Background

The existing prudential framework for UK banks and building societies, applying Basel standards to all UK deposit-takers, is disproportionately complex for small firms that are not systemically important or internationally active and therefore inhibits their development and growth. Through the introduction of the new Strong and Simple framework, the PRA is aiming to simplify the prudential requirements for these firms and reduce the costs of regulation, but without compromising their resilience.

The idea is that in its final form, the Strong and Simple framework will consist of a number of layered regimes, with requirements expanding and becoming more sophisticated as the size or complexity of a firm increases. Take a look at the PRA's initial April 2021 discussion paper (DP1/21) on the framework and related December 2021 feedback statement (FS1/21) for more details.

PRA consultations on Phase 1 of 'simpler regime' for the smallest banks and building societies

The PRA's work to date has focussed on development of the layer of prudential regulation that will apply to smaller banks, with simple business models (for example, challenger banks at the early stages of their development)  in the form of the 'simpler regime' (now the 'Small Domestic Deposit Taker' regime).

Phase 1 of this work led to the publication of the following:

By way of recap….the PRA proposed to create a new category of bank alongside “new and growing banks” that fall outside the proposed regime and those that fall under the ring-fencing regime.

Specifically, the regime would cater for UK banks or building societies which meet certain criteria including:

• being UK owned;
• holding less than £20 billion in assets (originally this was set at £15 billion)
• having upwards of 75% credit exposures located in the UK (subject to ensuring that its recent 3 year average  of such exposures is 85% or more  of its total relevant credit exposures);
• having limited exposure to FX and trading activity such that:
  • both on and off-balance-sheet trading remains below £44 million or 5% of total assets,
  • the firm’s overall net FX position does not exceed  a maximum of 3.5%, and an average of 2.5%, of own funds on the last day of at least 1 month in the last 3, and at least 6 months in the last 12;
• holding no position in commodities or commodity derivatives;
• use of the Standardised Approach to risk-weighting calculations; and
• no provision of interbank clearing or settlement services.

Where UK banks and building societies meet these requirements, the new regime permits eligibility for lighter touch reporting, disclosure, funding and liquidity requirements (subject to further threshold requirements in some cases).

For example, a bank within the regime that ensures half or more of its total funding is made up of retail deposits would be exempted from the PRA’s Net Stable Funding Ratio requirements.

What changes has the PRA made in the policy statement?

The PRA's policy statement implements its proposals  with the following limited changes:

• Renaming Simpler-regime Firm to SDDT (Small Domestic Deposit Taker), Simpler-regime Consolidation entity to SDDT consolidation entity, Simpler Regime to SDDT regime and Simpler regime criteria to SDDT criteria. According to the PRA, 'SDDT' is a more appropriate name as it is more informative about the type of firm that would be in the simpler prudential regime;
• Changing the modification by consent process for consolidation groups, so that the responsibility for certifying that the group meets the SDDT criteria on a consolidated basis and that the other firms in the group meet the SDDT criteria sits with the group’s CRR consolidation entity, rather than the solo entity. The SDDT consolidation entity is also responsible for notifying the PRA if the SDDT criteria cease to be met on a consolidated basis or by any firms in the group;
• Setting the implementation dates as 1 January 2024 for the rules relating to the definition of an SDDT, the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with glossary changes, application rules, definitions, as well as the disclosure rules, and as 1 July 2024 for the liquidity rules; and
• Other minor drafting changes to the rules to correct minor errors and improve readability.​

The appendices to the policy statement set out the related final PRA rules and policy (including a Statement of Policy 'Operating the Small Domestic Deposit Takers (SDDT) regime'), and the PRA has also published reporting instructions and templates – all of which are available from the policy statement's webpage here.

Next steps

The rules relating to the definition of an SDDT, and the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with Glossary changes, application rules and definitions took effect from 1 January 2024. ​

The rules on disclosure took effect from 1 January 2024. ​

Liquidity and reporting rules will take effect from 1 July 2024.​

In Q1 2024, the PRA and HM Treasury plan to consult on transferring parts of the Capital Requirements (Capital Buffers and Macro-Prudential Measures) Regulations 2014 (SI 2014/894) to PRA policy materials to enable the strong and simple reforms. This will then be followed by a policy statement, a statutory instrument, and implementation in Q4 2024.

The PRA plans to consult on simplifications to Pillar 2 and buffer requirements for SDDTs and SDDT consolidation entities in Q2 2024. This is Phase 2 of its work on the framework. When the PRA consults on further potential simplifications for SDDTs and SDDT consolidation entities, it intends to do so on the basis of proposing that simplifications would apply to SDDTs and SDDT consolidation entities without SDDTs or SDDT consolidation entities needing to consent to a further modification.

The latest edition of the Regulatory Initiatives Grid states that, as the regulators deliver the reforms, they remain conscious of firms’ planning processes. They have therefore amended the implementation timetable for Basel 3.1 standards accordingly, delaying it by 6 months to 1 July 2025.

Innovate Finance/Hogan Lovells 'Better Banking' report

Whilst the PRA has said that it intends that the SDDT regime should fully align with other areas of existing policy, including its approach to new and growing banks (as set out in SS3/21), obviously the regime remains something of a work in progress.

A recently published joint report by Innovate Finance and Hogan Lovells, 'Better Banking', refers to the Strong and Simple regime as 'an excellent start' in streamlining regulatory processes for challenger banks. However, the report goes on to comment that the 'piecemeal introduction of the regime makes it difficult for challenger banks to plan their financial requirements' which in turn affects their ability to attract investors for future growth. The paper made the following recommendations:

• The UK Government should require regulatory bodies to streamline/consolidate the rules that apply to banks during their early years (for example, aligning and clarifying the threshold criteria that determines the extent to which various regulatory regimes apply).
• Proportionate oversight and tailored reporting should be required for new and growing banks, particularly where their business models are simple, transparent and straightforward.

If you would like to discuss any aspect of the PRA's policy statement or would like to find out more about the Innovate Finance/Hogan Lovells 'Better Banking' report, please get in touch with one of the people listed above or your usual Hogan Lovells contact.

FCA/PRA joint policy statements on remuneration and proportionality for small firms

Also of note in relation to the regulatory regime for small firms is the publication by the FCA (PS23/17) and the PRA (PS16/23) of joint policy statements on remuneration and proportionality for such firms, making changes to proportionality thresholds and exempting firms meeting them from the requirements relating to malus, clawback and buyouts.​

For the PRA, the objective is to increase the proportionality of the remuneration regime by reducing the regulatory burden on small firms to a level more appropriate to the benefits arising from lowering risks to these firms' safety and soundness and to the UK financial system. ​Its policy intention remains that all firms within the same group must be subject to the same remuneration rules. A more proportionate regime is only applicable if all firms in the group, and the group as a whole, meet the conditions set out in the definition of small firms in the PRA Rulebook. The PRA has therefore amended the conditions in the definitions of 'small CRR firm' and 'small third-country CRR firm'.​

The FCA's changes make clear that the thresholds based on a firm's average total assets need to be met not just by each individual firm, but also by the group on a consolidated basis. The changes also explain how the various qualitative thresholds are to be applied where a firm is part of a group, making clearer which are relevant to an individual firm within the group and which also need to be met by the whole group​.

The policy statements were accompanied by the following related documents:

The FCA has also made consequential amendments to existing non-Handbook guidance to reflect the rule changes, namely FG23/4, FG23/5 and FG23/6.

The rule changes came into force on 8 December 2023 and apply to a firm's performance year starting on or after that date. The PRA supervisory statement and FCA non-Handbook guidance changes also apply from 8 December 2023.