In June, the PRA issued a Consultation Paper (CP) on recovery planning (CP9/17). This CP proposed a new supervisory statement that would supersede the existing SS18/13 (on the same subject) and would include some additional requirements. The key aims of this proposed supervisory statement are; to help improve the quality of Recovery Plans, and to make these plans more credible and usable in a stress.
SS18/13, which was updated in January 2015, showed the importance of a good governance and decision-making processes for producing and updating Recovery Plans and how that process should link the three key areas of Recovery Indicators, Recovery Stress Scenarios and Recovery Options. The process needed to be integrated into the overall risk management and governance framework of the firm to be efficient, alongside the risk appetite, stress testing and ICAAP processes.
Why is SS18/13 being superseded?
Since SS18/13 was updated, the PRA has had over two years of assessing Recovery Plans. It appears that the quality of some Recovery Plans lags significantly behind best practice, partly because of lack of engagement by senior management and the board in the Recovery Planning process. The PRA also thought that many Recovery Plans would be difficult for senior management to navigate in a stress situation, with compliance taking priority over usability – possibly another example of the tick-box mentality that some risk teams can fall into.
So what are the key new requirements proposed by the PRA?
First, is the requirement to do fire drill exercises. The exercises, that effectively simulate the requirement in a live environment, are seen as a good way to engage senior management in the whole Recovery Planning process. They would also test the governance arrangements, the management information capability and how Recovery Options could be executed in practice. The proper engagement of senior management and the board would help improve the quality of Recovery Plans.
The second key requirement proposed is to produce a “concise implementation guide” or “Playbook” that can be quickly digested and implemented by senior management in a stress situation. The third key requirement is that the Recovery Plan should include the full governance processes for the Recovery Plan – i.e. how it is produced, reviewed, signed off and, if Recovery Options are required, how they are implemented.
For firms with justifiably simple recovery plans, the draft SS is clear that playbooks are not required and that fire drill exercises are likely to be smaller in scale and potentially lower in frequency than for larger and more complex firms (it also allows for supervisory discretion on the frequency of fire drills). This helps ensure proportionality in any additional work required to produce a playbook or conduct fire drill exercises and recognises the costs and benefits involved.
So what are benefits of improving the quality of your Recovery Plan and the processes for its production?
The benefits include; less time interacting with the regulator and the many internal stakeholders involved; a more integrated and efficient approach to governance involving group and subsidiary plans to interlock, risk appetite, including consistent models for stress-testing, ICAAP and the Recovery Plan; and a more usable document in the event of a crisis.
Consultation closes in September 2017, so Jaywing will be keeping a close eye on developments as clearly this is an area of critical focus that embraces your entire organisation.