Prudential Regulation Authority Annual Report 2023/24

1 March 2023 to 29 February 2024

Presented to Parliament pursuant to paragraph 19(4) of schedule 1ZB of the Financial Services and Markets Act 2000 (FSMA 2000).

The Annual Report also includes a summary of the Prudential Regulation Authority’s (PRA) Secondary Competition Objective (SCO), and the Secondary Competitiveness and Growth Objective (SCGO), as introduced by the Financial Services and Markets Act 2023 (FSMA 2023), and the Annual Report of the Prudential Regulation Committee to the Chancellor of the Exchequer on the adequacy of the PRA resource and the independence of the PRA functions.

This Report is made by the PRA under FSMA 2000 and FSMA 2023. It is made to the Chancellor of the Exchequer and covers the year ended 29 February 2024.

The report covers the requirements of paragraph 19 of schedule 1ZB of FSMA 2000.

The Bank of England Annual Report and Accounts for the year ending 29 February 2024 are available on the Bank of England’s (the Bank) website. The PRA’s audited accounts for the reporting year ending 29 February 2024 are set out in the ‘Financial review of 2023/24’ 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 29 February 2024’ 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;
• the way in which the PRA has discharged its functions during the period to which the report relates; and
• the extent to which, in their opinion, the PRA’s objectives have been advanced (including its secondary objectives under section 2H FSMA), 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). Further information on how the PRA’s secondary objectives have been advanced is set out in the competitiveness and growth: embedding the PRA’s new secondary objective report (hereafter, the SCGO Report).

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 closing date for comments is Tuesday, 29 October 2024.

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 (hereafter ‘the Bank’). 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 the PRA’s further work as a regulator. The PRA 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 the PRA’s 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 receives a request for disclosure of this information, it will take your indication(s) into account, but the Bank cannot provide 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

This year, as we move into the second decade of the Prudential Regulation Authority’s (PRA) existence, we have once again seen the importance of strong standards and robust supervision; the need to continue taking timely action to ensure the financial and regulatory system can appropriately manage new and evolving risks; and the possibilities laid open to us from innovation and new technologies.

The PRA has ensured that UK banks, building societies, and insurers remain resilient, with strong capital and liquidity positions as well as robust governance and risk management. This was illustrated in the results of the 2022/23 annual cyclical stress test, which tested major UK banks’ resilience to a severe global and domestic downturn and interest rate shock, as well as in the 2022 cyber stress test and the 2022 insurance stress test.

In terms of the regulations underpinning such resilience, 2023/24 saw progress in a number of key areas. We have set out policy on the new UK insurance regime (Solvency UK), which will come into effect over 2024. And the final package of post-crisis capital reforms for banks (Basel 3.1), as well as a regime that is simpler but robust for smaller banks (Strong and Simple), made big strides forward.

However, high-profile cases like the failures of Credit Suisse and Silicon Valley Bank – and the effective resolution of Silicon Valley Bank UK – in March 2023 serve as a reminder that we cannot be complacent. The PRA, alongside the Bank of England in its role as resolution authority, has engaged in domestic and international efforts to learn lessons from those episodes, including by supporting plans for targeted additions to the Bank’s resolution toolkit to manage the failure of smaller banks.

Elsewhere, FSMA 2023 marked a milestone in UK financial regulation, granting the PRA wider rule-making responsibilities to design and implement regulation that is robust and better suited to the UK’s financial sector, as well as new powers to oversee critical third-party service providers to the financial system (alongside the Bank and the Financial Conduct Authority). And we continue to make progress following our consultation on the PRA’s approach to policymaking, including by establishing a Cost Benefit Analysis Panel made up of external experts.

The PRA was also given a new secondary objective to support the medium- to long-term growth and international competitiveness of the UK, subject to that aligning with relevant international standards. To support its new objective, the PRA hosted a major international conference on the role of financial regulation in competitiveness and growth, ensuring we could hear directly from industry participants, academics, and regulators. I am pleased to see the Bank’s Independent Evaluation Office is reviewing the new secondary objective, and their findings will usefully inform our future activity.

