Foreword by Chief Executive Sam Woods
Ten years on from the establishment of the PRA, this year starts with a reminder of how important our core mission is.
Recent events in the banking sector emphasise the need for strong standards and robust supervision. The UK banking and insurance sectors are resilient. But this resilience cannot be taken for granted: it requires constant work by firms and the PRA to maintain it, and we need to remain vigilant to emerging risks or any risk of an erosion of the foundations of financial stability.
At the same time, the progress of post-Brexit reforms points to the positive contribution strong financial regulation can make to wider economic success. Most importantly, under the Financial Services and Markets Bill currently being considered in Parliament, we expect very shortly to get a new secondary objective to facilitate, subject to aligning with relevant international standards, international competitiveness and medium to long-run growth of the UK economy when we make policy. Like our existing secondary objective for competition, this will rank below our primary objectives of safety and soundness and policyholder protection – as you would expect for a prudential regulator. However, it is a significant change in our mandate, and we will take forward our new objective vigorously.
There is no contradiction between robust standards and economic growth. The best thing we can do for the UK economy is make sure that banks and insurers are safe and sound: as we learnt in the financial crisis of 2008, economic growth based on excessive leverage and weak regulation is ultimately unsustainable and self-defeating. Our reputation for alignment with internationally-agreed minimum standards is also central to our attractiveness as a global financial centre – though there is always the scope to fine-tune rules to UK circumstances while maintaining that alignment. This relationship works both ways: safety and soundness is most likely to be achieved in a growing, competitive economy.
Our business plan for 2023/24 reflects both points. Our first strategic priority reflects our primary objective: Maintain and build on the safety and soundness of the banking and insurance sectors, and ensure continuing resilience.
Much of this first priority is achieved through the painstaking day-to-day work of our supervisory teams both on individual firms and across multiple firms. Alongside that, we have a programme of important policy reforms and thematic work. On the policy side, one highlight this year will be the implementation of the Basel 3.1 standards. This is the first major international standard being implemented by the PRA post-Brexit, and we will be considering carefully the evidence submitted in response to our recent consultation. This year we will also be taking forward a major set of reforms to the Solvency II rules for insurers.
Stress testing remains a vital part of how we achieve our mission. We will publish the results of our latest annual cyclical scenario for the major UK banks in summer 2023, and later in the year we will publish a timetable for the next insurance stress test. We will also work with colleagues in the wider Bank to run a system-wide exploratory scenario exercise to consider bank and non-bank financial institution behaviour in a severe but plausible market stress. We will also continue our work on operational risks and resilience, including for critical third parties that provide vital services to the financial sector. And we will continue to review trading book risk management in light of incidents like the failure of Archegos and events in the nickel market last year.
Of course, the environment in which we are operating is always changing, and regulation needs to adapt in order to respond to new risks and opportunities. Our second strategic priority: be at the forefront of identifying new and emerging risks, and developing international policy – is all about being ready to supervise the financial system of the future. This includes work on digitalisation and on the implications of AI and machine learning. It also includes work on cryptoassets, in coordination with UK and international authorities. And managing financial risks from climate change remains an important priority.
The new secondary competitiveness and growth objective, which if approved by Parliament will sit alongside our existing secondary competition objective, gives salience to the next priority: support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that we regulate.
A core part of this will be embedding competitiveness and growth in our policymaking processes, and looking for opportunities to improve our rules to support these objectives while still maintaining strong resilience. We will consult this year on our updated approach to rulemaking, and we have a long list of policy initiatives underway to enhance the financial sector’s contribution to growth. A particularly significant piece of work within this – which should support both secondary objectives – is our ‘Strong and Simple’ project for banks. By simplifying our rules for smaller banks, we should be able to achieve a material reduction in compliance costs for those firms. At the same time, we are clear that the ‘strong’ part of this project is just as important as ‘simple’, and we have no appetite to water down standards of resilience for small firms.
As CEO of the PRA, an important part of my job is ensuring that the PRA is set up to deliver on these substantial tasks. Our fourth strategic priority is all about this: run an inclusive, efficient and modern regulator within the central bank. This includes ensuring that we make best use of our resources – mindful of wider pressures on the public, we plan on maintaining our headcount broadly flat in the coming year, and our provisional budget and levy for 2023/24 is down a little on 2022/23 (in part reflecting fluctuations in pension costs).
Internally, a major focus this year will be improving the operational efficiency of processing regulatory transactions, in particular in relation to senior manager approvals where we have been too slow. We also have an ambitious programme of work on data and technology. We are paving the way for the Banking Data Review – a unique opportunity to modernise regulatory returns. More widely, we are improving how we collect data, and enhancing digital skills within the PRA. Ensuring we have the right skills and knowledge to support our evolving mission remains a key priority, as is our programme of work to strengthen our culture and promote diversity, equity, and inclusion.
So in summary, we have a lot to do in the coming year! But I’m very confident in the dedication, resilience, and talent of the PRA team, and look forward to working together with them in the year ahead.
