Prudential Regulation Authority Annual Report 2022/23

1 March 2022 to 28 February 2023

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 also includes the Annual Competition Report and the Annual Report of the Prudential Regulation Committee to the Chancellor of the Exchequer on the adequacy of the Prudential Regulation Authority (PRA) resource and the independence of the PRA functions.

This report is made by the Prudential Regulation Authority (PRA) under the Financial Services and Markets Act 2000 (FSMA) as amended by the Financial Services Act 2012 and the Bank of England and Financial Services Act 2016. It is made to the Chancellor of the Exchequer and covers the year ended 28 February 2023.

The report covers the requirements of paragraph 19 of schedule 1ZB of FSMA.

The Bank of England Annual Report and Accounts for the year ending 28 February 2023 is available on the Bank of England’s (the Bank’s) website. The PRA’s audited accounts for the reporting year ending 28 February 2023 are set out in the ‘Financial review of 2022-23’ section of the Bank of England Annual Report and Accounts. HM Treasury (HMT) has issued an accounts direction; disclosures relating to this can be found in the ‘PRA income statement for the period ended 28 February 2023’ section of the Bank’s Annual Report and Accounts.

Additional material can be found on the PRA section of the Bank’s website.

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 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, or by post to:

PRA Communications Team
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

The consultation closes on Monday 25 September 2023.

Privacy and limitation of confidentiality notice

By providing representation to the PRA on this Annual Report, you provide personal data to the Bank of England. This may include your name, contact details (including, if provided, details of the organisation you work for), and opinions or details offered in the representations.

The representations will be assessed to inform our further work as a regulator. We may use your details to contact you to clarify any aspects of your response.

Your personal data will be retained in accordance with the Bank’s records management schedule. To find out more about how we deal with your personal data, your rights, or to get in touch please visit our privacy web page.

Information provided in response to this report, including personal information, may be subject to publication or disclosure to other parties in accordance with access to information regimes including under the Freedom of Information Act 2000 or data protection legislation, or as otherwise required by law or in discharge of the Bank’s functions.

Please indicate if you regard all, or some of, the information you provide as confidential. If the Bank of England receives a request for disclosure of this information, we will take your indication(s) into account, but cannot give an assurance that confidentiality can be maintained in all circumstances. An automatic confidentiality disclaimer generated by your IT system on emails will not, of itself, be regarded as binding on the Bank of England.

Foreword by the Chair

1 April 2023 marked the 10th anniversary of the creation of the PRA, making it a good time to pause and reflect on a decade in existence. In that time, the PRA, alongside the Bank of England and other UK authorities, has strengthened the financial and regulatory system, maintaining a much stronger focus on microprudential regulation and on the resilience of the system as a whole. However, the events earlier this year are a reminder that this work is never done as old risks evolve and new risks emerge such as cyber and risks from artificial intelligence (AI).

Managing through a stress is a key test for any regulator. The PRA came into existence during a weekend of stress – the Cypriot banking crisis in 2013. The past year has seen similar challenges as the resilience of the financial system has continued to be tested, including by the invasion of Ukraine by Russia, dysfunction in the gilt market prompted by liability-driven investment (LDI) funds, and most recently, the failures of Silicon Valley Bank and Credit Suisse. Throughout these events, the effectiveness of the PRA and Bank’s responses have been strengthened by them working in close cooperation with each other.

UK banks and insurers maintain strong capital and liquidity positions. They are well regulated – in line with standards implemented by UK authorities that are at least as great as those required by international baseline standards – and subject to robust supervision.

The proposed Financial Services and Markets Bill 2022 (FSM Bill) presents new opportunities for UK financial regulation at a time when policy development is continuing at pace. We set out, in a discussion paper (DP) in September 2022, the PRA’s proposed approach to dispensing our new rule-making role and our vision to be a strong, accountable, responsive, and accessible rule-maker. In November 2022, the PRA issued a consultation on the implementation of the Basel 3.1 standards; the first major international standard being implemented by the PRA post-Brexit. In doing so, we will align with international standards while exercising our judgement to adjust them where appropriate. Over the coming year, we will be progressing major reform of Solvency II regulations, and developing our Strong and Simple regime for small banks. In each, we will take advantage of these new opportunities presented by the FSM Bill while maintaining robust standards in pursuit of the PRA’s primary safety and soundness and policyholder protection objectives.

As ever, I extend my deepest thanks to my colleagues on the Prudential Regulation Committee, and our dedicated and hard-working staff for their achievements over the past year under very challenging circumstances, as well as our achievements over the past decade.

Very sadly, after this report was finalised, we received the news of the passing of Melanie Beaman, our Executive Director for Resolution.