As ever, I am hugely grateful to my colleagues on the Prudential Regulation Committee for the valuable insights and expertise they bring to our decision-making, and to all PRA staff for their hard work and dedication in achieving these outcomes over a busy and challenging year.

29 July 2024

Foreword by the Chief Executive

Last year marked the 10-year anniversary of the Prudential Regulation Authority (PRA), and this was accompanied by a major update to our powers and objectives through the Financial Services and Markets Act 2023 (FSMA 2023).

Among other changes, FSMA 2023 gave us a new secondary objective to support the competitiveness and growth of the UK economy. This new objective now sits alongside our primary objectives for safety and soundness and insurance policyholder protection, and our secondary competition objective. Accordingly, we have begun a major programme of work to support this objective – which is summarised in detail in a separate report.

FSMA 2023 also represents a significant expansion of the PRA’s policymaking responsibilities, reflecting Parliament’s decision to delegate these powers to us as part of the post-Brexit framework for financial regulation in the UK. Reflecting this, 2023/24 saw us make significant progress on a range of important policies:

• We published the first set of near-final ‘Basel 3.1’ rules. These go towards completing the post-financial crisis reform of capital standards for banks.
• We continued to push forward on reforms to insurance rules (‘Solvency UK’), including by publishing a policy statement on reporting and disclosure. This reform package will reduce bureaucracy in the regime and support insurers to invest in a wider set of productive assets.
• We published the eligibility criteria for our ‘strong and simple’ prudential framework for smaller banks. This will improve proportionality and promote competition while maintaining robust standards.
• Jointly with the Financial Conduct Authority (FCA) and Bank, we consulted on our new powers to oversee third parties that provide vital services to the financial system.
• We published an updated approach to enforcement, including new proposals to streamline cases.
• We finalised our rules and expectations on solvent exit planning for non-systemic banks and building societies, which has been an important strategic priority for the PRA.

2023/24 was also notable for turmoil in the international banking sector – most obviously the failures of Credit Suisse and Silicon Valley Bank, both of which had material UK operations. I’m very grateful to PRA staff (and staff across the wider Bank) for their work in navigating those stresses with minimal impact on UK financial stability. These incidents serve as a reminder of the importance of safe and sound banking and insurance sectors as an essential foundation of the economy. Alongside policymaking, robust supervision is crucial for delivering this outcome and this activity continued to comprise much of the PRA’s work throughout 2023/24. Stress testing is another vital element of our approach, and in July 2023 we published the results of our latest ‘annual cyclical scenario’ stress test for the major UK banks, which found that the sector would be resilient to a very severe domestic and international recession.

We are always striving to be a better regulator, and to make the best possible use of new technology and data capabilities to be more effective and proportionate. This will be a major focus of the banking data review which launched in the past year. Relatedly, I am encouraged by the progress made in 2023/24 to improve our regulatory processes, including the timeliness of authorisations.

We are operating in an environment of rapid technological change, which is affecting both the financial services industry and wider society. The PRA is committed to supporting innovation while ensuring that any new risks are carefully managed. Among other things, over the past year we have: published a joint feedback statement (with the FCA and Bank) on artificial intelligence and machine learning; continued to work with HM Treasury on the future regulatory regime for cryptoassets; published a letter setting out our expectations on risks relating to digital money and money-like instruments; and continued to monitor closely the impact of digitalisation on PRA-regulated firms.

The PRA’s 11th year of operation has been one of its most intense periods for many staff and I am very grateful to all my PRA colleagues for their fantastic work in delivering our objectives for the British public.

