Ensure robust IT infrastructure
The PRA continues to work very closely with the Bank’s Technology directorate to ensure that it has the best IT infrastructure to achieve the Bank’s mission. This includes continuing to work with the FCA on shared technology services, and setting out options for future investment, including new systems and services that will help the PRA improve supervisory processes. The PRA is currently setting out its Operational and Data strategy from which the future IT needs will be
established, aligned with the One Bank Data Architecture programme. Services successfully delivered in 2015 to support CRD IV and Solvency II are now moving into a regular operational model.
Review of the PRA’s target operating model
In order to continue its commitment to provide value for money, and be able to respond swiftly to changes in the wider regulatory environment, the PRA must ensure that it is operating as efficiently and effectively as possible. In 2015 the PRA undertook a review of its ways of working compared to the target operating model set out before the PRA was created, the approaches taken by some of its regulatory peers, and against the backdrop of the current regulatory environment. PRA Strategic Report: Review of 2015/16
Climate change and financial stability
Under the UK Climate Change Act 2008, the Prudential Regulation Authority (PRA) received an invitation from the Department for Environment, Food & Rural Affairs (Defra) to submit a Climate Change Adaptation Report. The PRA report to Defra1 indicated
that there were three broad channels in which climate change could affect financial stability:
i) physical risks: the impacts today on insurance liabilities and the value of financial assets that arise from climate and weather-related events, such as floods and storms that damage property or disrupt trade;
ii) liability risks: the impacts that could arise tomorrow if parties who have suffered loss or damage from the effects of climate change seek compensation from those they hold responsible; and
iii) transition risks: the financial risks which could result from the process of adjustment towards a lower-carbon economy.
On 29 September 2015, the Governor delivered a speech at Lloyd’s of London2
which highlighted that the effects of climate change have already been felt by the industry. Since the 1980s the number of registered weather-related loss events has tripled and inflation-adjusted insurance losses from these events have increased from an annual average of around US$10 billion in the 1980s to around US$50 billion over the past decade.
The Governor warned that the combination of the weight of scientific evidence and the dynamics of the financial system suggest that, in the fullness of time, climate change will threaten financial resilience and longer-term prosperity.
1–2 www.bankofengland.co.uk/pra/Documents/ publications/ar/2016/pra-links.pdf.
Abbreviations used in this Report
Board of the Prudential Reguation Authority
The Bank of England and Financial Services Act 2016
Organisational structure PRA Strategic Report Overview
Directors’ Report
Financial Review of 2015/16 Contacting the Bank of England
The overarching conclusion of the review was that the PRA’s current operating model supports the organisation in achieving its statutory objectives and facilitates good supervisory outcomes, but there are some potential areas for improvement to be delivered in the medium term. These include further enhancing the PRA’s IT, data and analytics capability; strengthening supervisory controls and assurance through enhanced management information; refining the practical application of the PRA’s supervisory approach to increase its effectiveness; and ensuring that the operational support provided to front-line supervision remains aligned to the evolving needs of the organisation. Initiatives to deliver these improvements are underway, to ensure the PRA continues to operate efficiently and effectively.
Develop the control and assurance framework
In 2015, the PRA reviewed in detail the control and assurance framework around its approach to risk, as part of a wider review of the PRA’s operating model. Reviews of such frameworks are essential in ensuring that the PRA
continues to have robust checks and processes in place, and that they remain appropriate to support the delivery of the PRA’s objectives. As part of this review, the PRA identified some areas for further improvement in management information and frontline controls, and have begun work to strengthen these.
Communications: supporting the PRA’s objectives
A vital part of the delivery of its statutory objectives and supervisory approach is the PRA’s industry-wide communications. This includes publications, briefings and letters to firms and industry participants on both policy and supervisory activity.
In the 2015/16 financial year the PRA has:
• Updated its approach documents, for
both banking and insurance, to reflect how supervision will be delivered in the changing regulatory landscape — including the introduction of Solvency II on
1 January 2016.
• Launched the joint PRA/FCA New Bank
Start-up Unit, with information and materials available on the website, with a dedicated helpline and email address for newly authorised banks and those thinking of becoming a new bank in the United Kingdom. The Unit also issued invitations to a seminar held on 22 March 2016.
• Created new dedicated webpages for two
key initiatives: (i) Strengthening
Accountability; and (ii) Structural Reform. These webpages aim to provide all relevant information in one place on policy and implementation. The PRA continues to provide updates on Solvency II and CRD IV. It has also made improvements to the PRA webpages to assist access and use.
• Published a number of policy documents
across the range of its policy development work — including policy aligned with other areas of the Bank and the FCA. It has also published 25 letters and 9 other publications, including the PRA Climate Change Adaptation Report1 in
September 2015, and the PRA/FCA Review into the failure of HBOS.2
40
69
9
Consultation Papers
Policy Statements
Supervisory Statements
Statements of Policy
2015/16 policy
publications
345
PRA Strategic Report: Review of 2015/161–2 www.bankofengland.co.uk/pra/ Documents/publications/ ar/2016/pra-links.pdf. 3 For definition of different types
of policy publications see www.bankofengland.co.uk/pra/ Documents/publications/ ar/2016/pra-links.pdf.
In addition to the written word, the PRA has also continued its engagement with firms and other industry participants. It has hosted briefings, and provided speakers and panellists for a number of events hosted by others, including the FCA, overseas counterparts, trade and professional bodies. This has provided a valuable insight and enhanced the PRA’s understanding of prevalent issues and the implications of regulatory policy and supervision.
Firm feedback
The PRA asks firms to complete an annual feedback survey. Over the course of the year 69 firms completed the survey and 33 have had a follow-up meeting to discuss the
outputs. This process is overseen by the PRA’s Supervisory Oversight Function and the meetings are chaired by senior advisors so that independence is maintained. Overall, the feedback suggests that the majority of respondents have a positive view of the PRA (96% of respondents either agreed or strongly agreed that they have an effective relationship with the PRA). Where the survey results are less favourable, the PRA carries out an internal review of the relevant areas.
Figure 3 shows a selection of the survey results reflecting the type of issues on which the PRA sought opinion. The full results are available on the PRA’s website.1
19% 67% 13% 1% 1% 48% 51% 14% 70% 12% 4% 44% 52% 3% 1% Strongly agree Agree
Neither agree or disagree Disagree
Strongly disagree The supervisory team has an appropriate understanding of the market our firm operates in
We are clear as to what the PRA feels
are the key risks impacting our firm To what extent do you agree or disagree with the following statement about the supervisory team’s level of challenge? Senior management’s judgement of the risks presented by the firm is challenged appropriately by the supervisory team
My firm has an effective relationship with the PRA
Figure 3: Selection of firm feedback survey results 2015/16
PRA Strategic Report: Review of 2015/16
1 www.bankofengland.co.uk/pra/ Documents/publications/ar/2016/ pra-links.pdf.