Mel was an outstanding and unique colleague, the life and soul of the Bank, and an outstanding bank supervisor. I first worked with Mel nearly thirty years ago and I know from extensive experience that she was deeply proud of her work, but also very humble about her achievements. The tributes that we have received from around the world are evidence of the deep respect for Mel.

Our thoughts and prayers go to Mel’s family. She will be missed greatly, but not forgotten.

Foreword by the Chief Executive

It’s hard to think of a busier year in the PRA’s 10-year history than the one we’ve just had. Over the 2022/23 reporting period, we have had to respond to a series of shocks to the global economy and financial system, while also making progress on our core supervisory and policy priorities.

The first major shock in this period was Russia’s invasion of Ukraine. As well as the severe human costs of this invasion, it also has had significant impacts on the global economy and financial system. For the PRA, our focus has been on assisting the UK Government in the implementation of financial sanctions, and on monitoring firms affected by the invasion. This includes firms with a presence in or operating from Russia and Ukraine, as well as the wider set of firms affected indirectly, for example as a result of disruption in commodity markets and energy price pressures on UK households and businesses.

In the latter part of the 2022/23 year, the financial system has witnessed further shocks. Two in particular stand out: the crisis in the LDI fund sector in Autumn 2022, and recent stress in the global banking sector, following the events surrounding Silicon Valley Bank and Credit Suisse, which took place just after the period covered by this Annual Report.

The UK banking and insurance sectors have remained resilient in the face of these shocks, reflecting the strong standards they are subject to. It is vital for the success of the UK economy that this resilience is maintained – and the past year has seen a great deal of supervisory and policy work to ensure that it is.

One key focus this year has been stress testing. We use stress tests to assess the resilience of banks and insurers to severe macroeconomic shocks and other headwinds. We completed the 2022 insurance stress test, publishing the results in January 2023. On the banking side, we re-started the annual cyclical scenario (ACS) test of system-wide financial resilience, publishing in September 2022 the scenario for the next ACS. We also published in May 2022 the results of the Climate Biennial Exploratory Scenario (CBES) for the largest UK banks and insurers. This explored the resilience of the UK financial system to the financial risks associated with the impacts of climate change and the transition to net zero.

Stress testing is just one plank of how we supervise. The core of our approach is the day-to-day work of forward-looking, judgement-based supervision, which has continued throughout this year on both financial and operational resilience. To support this, we have conducted important cross-firm and thematic work. Highlights include: a review of general insurers’ risk management and reserving against claims inflation; ongoing implementation of new PRA requirements and expectations for internal ratings-based models for banks; coordination with the Financial Conduct Authority (FCA) to facilitate firms’ transition away from LIBOR; and a joint thematic review with the FCA on insurers’ operational resilience.

This was also a big year for policy. The FSM Bill has been making its way through Parliament. Subject to Parliament’s approval, this will create the new post-Brexit framework for UK financial regulation, with an expanded rule-making role for the PRA alongside an enhanced accountability regime and a new secondary objective to promote long-run economic competitiveness and growth. We published a DP on the PRA’s future approach to policymaking, setting out how we propose to operate within this new framework.

Looking beyond the overall framework for policymaking, this year also saw significant progress on several landmark policy reforms. We:

• published three consultation papers (CPs) on our proposed Strong and Simple framework for smaller banks and building societies. The aim of this project is to reduce regulatory complexity and compliance costs for those smaller firms, while maintaining robust standards;
• published a CP on the UK’s implementation of the Basel 3.1 standards. Our approach aims to support the UK’s competitiveness by maintaining our strong reputation for alignment with internationally agreed standards, with some adjustments;
• worked with HMT in developing proposals for the reform of the Solvency II standards for insurers. These reforms will reduce bureaucracy in the regulatory regime, and improve the incentives for insurers to invest in a wider range of productive assets;
• supported HM Government’s agenda of reforms to the financial sector, including working with HMT on implementing the recommendations of the independent panel on ring-fencing and proprietary trading; and
• published a joint DP with the Financial Conduct Authority (FCA) on new powers enabling regulators to oversee critical third parties (CTPs) that provide vital services to our regulated firms.

We also continued to build our own capacity as an organisation, so that we can be as effective as possible in delivering our objectives. We have taken steps to improve the consistency of our supervisory approach across firms. We have worked to improve the efficiency of our authorisation processes, in particular for senior management function applications, and I expect continued progress on this over the first few months of 2023/24. We have continued to push forward on diversity and inclusion at the PRA, including by implementing recommendations from the Bank’s 2021 review of ethnic diversity. And we have invested in our data capabilities, including by rolling out a digital skills strategy and recruitment of additional data scientists. This recruitment, plus an expansion of our policy function to take on our new post-Brexit responsibilities, meant that our headcount expanded over the course of 2022/23, as planned, by around a hundred staff. Having made this shift, I expect our headcount to be broadly flat in the year ahead.

