Prudential Regulation Authority Annual Report 2021

1 March 2020 - 28 February 2021

Presented to Parliament pursuant to paragraph 19(4) of Schedule 1ZB of the Financial Services and Markets Act 2000 as amended by the Financial Services Act 2012, and the Bank of England and Financial Services Act 2016.

The annual report consists of the following main sections:

• Foreword by the Chair (PDF)
• Report by the Chief Executive (PDF)
• Prudential Regulation Committee (PRC) – members and responsibilities (PDF)
• Annual report of the PRC to the Chancellor of the Exchequer (PDF)
• Senior leadership team as at 26 May 2021 (PDF)
• Review of 2020/21 (PDF)
• Complying with FSMA (PDF)
• PRA Annual Competition Report – June 2021 (PDF)
• Financial Review of 2020/21 (PDF)

Readers may find it helpful to read the PRA Annual Report alongside the Bank of England Annual Report and Accounts, which includes the PRA’s statement of accounts for the reporting period ended 28 February 2021.

Prudential Regulation Authority Annual Report 2021

Consultation

Members of the public are invited to make representations to the PRA on the:

• PRA Annual Report;
• way in which the PRA has discharged, or failed to discharge, its functions during the period to which the report relates; and
• extent to which, in their opinion, the PRA’s objectives have been advanced and the PRA has considered the regulatory principles to which it must have regard when carrying out certain of its functions (contained in section 3B of FSMA), and facilitated effective competition in the markets for services provided by PRA‑authorised firms in carrying on regulated activities in accordance with section 2H of FSMA.

Please address any comments or enquiries to praannualreport@bankofengland.co.uk.

The consultation closes on Tuesday 14 September 2021.

Examples of how the PRA delivered its 2020/21 strategic goals

Further details on delivery towards each of the strategic goals is available in the ‘Review of 2020/21’ section of the annual report.

• Managed the EU withdrawal transition, including implementation of Capital Requirements Directive V, smoothly and with minimal disruption.
• Implemented a number of updates and temporary measures to our prudential policies in response to Covid-19.
• Engaged with firms on actions and expectations to manage the transition from the London interbank offered rate (Libor) to alternative interest rate benchmarks.
• Continued to refine our implementation of Solvency II and worked with HM Treasury to launch a review of the regime.

• Continued to work with PRA-authorised firms towards improving their resilience against the risks from climate change and to support the transition to a net-zero carbon economy.
• Actively engaged with firms to build their understanding of our expectations on climate change, including through a joint PRA and FCA Climate Financial Risk Forum (CFRF), followed by a guide containing practical tools and case studies on climate risk management and scenario analysis.
• Announced further detail on our 2021 biennial exploratory scenario (BES) exercise system-wide climate test. This includes banks and insurers, and will assess resilience against the physical and transition risks using three different climate scenarios.
• Used our statutory powers to conduct investigations and initiate enforcement action where needed to tackle threats to safety and soundness in PRA-authorised firms.

• Contributed to the Bank’s desktop stress test of the resilience of the UK banking sector, which included a reverse stress test scenario that would deplete regulatory capital buffers by around 5 percentage points.
• Continued to assess the financial resilience of firms through our supervision at firm and sector level.
• Contributed to the work of the Basel Committee on Banking Supervision (BCBS) as it finalised revisions to the market risk framework.
• Ensured that insurers maintain capital for balance sheet risks arising from complex products and asset exposures, such as illiquid unrated assets, and also that they reflect reduced loss absorbency of own fund items where appropriate.
• Published our updated policy on Pillar 2A (reconciling capital requirements and macroprudential buffers).

• Published co-ordinated Policy Statements with the Bank and the FCA, as the culmination of a major workstream initiated through the 2018 operational resilience Discussion Paper.
• Published our Policy Statement aimed at modernising the regulatory framework on outsourcing and third-party risk management.
• Assessed the effectiveness of the operational risk management frameworks at firms, including service availability and business continuity management.
• Used the Cyber Questionnaire, completed by over 100 firms, as a key tool to assess firms’ cyber resilience.
• Explored how Covid-19 was affecting the resilience of firms’ IT arrangements, including the resilience of remote working technologies, the impact on IT change programs, the strength of IT control environments, and business continuity plans for critical operations.

• Extended the dates for the major UK banks and building societies to submit their first reports on their preparations for resolution, to reduce operational burdens on PRA-regulated firms in response to Covid-19.
• Published a consultation in October 2020 with proposals to revise the operational continuity in resolution (OCIR) policy.

• Consulted on a set of proposed clarifications to our approach to the supervision of banks and building societies that have typically been in existence for less than five years after receiving authorisation without restrictions.
• Proposed to introduce new expectations to address inappropriately low UK internal ratings based (IRB) mortgage risk weights and reduce unwarranted risk weight differences between standardised approach (SA) and IRB mortgage risk weights for current UK mortgages.

• Carried out work to minimise disruption that could have occurred in the event that the UK and EU ended the transition period on 31 December 2020 without agreeing the terms of a trade and co-operation agreement.
• Made preparations to retain and convert EU legislation into operable UK legislation (known as ‘nationalising the acquis’).
• Worked on deepening our relationships with supervisors and regulatory authorities around the world to advance our supervisory and regulatory objectives.
• Consulted on our approach to the supervision of international banks operating in the UK, proposing expectations for receiving information concerning the risks in the wider group, and for co-operation with regulated entities and their supervisors.
• Provided technical support to the UK Government, including in relation to the agreement by HM Treasury and the European Commission on an MoU on Financial Services Regulatory Cooperation.

• Reassessed our business critical needs and moved to virtual working in March 2020. We have balanced the demands associated with supervising in a fast-changing environment with the capacity of our staff using regular prioritisation reviews.
• Experimented with a number of proofs of concept in order to advance our RegTech and Data Strategy.
• Introduced the first AI search engine to all colleagues in the PRA to help them search for information received from regulated firms.
• Feedback from firms gave us assurance on the effectiveness and quality of our supervisory framework and approach.

Related publications

The Bank of England’s Annual Report and Accounts is available under ‘related links’. We also published the:

• list of ring-fenced bodies as at 20 May 2021, available on our ‘Which firms does the PRA regulate’? page;
• Practitioner Panel and Insurance Sub-committee Annual Report 2020/21;
• Enforcement Decision Making Committee’s Annual Report 2020/21;
• Prescribed Persons (Reports on Disclosures of Information) Regulations 2017 - Annual Report 2020/21.