Head of Retail Financial Services | Commercial
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The Prudential Regulation Authority (PRA) issued two communications last week of interest to international banks, and in particular their senior managers.
Banks should review these communications now to prepare for PRA supervisory engagement on these issues over the course of 2024 and beyond.
The Dear CEO letter is very focused on firms' risk management, governance and controls. It is clear that the PRA has identified deficiencies in the way that firms are currently addressing these areas and "expect individuals within our Senior Managers Regime to continue to lead the risk culture of their firms".
Two of the key areas that firms should seek to address are:
The thrust of the PRA's letter appears to be that firms' risk management controls are not sufficiently sophisticated to deal with a rapidly changing operating environment and must continuously evolve and be re-assessed in order to do so.
The PRA also refer to firms' financial resilience (which again must be robust enough to deal with a rapidly changing global environment) and expect firms to be robustly stress testing against forward-looking capital and liquidity indicators, saying that this should not be a "box ticking" exercise.
Finally, the PRA refer to the existing operational resilience deadline of March 2025 that firms should be working towards, in respect of their Important Business Services.
The other interesting point to note is that the PRA make explicit reference to the contribution that diversity and inclusion can make on these issues, which is consistent with the regulators' current focus:
"Operating diverse and inclusive firms, with cognitive variety and clear encouragement to speak up, challenge and question supports prudent decision-making and risk management practices."
Firms should expect the PRA to be engaging with them on all of the issues raised in the letter over the course of this year, and so should start preparing for such engagement and supervisory activity now.
The Iain Hunter Final Notice serves as a reminder that the PRA (and FCA) are likely to continue to focus on conduct rule breaches when considering enforcement action against individuals – after all, that was the objective of introducing the SMCR regime in the first place. That will increasingly be the hook upon which individual enforcement action is hung. One of the other key issues raised in the Final Notice is Mr Hunter's failure to ensure that the firm's processes around connected client exposure were sufficiently robust, which can be a particular problem for smaller banks.
If you require further advice on any of the above, please contact our Financial Services team.