I think you’ll agree that this all adds up to a rather eventful year! Of course it has been equally so for many other institutions and people across the UK and abroad. I am immensely grateful to the PRA team for their outstanding work on all of these topics, and look forward to working together in 2023/24.

Prudential Regulation Committee (PRC)

The PRC’s terms of reference provide for 12 members. Five members are Bank staff: the Governor; and four Deputy Governors. The Committee also includes the Chief Executive of the FCA, and at least six members appointed by the Chancellor of the Exchequer.

• The PRC is independent in all its decision-making functions, including making rules and the PRA’s most important supervisory and policy decisions.
• The PRA’s functions are exercised by the Bank and are funded by PRA fees, with the PRC responsible for consulting on and setting the level of those fees.
• The PRC is required to report annually to the Chancellor of the Exchequer on the adequacy of resources allocated to the PRA functions and the extent to which the exercise of those functions is independent of the exercise of the Bank’s other functions.^{footnote [1]}
• Since February 2016, the Bank has indemnified members of the PRC against personal civil liability on the same terms as the members of Court.^{footnote [2]}

The PRA’s statutory objectives for the year 2022/23, which underpin its forward-looking, judgement-based approach to supervision, are:

• a general objective to promote the safety and soundness of the firms it regulates;
• specifically for insurers, to contribute to the securing of an appropriate degree of protection for those who are, or may become, insurance policyholders; and
• a secondary objective to, so far as is reasonably possible, act in a way which facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying out regulated activities.

Under the FSM Bill currently before Parliament, the PRA has a proposed new secondary objective to facilitate international competitiveness of the UK economy and its growth over the medium to long term, subject to alignment with international standards. The PRA’s plans to implement this objective, as enacted by Parliament, are set out in its business plan 2023/24.

On 8 December 2022, HMT issued ‘Recommendations for the Prudential Regulation Committee’.^{footnote [3]} This sets out aspects of the Government’s economic policy to which the PRC should have regard when considering how to advance the PRA’s objectives, and when considering the application of the regulatory principles in FSMA.

FSMA also requires the PRA to review, if necessary, revise, and publish annually its strategy in relation to how it will deliver its statutory objectives. The strategy is set by the PRC, in consultation with the Bank’s Court of Directors. The PRA’s strategy was published in the PRA business plan 2023/24, in May 2023.

Annual report of the PRC to the Chancellor of the Exchequer

This is the Annual Report by the PRC to the Chancellor of the Exchequer under paragraph 19 of Schedule 6A to the Bank of England Act 1998 (as amended). It relates to the period of 1 March 2022 to 28 February 2023. The PRA publishes this report as part of its commitment to transparency.

Background

Since 1 March 2017, the PRA has been part of the legal entity of the Bank of England. The PRC is a statutory committee of the Bank and is responsible for the exercise of the Bank’s functions as the PRA. The PRC is on the same statutory footing as the Bank’s Monetary Policy Committee (MPC) and the Financial Policy Committee (FPC). The PRA Annual Report summarises the PRC’s responsibilities and the statutory framework under which the PRA operates. Under this statutory framework, the PRC is responsible for strategy, policy, and rulemaking, and the adoption (with the approval of the Bank’s Court of Directors and within the overall framework set by the Bank) of the budget for the PRA. These functions cannot be delegated.

The performance of the PRA functions

The PRA has published two approach documents setting out how it advances its statutory objectives. The PRA does not seek to operate a zero-failure regime. This is a key principle underlying the PRA’s approach to supervision. Each year, the PRC sets the PRA strategy and business plan, and adopts the PRA’s budget. These are based on the PRA’s approach to supervision, the PRA’s operating model, and its risk tolerance, all agreed by the PRC. During 2022/23, the PRA has also been planning for its future approach to policy, as set out in DP4/22 – The Prudential Regulation Authority’s future approach to policy, with regards to its expanded role and the regulatory obligations introduced by the FSM Bill.

The adequacy of resources

The PRA is fully funded by fees paid by regulated firms. The PRA consults each year on the allocation of fees among firms and has the ability, after consultation, to raise additional funds during the year for material changes. The PRA received three responses to its fees consultation proposals in 2022/23, which did not result in changes to the proposals set out in CP4/22 – Regulated fees and levies: Rates proposals 2022/23.