29 July 2024

Prudential Regulation Committee (PRC)

The PRC’s terms of reference provide for 12 members. Five members are Bank of England staff: the Governor and four Deputy Governors (the Deputy Governors for Financial Stability; Markets, Banking, Payments & Resolution; Monetary Policy; and Prudential Regulation), and a member appointed by the Governor with the approval of the Chancellor. The Committee also includes the Chief Executive of the Financial Conduct Authority (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 Bank’s functions as the PRA and the extent to which the exercise of those functions is independent of the exercise of the Bank’s other functions.^{footnote [4]}
• Since February 2016, the Bank has indemnified members of the PRC against personal civil liability on the same terms as the members of the Court.^{footnote [5]}

The PRA’s statutory objectives for the year 2023/24 underpin its approach to supervision, which is forward-looking, judgement-based, and focused on segmented and holistic key risks. These objectives 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;
• a secondary objective^{footnote [6]} to, so far as is reasonably possible, act in a way that facilitates effective competition in the markets for services provided by PRA-authorised persons in carrying on regulated activities; and
• a further secondary objective to, so far as is reasonably possible, act in a way that facilitates, subject to aligning with relevant international standards: (a) the international competitiveness of the UK economy (including, in particular, the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

On 8 December 2022, HMT issued ‘Recommendations for the Prudential Regulation Committee’.^{footnote [7]} 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 and, 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. The PRA’s strategy was set out in the PRA Business Plan 2024/25 which was published in April 2024.

Annual report of the PRC to the Chancellor of the Exchequer

This is the Annual Report by the Prudential Regulation Committee (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 2023 to 29 February 2024. 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 and rule-making, and the adoption (with the approval of the Bank’s Court 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: one is the PRA’s approach to banking supervision; the other is its approach to insurance supervision. A key principle underlying the PRA’s approach to supervision is that it does not seek to operate a zero-failure regime.

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 of which are agreed by the PRC.

In 2023, the PRA published its consultation paper (CP) CP27/23 – The Prudential Regulation Authority’s approach to policy, which sets out its approach to policymaking with regard to its expanded role and the regulatory obligations under the regulatory framework as amended by FSMA 2023. CP27/23 builds on discussion paper DP4/22 – The Prudential Regulation Authority’s future approach to policy.

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 2023/24, which did not result in changes to the proposals set out in CP7/23 – Regulated fees and levies: Rates proposals 2023/24.

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 (such as factors introduced by the Financial Services Act 2021 and FSMA 2023) and the Legislative and Regulatory Reform Act 2006. The PRC also takes into account HM Treasury’s recommendation letter, which was updated on 8 December 2022 (more information is available on the PRC 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 section 3B 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:

• implementing the outcomes of the Future Regulatory Framework (including embedding the new competitiveness and growth objective), and the Government’s aim to deliver a Smart Regulatory reform (supporting growth);
• delivering a package of measures to reform the UK regulatory regime for insurers;
• implementing Basel 3.1 standards and the Strong and Simple framework; and
• strengthening operational resilience and mitigating the risk of disruption, including through cyber stress tests.

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. These include 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 2023/24 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 the resources that are allocated to its increased responsibilities related to rule-making and investment in data and technology. To support this, the PRA made reprioritisation decisions to restrain further cost growth for 2023/24.

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 Bank’s wider technology estate, where there is a programme of work underway to address obsolescence by implementing more widely adopted industry-standard solutions to replace older bespoke applications. This is limiting the speed with which the PRA is able to deliver some of its strategic ambitions to improve its operational effectiveness.

In 2023/24, the PRA final outturn was £4 million below budget. This is because costs that are directly within PRA’s control, as well as pensions and depreciation, were all lower than budgeted. At the same time, support costs allocated to the PRA for services provided by the Bank’s central functions were higher than anticipated. The PRA received additional income of £2 million in the form of Retained Financial Penalties. As a result, there is a surplus of £6 million. This is explained further in CP4/24 – Regulated fees and levies: Rates proposals for 2024/25.

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 part of the Bank’s legal entity and contributes to effective policymaking on financial stability. The roles and responsibilities of the Bank and the PRA are distinct, and their 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 and co-ordinating system-wide exploratory scenarios. 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 and also supports 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

The senior leadership team at the PRA is below as at 29 July 2024^{(a) (b)(c)(d)}