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New model risk management rules inc. simpler regime firms

Rules are changing!

The PRA has found evidence of poor Model Risk Management (MRM) when reviewing firms’ applications for internal regulatory model permissions and when reviewing approaches to expected credit loss accounting under IFRS 9.                             

This has led to an update of regulatory expectations for MRM.

The PRA issued a Supervisory Statement on MRM (SS1/23) on 17th May 2023, with a 12-month implementation date. It is rich in detail on good MRM principles.

The initial scope lies only with firms who have approved Internal Models (IM) for regulatory capital.

However, it also makes the following comments which are relevant to non-IM (internal model) firms. 

  • The PRA will 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 finalised.”  
  • Irrespective of scope of application of SS1/23, all firms regardless of size are already expected to manage the risks associated with models, as they would with any risk they are exposed to”.

So what does this mean in practice? 

  1. PRA sees SS1/23 as the first phase of introducing comprehensive model risk management into the Banking and Building Society segment across all models, not just stress testing models. 
  1. Phase two - will likely come once the definition of simpler-regime firms is confirmed. It will likely include the implementation of a more proportionate approach of SS1/23 to firms that do not use IMs but instead use standardised approaches for regulatory capital ie the so called ‘simpler-regime’ firms. 
  1. SS 3/18 Model Risk Management principles for stress testing models does continue to apply to non-IM firms. 
  1. Non-IM firms should use this window of opportunity to refresh their MRM principles on the back of SS1/23 and start to consider what would be a proportionate approach for them in preparation for the PRA providing its update for simpler-regime firms in phase two.

Check out a more in depth heads up produced for members by the Banking and Financial Services Sector Advisory Panel (BFSSAP).
Model Risk Management heads up on new rules

Content reviewed: 29 June 2023