The PRC seeks to ensure that the PRA’s financial and non-financial resources are appropriately allocated to the work that best advances its objectives. In making judgements on the allocation of resources, the PRC takes into account a wide range of relevant considerations. These include the wider legislative and policy framework under which the PRA operates, including the duty to have regard to certain factors under FSMA, the Legislative and Regulatory Reform Act 2006 and the Financial Services Act 2021 effective 1 March 2023. The PRC also takes into account HMT’s recommendation letter, which was updated on 8 December 2022 (more information available on the Prudential Regulation Committee page), and contains aspects of the Government’s economic policy to which the PRC should have regard when considering how to advance the PRA’s objectives, and the application of the regulatory principles set out in FSMA.

The PRC oversees the allocation of the PRA’s resources to a combination of assurance work on individual firms and sectors, sectoral stress testing, policymaking, and investment in multi-year programmes that respond to changes in the external environment and risk profile of regulated firms. Work on multi-year programmes can span a range of areas, such as supporting the implementation of the Future Regulatory Framework (FRF) Review, data and technology, reform of Solvency II insurance regulation, preparation for the implementation of Basel 3.1 standards, operational resilience, and investment in data and technology.

The PRC also receives and reviews regular updates on the PRA’s performance and on how the PRA’s financial and non-financial resources are allocated and monitored, as well as how any resource risks are being mitigated through performance and assurance reporting, discussions of papers prepared by staff, and PRC members’ regular interaction with the PRA, including meetings with senior management and other staff. In addition, PRC members have the benefit of their own engagement with industry through meetings and events across the year. Regular reporting to PRC covers: progress against strategic aims; budget and headcount position; staff turnover; technology availability; and the PRA’s risk profile. The reports and other evidence provided to the PRC during the year indicate whether the PRA has used its financial and non-financial resources to deliver its functions, in line with its business plan.

The Bank’s second and third lines of defence are also applied within the PRA. This includes the Bank’s risk management framework, compliance function, internal audit function, and the Audit and Risk Committee of Court.

The PRA made substantial progress against its strategic priorities in its 2022/23 business plan. The PRA’s budget is set within the wider context of the Bank’s overall budget policy. As set out in this report, the PRA increased resources in the year due to its increased responsibilities related to rule-making and investment in data and technology. In the light of this increase in resourcing, the PRA has sought to restrain further cost growth for 2023/24 and has made reprioritisation decisions to support this. The PRA continues to invest in technology to maintain and improve its operational effectiveness. The PRA’s technology improvement programme is prioritised in the context of the work relating to the Bank’s wider technology estate which requires significant investment to be in step with new developments, restraining the speed with which the PRA is able to make improvements. This could constrain the PRA’s ability to deliver its strategic ambitions if it were to persist over time.

In 2022/23, the PRA final outturn was £4.7 million above budget due to higher than budgeted allocated support costs, for example for central functions and pension costs. The higher costs were offset by additional income received in the year. This is explained further within the 2023/24 fee rates consultation.

The extent to which the exercise of PRA functions is independent of other Bank functions

The PRA has a number of safeguards in place to ensure that it retains sufficient operational independence, including the independence of the PRC and the funding and reporting arrangements set out in FSMA and the Bank of England Act 1998.

The PRC is independent in all its decision-making functions, which include making rules and the PRA’s most important supervisory and policy decisions. The PRC also maintains its independence by ensuring that actual and potential conflicts of interest across its members are identified and managed on a continual basis, and by having its own internal infrastructure and processes that supplement Bank-wide arrangements. PRC members’ remuneration is determined by the Bank’s Remuneration Committee (see the ‘Report of the Remuneration Committee’ section of the Bank of England Annual Report and Accounts).

The PRA is located within the Bank, and contributes to effective policymaking on financial stability. Roles and responsibilities of the Bank and the PRA are distinct, and functions are discharged in line with the Basel Core Principles. For example, the Bank has legislation-driven arrangements in place to ensure that its functions as the UK’s resolution authority, and its supervisory functions (which are exercised in its capacity as the PRA) are operationally independent from one another, and has issued a statement setting out these arrangements.

The PRC is structurally separated from the FPC and MPC by having different external memberships. The PRC and FPC hold all meetings separately, except those to discuss matters of mutual interest (for example, when conducting the annual concurrent stress test). The FPC has specific powers of direction over prescribed macroprudential measures, and can make recommendations to anyone with the purpose of reducing risks to financial stability, including the PRA. This can sometimes mean that the FPC takes decisions that constrain the actions determined by the PRC.

The fee income generated from regulated firms can only be used for the functions covered by the statutory framework that the PRA operates within. The PRA’s budget covers its direct costs, as well as support costs charged by the Bank, including those for central functions such as technology, finance, and human resources. The Bank’s external auditors review the allocation of support costs charged by the Bank, and provide external assurance that costs have been allocated appropriately (see the ‘Financial statements: Report of the Independent Auditor’ section of the Bank of England Annual Report and Accounts).

Senior leadership team