The Prudential Regulation Authority (PRA) has recently released its priorities for international banks and designated investment firms operating in the United Kingdom for 2024 through its “Dear CEO” letter, emphasising the need for strong governance, risk management, and controls to identify, assess, and successfully minimise risks in a competitive operational environment. And PRA’s primary priorities in 2024 are as follows:
Risk Management and Controls
PRA advised non-bank financial institutions (NBFI) to address equity financing difficulties raised in the 2021 and the subsequent “Dear CEO” letters on fixed income financing. Additionally, the following were underscored as its primary concerns:
- Recommends firms avoid segregating risk management and instead consider its ramifications for other businesses.
- Places exclusive attention on counterparty credit risks and secured financing, particularly in relation to non-bank financial institutions.
- Encourages firms to improve their abilities in detecting and evaluating correlations among multiple clients’ financing activities.
- Emphasises market depth, as quantitative tightening diminishes financial system reserves.
- Advocates for the adaptation of risk management frameworks to dynamic macroenvironments, encompassing the potential risks posed by distributed ledger technologies and generative AI.
Financial Resilience
The key message of the Prudential Regulation Authority (PRA) to financial institutions is to emphasise the importance of managing financial resilience in the face of challenging and uncertain global economic conditions. This involves:
- Maintaining robust treasury management.
- Effectively managing credit portfolios.
- Anticipating ongoing engagement with the PRA on counterparty and credit risk.
- Urging to prepare for the implementation of Basel 3.1 standards.
- Proactively considering changes in funding and liquidity conditions.
- Addressing climate-related financial risks by developing processes to identify, measure, manage, and mitigate these risks.
Operational Resilience
As per the supervisory statement 1/21, the firms must demonstrate the ability to remain within impact tolerances for all important business services (IBS) by March 2025. The PRA anticipates inclusion of the following in the firms’ operational resilience programmes:
- Should have a clear plan to identify and rectify vulnerabilities affecting IBS delivery.
- Resource identification for each IBS.
- Conduct tests using severe yet plausible scenarios to learn from operational disruptions.
- Scenarios should include cyber-related disruptions to understand recovery needs.
- Boards and senior management should actively oversee the delivery of their firms’ operational resilience programme.
- Engagements with third-party providers should be managed in line with supervisory statement 2/21 and firms should consider the impact of outsourcing and third-party relationships on IBS.
- As the RTGS Core Ledger is scheduled to be replaced in June 2024, RTGS Account Holders are expected to manage changes appropriately, participate in the Bank of England’s testing, and go-live activities.
Data Risks
PRA signifies to the financial institutions that accurate, timely, and comprehensive regulatory returns are the foundation of efficient supervision.
- They demand that firms take remedial actions and maintain a steadfast commitment to regulatory reporting in light of the shortcomings they identify in data, governance, systems, and production controls that are associated with regulatory reporting.
- PRA also specifies that targeted supervisory tools and skilled person evaluations will continue to be utilised in this domain through 2024.
Expected Actions from Financial Institutions
Thus, financial institutions are expected to take compelling actions in response to the “Dear CEO” letter from the Prudential Regulation Authority (PRA) regarding its 2024 priorities:
- PRA encourages firms to incorporate precise information, structures, processes, and capabilities into their risk management and governance frameworks.
- The PRA prioritises the need to sustain a robust risk culture, fostering inclusivity and diversity, and establishing guidelines for succession of board and executives.
- It expects firms to have innovative risk management strategies due to emerging technology threats.
- Be forward-thinking in scenario planning to manage extreme tail events effectively.
Consistent with the enumerated priorities, the PRA will persist in overseeing and requesting confirmation that the governance, risk management, and control frameworks of firms are adjusting to the evolving environment.
How Macro Global Empowers International Banks to Address the PRA's 2024 Dear CEO Letter
Macro Global, with its industry leading SCV Forza and SCV Alliance platforms, can directly address the critical areas outlined by the PRA’s Dear CEO letter, helping international banks achieve FSCS compliance, focus on financial & operational resilience, and data governance, and enhance their overall risk management framework.
Addressing Key PRA Priorities:
- Macro Global’s data cleansing and enrichment processes ensure clean, accurate data for stress testing, scenario planning, and risk management.
- Automated reporting with SCV Forza and SCV Alliance platforms improves data collection, validation, and reporting processes, verifying data accuracy and completeness.
- SCV Forza’s data analytics capabilities help banks prioritise remediation efforts based on risk classification (e.g., High, Medium, Low).
- Macro Global’s consultants provide guidance on implementing effective data governance practices, verifying data accuracy and completeness.
- Enables comprehensive audit trials and data reconciliation, fostering transparency and accountability for regulatory scrutiny.
- Macro Global’s solutions ensure adherence to regulatory reporting requirements, minimising the risk of penalties and regulatory interventions.
- Integration with FCA, Companies House, and other trusted sources enhances data quality and compliance.
- Secure data transmission through encryption and robust access controls minimise cyberattack threats.
Macro Global’s solutions empower banks to achieve demonstrably high data quality, operational resilience, and effective controls, ensuring compliance with the PRA’s latest directives and fostering a solid foundation for long-term success.
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