The Bank of England’s Prudential Regulation Authority (PRA) has issued a Dear CEO letter setting out its regulatory priorities for 2021. The letter, which was issued by PRA Executive Director David Bailey and Director Rebecca Jackson, was sent to a “wide and diverse” range of international banks that the PRA regulates.
Within the letter, the PRA highlights four key priorities, but notes that Covid-19 remains an “over-arching issue” which has implications for each priority area.
1. Financial resilience
The PRA notes that the financial sector must remain resilient in order to continue its support of businesses and households in light of the economic disruption caused by Covid-19. This disruption is likely to have a continued effect. With that in mind, the PRA will continue to assess how firms are ensuring robust credit risk management practices, that are appropriate for the current situation.
2. Operational risk and resilience
The new working environment has presented new challenges and risks for many firms. As such, operational risk and resilience remains a key priority for the PRA, which notes that it will continue to challenge how firms are ensuring that risk and control frameworks are operating effectively in the current working environment. It adds that firms should not be complacent in preparing for other operational disruptions, or from the ongoing impact of the pandemic. Over the course of 2021, the PRA will set out its expected standards for operational resilience and outsourcing and will expect firms to consider the steps they will need to take to meet those standards.
3. Transition from LIBOR to alternative Risk Free Rates
LIBOR poses ongoing challenges and as noted by the PRA, the continued reliance of global financial markets on LIBOR poses risks to financial stability. These risks can only be reduced by the transition to alternative risk-fere rates, which is ongoing. The PRA highlights, however, that progress has been somewhat stifled by the events of this year. As such, it will expect to see “intensive efforts and early progress” in 2021.
4.Financial risks arising from climate change
Climate change is an area of increasing focus in the UK, as demonstrated by the introduction of disclosure requirements, the creation of a joint regulator and a government task force all in the not-so-distant future. The PRA expects banks and insurers to enhance their approaches to managing climate-related risks and fully embed these by the end of 2021.
As well as these four key priorities, the PRA notes that strong governance within firms continues to be the key to underpinning progress in meeting expectations. Moreover, diversity should be considered crucial to improving decision-making. The PRA adds that it will continue to use the Senior Managers Regime to bolster its objectives in 2021.
At this time of year, with the New Year now firmly on the horizon, many will be looking to take a break with a view to starting the year afresh, ready to grapple whatever regulatory changes may come their way. Others will take this time to reflect back on the year passed and gear up to anticipate what may be next. The PRA’s letter goes some way in clarifying the priorities that the regulator will be focussing on in 2021.
Given the challenges of 2020, in particular those caused by the global pandemic, it is unsurprising to see that financial and operational resilience remain high on the risk of regulatory priorities. No doubt, coronavirus will have spooked both regulators and the regulated. It is imperative, therefore, that firms remain stable, transparent, and resilient as we move into 2021.
The Governor of the Bank of England, Andrew Bailey, recently affirmed its commitment to climate change. It comes as no surprise, therefore, that climate change risks remain on the agenda, though it will be a relief for some.
It is pleasing to see that the PRA’s 2021 priorities are well aligned with CUBE’s trends to watch out for in 2021, which will be released in the New Year. Keep your eyes peeled for this in-depth report which scans the length and breadth of financial services to highlight what to watch out for in the year ahead.