PRA Annual Report Highlights Resilience, New Objectives, and Key Regulatory Developments

The Prudential Regulation Authority (PRA) has unveiled its annual report for 2023/24, offering a comprehensive overview of a year marked by significant regulatory developments and enhanced financial sector resilience. Published on July 30, 2024, the report covers the period from March 1, 2023, to February 29, 2024, detailing the PRA's extensive activities in safeguarding the UK's banking and insurance sectors.

A cornerstone of the report is the discussion of the Financial Services and Markets Act 2023 (FSMA 2023), which introduced a new secondary objective for the PRA. This objective tasks the authority with facilitating the international competitiveness of the UK's economy and its growth over the medium to long term, while maintaining alignment with relevant international standards. Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA, emphasized the significance of this change, noting that it represents a significant expansion of the PRA's policymaking responsibilities as part of the post-Brexit regulatory framework.

The report highlights several critical policy advancements made during the year. In December 2023, the PRA published the first of two near-final policy statements on Basel 3.1 standards, aiming to make capital ratios more consistent and aligned with international standards. The implementation is set to occur over a 4.5-year transitional period, beginning July 1, 2025. Additionally, near-final policy statements were issued on reforms to the Solvency UK (formerly Solvency II) insurance regime, designed to streamline the regime, improve flexibility, and encourage new market entrants.

The PRA's commitment to proportionate regulation was evident in its further development of the Strong and Simple framework. The authority published final policy for small domestic deposit-takers, aiming to create a simpler but equally resilient prudential framework for smaller banks and building societies. This approach demonstrates the PRA's efforts to balance robust regulation with the need to support a diverse and competitive financial sector.

Stress testing remained a crucial tool in assessing sector resilience. The 2022/23 annual cyclical scenario (ACS) stress test results, published in July 2023, indicated that major UK banks would be resilient to a severe stress scenario incorporating high inflation, increasing interest rates, deep recessions, and sharp falls in asset prices. Notably, the test assessed ring-fenced subgroups of selected participating banks on a standalone basis for the first time, providing a more nuanced view of the sector's resilience.

The report also highlights the PRA's crucial role in navigating the stresses caused by the failures of Credit Suisse and Silicon Valley Bank in March 2023. Working closely with the Bank of England, the PRA executed the orderly resolution of Silicon Valley Bank UK, transferring its shares to HSBC for a nominal consideration. This swift action demonstrated the authority's ability to respond effectively to acute financial sector challenges.

In the realm of technological innovation and operational resilience, the PRA made significant strides. The authority published expectations on how deposit-takers should address risks arising from digital money and money-like instruments, reflecting the growing importance of digital assets in the financial landscape. A joint feedback statement was issued with the Bank of England and Financial Conduct Authority (FCA) on artificial intelligence and machine learning, acknowledging the transformative potential and risks of these technologies.

The report notes several significant enforcement actions, including fines for regulatory and governance failings in Wyelands Bank Plc and HSBC, with the PRA imposing its largest-ever fine in the case of Credit Suisse. These actions underscore the authority's commitment to maintaining high standards of conduct and governance in the financial sector.

Efforts to enhance regulatory processes were also detailed in the report. The PRA introduced quarterly reporting of performance metrics for various regulatory transactions, including time taken to determine cases. Improvements were made to the PRA Rulebook to make it easier for regulated firms to navigate rules and other policy materials. The authority also commenced work on its Banking Data Review, part of a broader Transforming Data Collection programme, aimed at improving the efficiency and effectiveness of data collection from regulated firms.

The PRA's international engagement remained strong, with active involvement in international standard-setting bodies and support for HM Treasury in international trade negotiations. The establishment of a Cost Benefit Analysis Panel further enhanced scrutiny and accountability in the authority's policymaking processes.

The PRA's Annual Report 2023/24 paints a picture of an authority adeptly navigating a rapidly evolving financial landscape while maintaining its core focus on financial stability. It demonstrates the PRA's efforts to balance its primary objectives of safety and soundness with its new secondary objective of supporting UK economic growth and competitiveness. As the financial sector continues to face new challenges and opportunities, the PRA's role in maintaining trust, adopting effective regulatory processes, and taking a responsive approach to risks and opportunities remains crucial for the UK's financial stability and economic growth.

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