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The PRA’s Supervisory Statement SS1/23 on Model Risk Management

Posted on May 31, 2023

The PRA (Prudential Regulation Authority) has released its initial Supervisory Statement on model risk (SS1/23) as a follow-up to the June 2022 Consultation Paper (CP6/22). The Supervisory Statement contains a few notable changes and non-changes, the most significant of which is to the scope of firms affected by the statement. Below we highlight Fintegral’s top three key takeaways from SS1/23:  

  • Scope: The scope of SS1/23 is now limited to firms with approval to use internal models (IM) to calculate their regulatory capital. The original consultation paper also included firms categorised as “Simple-regime Firms”, albeit with reduced requirements. The scope of the Supervisory Statement has been updated since the Consultation Paper due to the lack of a published definition of “Simple-regime Firms”. The Supervisory Statement now only includes the requirements for IM Firms. However, non-IM Firms can still use this statement as a guide towards a sound Model Risk Management Framework (MRM) and should expect a complementary Statement to SS1/23 by the PRA in the future.  

  • Model Definition: The provided definition of a model remains unchanged from the Consultation Paper and still includes processes that produce a qualitative output. The PRA acknowledged that this is broader in scope than the definition provided in SR11-7 but justified its necessity to capture tools such as AI/ML recommendation services under the definition of a model. They also note that this aligns with updates from other regulators, such as the Japanese Financial Services Agency, which made a similar increase in scope in 2021. To comply, Firms should update their model definition promptly and communicate the change to all model owners during the next model attestation period. 

  • Enactment & Review: The policy will take effect on the 17th of May 2024, and the PRA intends to assess the overarching MRM frameworks for a sample set of firms that use IMs to calculate their regulatory capital. 

Further reading:
Supervisory Statement SS1/23 
Policy Statement PS6/23 
Consultation Paper CP6/22 

For more information or if you have any questions please contact:

Dr. Andreas Peter
Managing Partner
Fintegral Deutschland AG
+49 160 583 40 66 

Alexander Mottram
Fintegral UK Ltd.
+44 748 7738 468

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