A resilient and future-proofed UK financial system that can flex and regroup quickly in the face of large-scale shocks: that is the ambition of the nation’s three most significant financial watchdogs.
On 5 July, the Bank of England, the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) published a joint paper proposing an approach designed to boost the resilience of the UK’s financial network.
Its thrust has major implications for treasurers: the organisations suggest that the financial system’s overall resilience should be enhanced by leveraging improvements to the services that institutions and financial market infrastructures (FMIs) provide to non-financial corporates.
Partly – the paper has its eye on a range of potential risk factors, also including spells of market turbulence. In their introduction, Bank of England deputy director Jon Cunliffe, FCA chief executive Andrew Bailey and PRA head Sam Woods note:
“Operational disruption can impact financial stability, threaten the viability of individual [finance] firms and FMIs, or cause harm to consumers and other market participants in the financial system. Firms and FMIs need to consider all of these risks when assessing the appropriate levels of resilience within their respective businesses.”
They add: “Dealing with cyber risk is one important element of operational resilience. But this paper sets out a broader approach, which addresses how the continuity of the services that firms and FMIs provide might be maintained – regardless of the cause of disruption.”
With that in mind, the paper explains, the approach it proposes is driven by three, key concepts:
In its second chapter – which is fully devoted to the value of enhancing business services – the paper stresses:
“Operationally resilient business services provided by [institutions] and FMIs directly support resilient economic functions, enabling people to buy goods, borrow money and markets to transact. Resilient business services therefore support financial stability.
“The UK financial system is resilient if its economic functions can continue to operate during potentially disruptive incidents at a [financial] firm, FMI or across groups of firms. Resilience of the financial system depends on both individual firms and FMIs, and the interconnections between them.”
It adds: “Continuity of business services is also critical to the viability of individual [financial] firms and FMIs, and disruptions can cause harm to consumers and market participants.
“The supervisory authorities [ie, the Bank, FCA and PRA] believe that if firms’ and FMIs’ boards and senior management focus on the operational resilience of their most important business services, this would assist the supervisory authorities in furthering their objectives.”
Not as far as the discussion paper’s authors are concerned.
“A business services approach,” the paper points out, “is an effective way to prioritise improvements to systems and processes. Firms and FMIs may currently prioritise the upgrading of their IT systems by: i) age; ii) those most prone to failure; iii) anticipated cost of financial failure; or iv) cost of upgrade against available budget.”
However, it notes: “Such considerations may be inconsistent with an outcome focused on continuity of business services.”
The report explains: “Looking at the systems and processes on the basis of the business services they support may bring more transparency to – and improve the quality of – decision-making, thereby improving resilience.”
It continues: “A focus on business services could help drive specific and measurable activities – including investment – that increase operational resilience. [Financial] firms and FMIs could set target metrics for the continuity of important business services.
“Firms’ and FMIs’ ability to meet their target metrics could then be tested, enabling them to take action as necessary.”
As Cunliffe, Bailey and Woods assert in their introduction, a resilient financial system “is one that can absorb shocks rather than contribute to them”.
They add: “The financial sector needs an approach to operational risk management that includes preventative measures, and the capabilities – in terms of people, processes and organisational culture – to adapt and recover when things go wrong.
“As recent high-profile disruptive events have shown, the speed and effectiveness of communications with the people most affected, including customers, is an important part of any firm’s or FMI’s overall response to an operational disruption.”
The key questions that the paper asks are:
Read the full discussion paper here.
Stakeholders are invited to submit comments to Jack Armstrong at the Bank of England, Chris Walmsley at the FCA and Jon Newton at the PRA by email.