disruption to the provision of critical economic functions;
- ensure that banks and insurers have credible plans in place to enable them to recover from stress events, and that the PRA has a credible resolution strategy to manage a firm’s failure – proportionate to the firm’s size and systemic importance – in an orderly manner;
- facilitate effective competition by actively considering the proportionality of PRA’s approach as it contributes to the safety and soundness of the UK financial system;
- deliver a smooth transition to a sustainable and resilient UK financial regulatory framework following the UK’s exit from the European Union; and
- operate effectively by ensuring that resources are allocated to work that best advances PRA’s strategy and reduces the greatest risks to the delivery of PRA’s statutory objectives.
You can read our blog on the FCA’s 2018/19 business plan here.
1See InsuranceERM article from 31 January 2018 – “The PRA's David Rule on Brexit, the risk margin and the regulator's hotspots for supervision in 2018” – The article reports that a paper was due to be put before the PRA’s Prudential Regulation Committee in March to consider such an approach on the risk margin.