Clifford Chance

The PRA has recently published its 2023/24 Business Plan. The plan provides an update on the PRA's strategy and sets out its priorities over the next 12 months.

As expected, the Financial Services and Markets Bill (FSM Bill) and the implementation of the Future Regulatory Framework (FRF) review are key priorities. The plan makes clear that a critical element of this will be the PRA's new secondary objective to "facilitate international competitiveness and medium to long-run growth of the UK economy" and the business plan sets out the PRA's commitment to "vigorously" take forward this new objective. Notably, the PRA are of the view that there is "no contradiction between robust standards and economic growth" and that such "safety and soundness is most likely to be achieved in a growing, competitive economy". Such an approach will be welcomed by UK firms, although it remains to be seen how this will translate into tangible practices. Interestingly, HM Treasury has separately published a 'Call for Proposals' to measure the success of the new competitiveness and growth objective and therefore to hold the PRA to account (to learn more on the Call for Proposals click here).

These are potentially highly significant developments to the regulatory landscape which, taken alongside the other strategic priorities set out in the PRA's 2023/24 business plan (e.g. to be at the forefront of identifying new and emerging risks, such as AI, focusing on financial resilience) suggest that the next 12 months will be a very busy period for UK regulation.

Key priorities in 2023/24

The 2023/24 Business Plan is centred around four strategic priorities, further described below. For the purposes of this article, we have focused only on the key points for the UK insurance sector although some of these points will also be relevant for other firms within the PRA's perimeter.

1. To maintain and build on the safety and soundness of the banking and insurance sectors, and ensure continuing resilience

The main focus is on resilience, both in operational and financial terms. The PRA intends to achieve this through legislative reforms in co-operation with HM Treasury and a host of policy work, risk management and supervision.

To facilitate this, the PRA will issue a series of consultations on rule changes and expectations to implement reforms to the Solvency UK regime (for an overview of the reforms click here).

The PRA intends to focus on the following areas:

• Insurance Resolution Regime (IRR) – The PRA will continue to assist HM Treasury with the creation and implementation of a resolution regime for insurers in the UK.
• Stress Testing – A timeline for the next insurance stress test will be published in H2 2023. The PRA will also look to engage with firms on the development of its insurance stress testing regime and the publication of stress test results at an individual firm level.
• Reinsurance Risk – The concentration of reinsurance risk for annuity business, and the emergence of "funded reinsurance" in the UK life market and risks to the protection of UK policyholders remains an area of focus.
• Operational Risk and Resilience – Working with the FCA to assess progress of firms' implementation of the operational resilience policies that came into force in March 2022 and continuing to monitor threats to firms' resilience due to critical third party dependencies.
• Senior Managers & Certification Regime (SM&CR) review and reform – The PRA and FCA issued a joint discussion paper (DP1/23) in March 2023 alongside HM Treasury's Call for Evidence.
• Diversity and Inclusion – Building on the feedback and data received in response to DP2/21 on diversity and inclusion in the financial sector, the PRA expects to publish with the FCA a consultation paper with further proposals on diversity and inclusion later this year with the expectation that the final policy will be published in 2024.
• Cyber – The PRA will continue to monitor and assess firms' ability to manage cyber threats through the use of CBEST and the cyber questionnaire (CQUEST).
• Inflation –The PRA plans to continue working with firms to help them assess, monitor and account for the impact of claims inflation in general insurance, particularly in relation to motor and home insurance.
• Regulatory Reporting Requirements – As part of the second phase of changes to regulatory reporting requirements the PRA intends to issue a policy statement containing all reporting changes later this year followed by a final taxonomy for firms to begin implementing the reporting changes ahead of a proposed implementation date of 31 December 2024 for all phases.

2. To be at the forefront of identifying new and emerging risks, and developing international policy

The PRA intends to lead and influence the setting of international regulatory standards through participation in the International Association of Insurance Supervisors ("IAIS") with a focus on the development of the Insurance Capital Standard, work on private equity and risk transfers, and the implementation of a framework for assessing and mitigating systemic risk in the insurance sector.

The PRA also intends to engage with opportunities and risks arising from the following key areas:

• Digital Innovation within the financial sector with developments monitored by the PRA's Fintech Hub. The PRA will consider policy proposals to respond to digitalisation and the new insurer start-up unit will engage with applicant firms using novel technology. The PRA will also play an "active part" of the IAIS Fintech Form;
• AI and Machine Learning and their use in UK financial services focusing on the safe and responsible adoption of these technologies. The PRA will be considering how best to address the issues raised by AI and machine learning whilst accounting for the wider policy debate on AI, including the UK Government's policy paper on 'Establishing a pro-innovation approach to regulating AI'; and
• Climate Change and the associated increased financial risk to firms and the financial system. The PRA will assess firms' abilities to manage climate-related financial risks and meet supervisory expectations in a proportionate way.

3. To support competitive and dynamic markets, alongside facilitating international competitiveness and growth, in the sectors that we regulate

The proposed new secondary competitiveness and growth objective has spurred the PRA to work on initiatives to shift its policy focus and to develop more proportionate and agile prudential requirements. For example, reducing regulatory burdens on small firms. The PRA also expects that the ongoing FRF will enable it to be more responsive and proactive in advancing its objectives and ensuring that rules are appropriately tailored to the UK market.

Following on from DP4/22 on the PRA's intended approach to policymaking, the PRA expects to publish a consultation paper on the same topic to further this work during 2023. Work with HM Treasury to transfer various direct firm-facing rules to the PRA Rulebook is also ongoing. Once passed, the FSM Bill will also require the PRA to keep its rules under review, carry out rule reviews and publish a statement of policy with respect to its review of rules. The PRA expects to publish a consultation paper on its approach to rule reviews later this year.

The PRA is also working on how its Cost Benefit Analysis (CBA) panel will be structured and will look to publish a statement of policy on panel members' appointments later this year before setting up the CBA panel. Following which, the PRA will also consult on a CBA framework.

The PRA intends to support market entrants in navigating the authorisation process through the work of the New Insurer Start-up Unit including providing clear online guidance and offering potential applicants the opportunity to meet with PRA staff through a structured pre-application stage. The introduction of a mobilisation stage for new insurers to operate on a restricted basis while they complete their set up is also being considered.

The PRA also intends to embed an accelerated authorisation pathway for participants in the wholesale insurance market with a "highly credible" track record who wish to set up insurance special purpose vehicles to support the UK's insurance linked securities (ILS) regime.

4. To run an inclusive, efficient, and modern regulator within the central bank

The PRA intends to:

• increase operational efficiency on regulatory transactions by increasing resources and streamlining reviews of transactions;
• enhance its transparency on authorisations through introducing quarterly reporting of performance metrics for a range of regulatory transactions, which will include the time taken to determine cases;
• implement the recommendations of the Bank's Court review into ethnic diversity and inclusion to embed inclusive recruitment and invest in talent support/development;
• implement its digital skills strategy including use of technology to supervise firms and hire data scientists and specialists to support supervisors and data analysts; and
• update its published supervisory approach documents during the course of 2023 to reflect recent updates to the PRA's supervisory approach, which now categorises firms according to their 'potential impact' on financial stability on a scale of 1 to 4.

Next steps

The upcoming year looks to be very busy for the PRA and firms alike, with a broad spectrum of incoming regulatory reforms alongside numerous reviews of existing policies and practices. We would recommend that firms routinely monitor announcements from the PRA, FCA and HM Treasury on the Edinburgh Reforms and Solvency UK, as well as the various consultation papers proposed by the PRA in its 2023/24 Business Plan and referenced above.