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    UK Authorities Publish Multiple Regulatory Updates in October 2022

    The Bank of England (BoE) published results of a systemic risk survey and issued an update on the progress of the joint data transformation program for the financial sector in UK. The Prudential Regulation Authority (PRA) published a consultation paper (CP12/22) on risks from contingent leverage and issued letters to directors of credit unions, chief financial officers, and CEOs of PRA-regulated firms regarding feedback on the annual assessment of credit unions, thematic findings on IFRS 9 expected credit loss accounting (as part of the review of 2022 written auditor reports), the supervision of climate-related financial risk, and the Climate Biennial Exploratory Scenario exercise of BoE. The Financial Conduct Authority (FCA) announced the cessation of one- and six-month synthetic sterling LIBOR at the end of March 2023 and published a consultation paper (CP22/19) on creation of a baseline financial resilience regulatory return. Finally, BoE and FCA jointly published a discussion paper (DP5/22) on artificial intelligence and machine learning and a survey on machine learning in the financial services sector in UK in 2022.

    Below are the key highlights of these recent updates: 

    • The Systemic Risk Survey was conducted among UK banks and building societies, large foreign banks, asset managers, hedge funds, insurers, pension funds, large non-financial companies, and central counterparties. The 2022 systemic risk survey revealed that the perceived probability of a high-impact event occurring over both the short-term and the medium-term, in the UK financial system, has increased significantly. Cyber-attacks remain the most cited risk to the UK financial system, followed closely by inflation and geopolitical risks; however, pandemic risk remains among the most frequently cited perceived risk to the financial system. Moreover, inflation risk is considered the most challenging risk to manage for firms, followed closely by cyber risk.
    • The communication on joint data transformation program highlights the start of phase two and the new use cases and sets out plans for taking forward the recommendations for the phase one use cases. The new use cases for phase two of the program involve Incident, Outsourcing and Third Party reporting (OATP), Commercial Real Estate (CRE) database, Retail Banking Business Model data, and review of prudential data collection from solo regulated firms. The use case on asset reporting for insurers was removed from scope due to lack of resources. Regarding update on the phase one use cases, BoE and FCA agreed to accept, in principle, all of the seven recommendations made by the joint transformation programs industry committee. BoE and FCA will add these recommendations to their future roadmap for transformation if there is found to be a business case for them.
    • FCA announced that the publication of one- and six-month synthetic sterling LIBOR will continue for a further three months after the end of 2022, until March 31, 2023, and these settings will permanently cease immediately after final publication on March 31, 2023. FCA suggests that issuers and holders of outstanding bonds referencing sterling LIBOR need to agree to convert these bonds to fair alternative rates. Lenders and borrowers will also need to agree appropriate arrangements for any outstanding loans referencing sterling LIBOR. FCA is currently seeking views on when the three-month synthetic sterling LIBOR setting could cease in an orderly fashion and further informs market participants having contracts referencing 3-month synthetic sterling LIBOR to prepare for its cessation in due course.
    • Consultation on financial resilience regulatory return. FCA seeks comments, until December 02, 2022, on proposed rules to introduce a new financial resilience regulatory return for solo-regulated firms by replacing the current FCA Financial Resilience Survey data collection (formerly “Covid-19 Impact Survey”). The proposed new regulatory return aims to reduce the administrative and financial burden that an ad hoc survey places on firms and increase the quality and consistency of financial resilience data received from solo-regulated firms. The consultation applies to all FCA regulated firms.
    • Consultation on risks from contingent leverage. PRA seeks comments, until February 03, 2023, on proposals to update the PRA’s supervisory expectations for firms undertaking an Internal Capital Adequacy Assessment Process (ICAAP) in relation to the risks from contingent leverage, and to introduce a new data reporting requirement for collecting data on trading exposures where these risks may most likely arise. The proposals in this consultation paper would help the PRA and firms identify, monitor, and manage contingent leverage risk and would improve its ability to monitor the evolution of these risks with more granular data, helping the PRA take targeted action where relevant. PRA expects the implementation date for the proposed changes will come in effect by July 01, 2023.
    • Letter on annual assessment of credit unions by PRA. The Letter discusses the findings from the assessment and highlights that credit unions across the UK continue to face a very challenging business and operating environment. PRA expects all credit union boards should continue to be proactive in regularly monitoring their prudential position. By the end of December 2022, credit unions should review their financial projections to ensure that these are realistic, especially with regards to the anticipated income and expenditure over the next 36 months. The letter is addressed to directors of all credit unions.
    • Letter on review of 2022 written auditor reports by PRA. The letter provides thematic feedback to both firms and auditors from PRA’s review of written auditor reports received in 2022. The main thematic findings are briefly set out in this letter, with detail provided in the two annexes. The first annex covers thematic findings on IFRS 9 expected credit loss accounting (ECL). The second annex covers thematic findings on accounting for climate-related financial risks. The letter also sets out observations on disclosure and benchmark reform. The letter is addressed to chief financial officers of selected PRA-regulated deposit-takers.
    • Letter on supervision of climate-related financial risk by PRA. The letter provides a list of areas including governance, risk management, scenario analysis, and data, where, by now, firms would be expected to demonstrate capabilities in meeting supervisory expectations, sets out thematic observations on firms’ levels of embeddedness, and provides examples of effective practices identified. The letter draws on PRA’s supervision of firms of all sizes, as well as engagement with specific firms, the thematic climate work and the findings from the Bank’s Climate Biennial Exploratory Scenario exercise results published in May 2022. The letter is addressed to CEOs of PRA-regulated firms.
    • Discussion paper on artificial intelligence and machine learning. BoE and FCA published the discussion paper in response to the AI Public-Private Forum (AIPPF) final report, which made it clear that the private sector wants regulators to have a role in supporting the safe adoption of artificial intelligence in UK financial services, as well as a wider background of domestic and international developments regarding artificial intelligence regulation. The purpose of this discussion paper is to share and obtain feedback on the potential benefits, risks, and harms related to the use of artificial intelligence in financial services, how the current regulatory framework could apply to artificial intelligence, whether additional clarification may be helpful and how policy can best support further safe artificial intelligence adoption. The comment period will end on February 10, 2023.
    • Survey on Machine Learning. The survey builds on the 2019 survey, the AIPPF final report, and the wider domestic and international discussion about the use of machine learning in financial services. In publishing the findings, BoE and FCA demonstrate their commitment to monitoring the state of machine learning deployment, improve their collective understanding, and support the safe and responsible adoption of machine learning technology in UK financial services. The survey results show that number of UK financial services firms that use machine learning continues to increase and firms expect the overall median number of machine learning applications to increase by 3.5 times over the next three years.


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    Keywords: Europe, UK, Banking, Systemic Risk Survey, Cyber Risk, Reporting, Data Transformation, Commercial Real Estate, LIBOR, ICAAP, Credit Unions, IFRS 9, ESG, Climate Change Risk, Disclosures, CBES, Regtech, Artificial Intelligence, Machine Learning, ECL, PRA, BoE, FCA

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