Prudential Regulation Authority Rulebook

2.1

Firms are reminded that once a formal internal model application has been submitted to the PRA, there is limited opportunity for firms to make substantive changes. Firms should therefore make sure their applications are stable and approved by their internal governance processes prior to formal application. Where firms become aware that they may need to make changes during the application period, these should be discussed with their usual supervisory contact as soon as possible. Where changes are material, a new application is likely to be required. Alternatively, firms themselves have an option to ‘stop the clock’ on the current application. Neither of these options should be approached lightly. If firms believe that significant model changes are likely to continue into the formal application phase, they are encouraged to consider delaying their application to the PRA and to discuss options with their usual supervisory contact. In this respect, the pre-application process is a means to help firms verify they are on the right path before they submit an application.

2.2

The PRA can approve an internal model application only where it is satisfied that the model has met all the Directive tests and standards (T&S). Approval must be based on this requirement^[4] and not an ‘on-balance’ judgement. Some firms have proposed applying internal management loadings to models to help deal with known areas of weakness which cannot be fully fixed ahead of the formal application. In some cases, such adjustments might help firms to demonstrate that specific areas of the model meet the relevant T&S (for example, the Directive calibration standard of 99.5% over one year).^[5] However, all areas of the model must meet the Directive requirements and the use of more generic management loadings cannot be used by firms as a mitigant where the model does not meet the required T&S.

2.3

Irrespective of the progress of the internal model application, firms should have an alternative approach that they can use if they fail to gain model approval after submitting an application, and ensure that they have a clear understanding of the actions they would take in those circumstances. For example, a merger or restructuring may make the existing standard formula inappropriate and therefore the applicant would need to have a contingency plan in the event of non-approval.