Further to the joint announcement on Friday 20 March 2020 from the Bank of England (‘Bank’) and the Prudential Regulation Authority (‘PRA’), setting out a number of measures aimed at alleviating operational burdens on PRA-regulated firms (‘firms’), the PRA is today announcing further details of its plans to support firms and enable them, and the PRA, to focus their resources on the highest priority work. The PRA’s work, alongside that of the wider Bank, is focused on ensuring that banks and insurers can play their part in supporting the UK economy to respond to the significant impact of Covid-19.
The Prudential Regulation Committee and the Financial Policy Committee have agreed to re-prioritisation in the following areas of the PRA’s work:
Recognizing current pressures on firms, and in light of the responses to the December 2019 Discussion Paper on the Climate Biennial Exploratory Scenario, the PRC and FPC have agreed to postpone the launch of the exercise until at least mid-2021. This delay reflects a desire to maintain the ambitious scope of the exercise, whilst giving firms enough time to invest sufficiently in their capabilities to allow them to deliver to a high standard.
Climate change represents a material financial risk to firms and the financial system and is a strategic priority for the Bank. Whilst Covid-19 represents a present risk, minimising the future risks from climate change requires action now. As such, the Bank will continue its work to better understand and mitigate these risks.
- Continued support for firms’ enhancements of their climate risk capabilities. To aid this, this summer the PRA will issue follow-on guidance on the PRA’s 2019 Supervisory Statement on enhancing firms’ approaches to managing the financial risks from climate change. Furthermore, the outputs from the Climate Financial Risk Forum (an industry group set up in 2019 to bring together leading practice across the financial sector, and chaired jointly by the PRA and FCA) will be published in the summer.
- Continuation of the Bank’s international engagement on climate issues. This includes working with other central banks within the Network for Greening the Financial System, through which guides on key issues like supervision and scenario analysis will shortly be published. The Bank will also assist the Government with its preparations for COP 26; and
- Continued focus on embedding climate disclosure across the financial system, including through the Bank’s own disclosures.
Due to Covid 19, the PRA and FCA suspended transition data reporting at the end of Q1, and cancelled some Q1 firm meetings. In light of the developments since, including the FSR statement on LIBOR today, the PRA and FCA have decided to resume full supervisory engagement on Libor from 1 June 2020, including data reporting at the end of Q2.
Insurance Stress Test 2019
The PRA has decided to pause further work on the Insurance Stress Test, given other pressures on firms and the need to focus on Covid-19 specific stresses. We will therefore not be publishing the results of last year’s test (IST2019) and will postpone the next Insurance Stress Test to 2022, with a view to seeking feedback from firms on the proposed design during Q4 2021.
In the PRA Supervisory Statement on Market Risk (SS13/13) we have previously set expectations on how the 12-month period used for Stressed VAR (SVAR) should be calculated, and how frequently it should be reassessed. In relation to the latter point, we would like to confirm that we do not expect firms to update their SVAR 12-month period during the current period of financial market stress, other than if a firm’s current period no longer represents a significant period of stress for the firm’s portfolio (e.g. due to a material change in risk profile). The CRR requires firms to review the choice of historical data at least annually and, although in normal circumstances we have set an expectation of quarterly reviews, in the current circumstances we will permit firms to delay this review until December 2020, in line with EBA guidance.
The Bank and the PRA have today also announced changes to resolution measures aimed at alleviating operational burdens on PRA-regulated firms.
In addition to these specific areas the PRA is continuing to make other adjustments and review ongoing plans, to support firms while ensuring their safety and soundness is maintained. This includes postponing or scaling back planned reviews, consultations and policy announcements where suitable; wide-ranging reprioritisation of the PRA’s internal initiatives and development workstreams; and deferring governance decisions on some less critical matters, where possible.
Further details on the UK’s regulatory pipeline can be found on the Regulatory Initiatives Grid published by the Financial Services Regulatory Initiatives Forum. The Grid sets out the planned regulatory workplan over the next twelve months. It will help firms understand – and plan for – the timing of the initiatives that may have a significant operational impact on them.