PRA focuses on regulatory reporting with 2 Final Notices in 3 days

Regulatory reporting is a hot topic for the PRA. In ‘Dear CEO’ letters in 2019 and 2021 the PRA said that accurate regulatory reporting “is the foundation of effective supervision” and “essential for us to advance our primary objective to promote the safety and soundness of PRA-authorised firms.” This has now manifested itself in Final Notices imposing financial penalties on two banks relating to the accuracy of their regulatory reporting.

Metro Bank

On 22 December 2021 the PRA published a Final Notice imposing a penalty of £5.3m on Metro Bank plc for breaches of PRA Fundamental Rules 2 (“a firm must conduct its business with due skill, care and diligence”) and 6 (“a firm must organise and control its affairs responsibly and effectively”). The breaches relate to misreporting of the bank’s risk weighted assets (RWAs) in 2016 –19.

PRA regulated banks must meet minimum regulatory capital targets set by the PRA, to ensure they can absorb losses in periods of stress. One driver of the minimum regulatory capital level a bank must hold is the is the riskiness of a bank’s assets. Assets are weighted based on the risk that each asset presents; the higher the amount of RWA that a bank has, the more capital it is required to hold.

Banks are required to submit reports to the PRA as part of the Common Reporting framework, which includes quarterly reporting on the bank’s current assessment of its RWA. To do this, banks must assign each of their assets, including loans, to the appropriate category depending on exposure and counterparty and apply to the assets in each of those categories the percentage risk weighting prescribed in the PRA Rulebook.

In January 2019 Metro Bank announced to the market that it was making an adjustment to its assessment of its RWAs of approximately £900m, with the result that the bank’s capital ratio decreased and it had to raise more capital.

Following an investigation Metro Bank was found by the PRA to have applied the incorrect risk-weightings to categories of loans in its book. Specifically, the bank had misinterpreted a PRA rule which meant that certain exposures secured by mortgages on commercial immovable property should have been assigned a 100%, rather than a 50% risk weighting. The PRA found that the circumstances leading to this misinterpretation included shortcomings in the firm’s governance (including escalation), controls (including role and responsibilities) and resourcing.

Relevance for fast growing firms

The Metro Bank findings are particularly relevant for fast growing firms, such as challenger banks and fintech firms. Many of the PRA’s findings appear to have as their root cause the rapid growth and expansion plan pursued by Metro Bank since it was established in 2010. The PRA found that the bank had failed to ensure development of, and investment in, governance arrangements and systems and controls to keep pace with its growth.

The case illustrates the challenges that fast growing firms face in seeking to create and manage complex systems and controls for a business that is rapidly changing. This theme has been highlighted by the PRA before and also echoed in FCA communications to payments and e-money firms. As new technologies and the Covid-19 pandemic accelerate the growth of new financial services market entrants, it is a theme that is likely to continue to grow in importance for regulators.

Standard Chartered Bank

The Metro Bank Final Notice comes two days after the PRA published a Final Notice imposing a penalty of £46.5m on Standard Chartered Bank (SCB), relating to the accuracy of its reporting to the PRA of its USD Gap 2 metric (a measure of USD liquidity assuming a lock out from certain wholesale funding and foreign exchange markets).

As with Metro Bank, the PRA found that SCB had not complied with Fundamental Rule 6 referring to shortcomings with its arrangements concerning escalation of miscalculations and reporting, processes for notifications to the PRA; controls and testing of reporting accuracy and availability of human resources to investigate.

The PRA also made related findings in that matter relating to SCB’s compliance with Fundamental Rule 7 (dealing with regulators in an open and co-operative way, the PRA’s equivalent of the FCA’s Principle 11).