Quarterly prudential risk radar - Q3 2024

Following the announcement of the general election in late May, planned regulatory announcements were largely paused across the FS sector.

While uncertainty remains around the revised timings for key policy updates, including the near-final credit risk rules under Basel 3.1 and the draft SDDT capital framework, we predict the second half of 2024 to be a busy period for regulatory policy announcements. Basel 3.1 rules are expected shortly after the summer break.

Aside from major policy changes, there is continued focus on recovery and wind-down planning after the Prudential Regulation Authority (PRA) issued its feedback to the banking sector, following its thematic review of non-systemic firms. Effective scenario testing and quantification of recovery capacity were key areas of improvement, a theme consistent with our own work across the sector.

Investment firms

As a possible by-product of the general election, regulatory attention over firms’ implementation of (MIFIDPRU) rules appears to have not yet gained significant momentum in the first half of 2024. We would continue to expect this to gather pace over coming months, along with further consultations on remaining elements of MIFIDPRU and ESG disclosures.

Insurance

After reforms to the Matching Adjustment (MA) went live at the end of June 2024, the Bank of England has been vocal in its support for firms taking advantage of the increased flexibility the updated rules allow, specifically around investment portfolios.

The PRA also published its planned approach to the 2025 Life Insurance Stress Test (LIST) and Dynamic General Insurance Stress Test (DyGIST) during July with technical input requested from firms during the second half of 2024.

Banking

The delay of Basel 3.1 and Small Domestic Deposit Takers (SDDT) announcements following the general election will likely bring a great deal of uncertainty for firms across the banking sector, with those forecasting a significant deviation in capital ratios most affected.

Given the political attention on the SME-supporting factor, following the Treasury Committee statement in May which criticised the planned removal of the capital benefit, firms with business models which are heavily focused on lending to small businesses will be waiting with anticipation for an update from the PRA around the revised timing of final Basel 3.1 rules.

Priority Matrix - July 2024

Basel 3.1: the extent of application and priority level assigned to changes to credit risk rules under Basel 3.1 remains high for all affected firms.

Strong and simple: similarly, with planned credit risk rules under SDDT not yet visible, there is no change to priority or application scores this quarter.

Recovery and wind down: feedback around recovery plans continues to be issued to firms (either individually or industry wide). With solvent exit rules also becoming close to implementation, there is no change to the rating.

Solvency II: now the remaining elements of solvency UK have largely been published, attention moves to ensuring compliance before the end of 2024.

IFPR: after a relative quiet three months for regulatory pronouncements for MIFIDPRU investment firms, there is no change in priority or application ratings in this edition of the quarterly radar.

Forward view

Q3 2024

Basel 3.1: final policy on credit risk, output floor, reporting and disclosure.

SDDT: consultation on capital regime, pillar 2 and buffer requirements.

SDDT: implementation of simplified liquidity requirements.

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

IFPR: consultation on MIFIDPRU clarifications and ESG disclosures.

Q4 2024

Securitisation: implementation of general requirement rules under CP 15/23.

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

Q1 2025

Securitisation: consultation on further changes to rules expected.

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

Insurance: launch of the Life Insurance Stress Test (2025).

Q2 2025

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

Insurance: the Dynamic General Insurance Stress Test (DyGIST) commences.

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, please contact Gavin Sharpe, or James Roberts.