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    UK Authorities Issue Updates, Finalize Policy on Model Risk Management

    May 25, 2023

    The Prudential Regulation Authority (PRA) finalized the model risk management principles for banks, the policy statement PS5/23 on risks from contingent leverage, and PS4/23 on moving senior managers regime forms from the PRA Rulebook. The Bank of England (BoE) published a notice (2023/03) on statistical reporting requirements for banks, while the Financial Conduct Authority (FCA) proposed changes to the remuneration rules for dual-regulated firms and changes to the FCA sourcebooks to reflect the planned withdrawal of the Tailored Support Guidance regarding the Consumer Credit (CONC) and Mortgages and Home Finance. In another development, the UK and European Commission published a draft memorandum of understanding (MoU) on regulatory cooperation in financial services.

    PRA published the supervisory statement SS1/23, which sets out expectations on model risk management by banks, and the policy statement PS6/23, which provides feedback to the responses to the consultation CP6/22. The policy statement is relevant to all regulated UK-incorporated banks, building societies, and PRA-designated investment firms whereas the expectations in the supervisory statement only apply to firms that have internal model approval to calculate regulatory capital requirements for credit risk (Internal Ratings Based approaches), market risk (Internal Model Approach), or counterparty credit risk (Internal Model Method). Based on the responses to the consultation (CP6/22), PRA expects all firms regardless of size to manage the risks associated with models and apply the existing supervisory expectations relevant to them and their particular models, including attestations and self-assessments where applicable. The final supervisory statement has been amended to add implementation guidelines for firms that are granted permission to use internal models to calculate regulatory capital for the first time after the publication of the supervisory statement.

    PS6/23 will go in effect on May 17, 2024. Firms that first receive permission to use an internal model to calculate regulatory capital after the publication of this policy will have 12 months from the grant of that permission to comply with the expectations in SS1/23. In the first year following policy implementation, PRA will assess the overarching model risk management frameworks and practices for a sample of firms with permission to use internal models to calculate regulatory capital. Going forward, PRA will also provide an update on the approach for all other firms, including "Simpler-regime Firms," at a future date, once the definition of a "Simpler-regime Firm" has been finalized.

    Below is a summary of the additional regulatory updates from UK authorities:

    • PS5/23 provides feedback to responses to the consultation paper CP12/22 on risks from contingent leverage. Based on the consultation responses, PRA made minor changes to the reporting requirements and added a clarification on the business lines and trade structures in scope of the Internal Capital Adequacy Assessment Process (ICAAP) expectations and on how to assess the materiality of contingent leverage risks to a firm’s business. The expectations for firms undertaking an ICAAP will take effect on the date of publication of this policy statement, while the reporting requirement for firms subject to a leverage ratio minimum requirement (LREQ firms) will take effect on January 01, 2024, with a first reporting reference date of June 30, 2024.
    • PS4/23 provides feedback to responses to the consultation CP2/23 regarding moving senior managers regime forms from the PRA Rulebook. The rules will come into effect on May 11, 2023. The Senior Managers and Certification Regime, or SM&CR Form A (long form) will be updated to increase the length of employment history in due course and simultaneously with the update of the Connect system.
    • In the Statistical Notice 2023/03, BoE announced that, by May 19, 2023, it will adjust the applicable ratio for cash ratio deposits (CRDs) and issue call notices to CRD payers. This CRD ratio will be applied to average eligible liabilities in excess of GBP 600 million over the previous six end-calendar months. CRDs are non-interest-bearing deposits lodged with BoE by eligible institutions (that is, banks and building societies), which have reported average eligible liabilities in excess of GBP 600 million over a six-month calculation period. The level of CRD of each institution is calculated twice yearly (in May and November).
    • FCA is seeking comments, until June 09, 2023, on proposed changes to the remuneration rules for dual-regulated firms. The proposals in this consultation seek to amend proportionality thresholds that allow smaller, less complex dual-regulated firms to be excluded from some of the remuneration rules by increasing the total assets threshold and changing the additional criteria that firms with over GBP 4 billion of total assets must meet, remove the requirement for smaller, less complex dual-regulated firms to apply the rules on malus and clawback, align some minor differences between the rules and the PRA Rulebook, including those relating to the identification of dual-regulated firms Remuneration Code Staff, and make corresponding changes to the non-Handbook guidance. The consultation is applicable to credit institutions (banks and building societies), designated investment firms, firms from overseas that carry on activities from an establishment in the UK. Based on the feedback received, FCA expects to publish the policy statement and final rules and guidance in the fourth quarter of 2023.
    • FCA is seeking comments, until July 13, 2023, on changes to incorporate aspects of the Tailored Support Guidance into the Consumer Credit (CONC) and Mortgages and Home Finance: Conduct of Business (MCOB) sourcebooks to reflect the planned withdrawal of TSG. The purpose of this consultation was to provide a stronger framework for firms to better support customers facing payment difficulties by incorporating relevant aspects of the TSG into the Handbook. Based on the feedback received, FCA will publish a final policy statement, including the response to feedback, in the second half of 2023. FCA expect the rules to come into force in the first half of 2024 and propose to withdraw the TSG at the same time.

     

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    Keywords: Europe, UK, Banking, Basel, Regulatory Capital, Credit Risk, IRB Approach, Market Risk, Internal Model Approach, Counterparty Credit Risk, Statistical Notice, ICAAP, Reporting, Leverage Ratio, SM&CR, PRA Rulebook, Cash Ratio Deposits, Remuneration, Mortgage Lending, Model Risk Management, Operational Risk, Consumer Credit, FCA, BoE, PRA

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