Quarterly prudential risk radar - Q2 2024

Whilst not standing at the top of the list in the Prudential Regulation Authority’s (PRA) 2024 regulatory priorities, wind-down planning appears to be a significant regulatory focus across the financial services sector at the present time. After the publication of PS5/24, smaller banks and building societies will be expected to implement a solvent exit analysis by October 2025, and similar rules are under consultation for insurers. Wind-down was also as a key area of concern noted by the Financial Conduct Authority (FCA) in its industry-wide final report on Investment Firms Prudential Regime (IFPR) implementation.

In conjunction with the upcoming publication of final Basel 3.1 credit risk rules in Q2 2024, the PRA is expected to issue its long-awaited consultation on the remaining elements of the Small Domestic Deposit Takers (SDDT) regime. This will hopefully provide clarity to less complex firms on the extent of simplification in the new rules and expectations.

Investment firms

After industry wide feedback was published late in 2023 outlining the FCA’s feedback on how firms have implemented IFPR, we would expect regulatory attention will move to firm specific reviews, shifting down the complexity spectrum. Firms need to take note of the feedback in developing the next phases of Internal Capital and Risk Assessment (ICARAs) and wind-down plans.

Insurance

The PRA continues to look to take advantage of the UK’s withdrawal from the EU in the insurance sector. A number of significant proposed rule changes were published over the last six months which were largely finalised at the start of the 2024 within PS2/24 and PS3/24. With an implementation date of 31 December 2024, firms will need to ensure they take necessary action during 2024. To continue with a general trend across the wider FS industry, wind-down is also an area under increasing focus for insurers.

Banking

Now that firms have some certainty around the final position regarding elements of Basel 3.1, attention must move to implementation to ensure firms can meet the 1 July 2025 deadline. It is key that system vendors are engaged, and resource assessments are carried out to ensure there is sufficient capacity and data to comply with the new rules.

There is however a great deal of anticipation surrounding any amendments to the credit risk elements of the regime. These are due to be finalised in the coming weeks and are likely to drive the upcoming consultation on the capital elements of the SDDT regime which is expected to be published at a similar time. With a proposed implementation date of H1 2026, smaller firms will have more time to prepare.

Priority matrix – April 2024

Basel 3.1: firms are increasing preparation activity in advance of the publication of final rules, which is expected to continue through the next 12 months. Engaging system providers is a key priority.

Recovery and wind-down: regulatory focus on recovery and wind-down plans has increased over the last 12 months. The PRA has agreed rules for smaller banks and building societies to produce and maintain solvent exit analyses and similar rules are being considered for insurers.

Solvency II: with the publication of final rules proposed under CP12/23 in February 2024 which look to adapt Solvency II to the UK market, firms should be focusing on ensuring compliance by the end of 2024.

IFPR: after the FCA’s industry-wide feedback was published late in 2023, we see this as an increasing area of regulatory focus in the coming months as firms will be tested against the concerns noted in the report.

Strong and simple: as rules become clearer under Basel 3.1, work to establish the impact of the simpler regime will need to be assessed by firms to understand the projected impact.

Forward view 

Q2 2024

• Basel 3.1: final policy on credit risk, output floor, reporting and disclosure.
• SDDT: consultation on capital regime, pillar 2 and buffer requirements.
• IFPR: consultation on MIFIDPRU clarifications and ESG disclosures.
• Solvency II: final policy on matching adjustment (MA) reforms.
• Model risk: implementation of principles under SS1/23 on 17 May 2024.

Q3 2024

• SDDT: implementation of simplified liquidity requirements.

• Model risk: consultation on model risk management principles for smaller firms expected.

Q4 2024

• Solvency II: implementation of rules under CP12/23 and CP14/22 on 31 December 2024.

Q1 2025

• Banking data review: consultation expected which will focus on regulatory reporting.

Q2 2025

• Basel 3.1: final preparations for 1 July 2025 implementation date.

Q3 2025

• Basel 3.1: implementation date on 1 July 2025.
• Solvent wind-down: final preparations for compliance on 1 October 2025 implementation date.

For more information on prudential regulations, please contact James Roberts.