Sam Woods, CEO of the UK's Prudential Regulation Authority (PRA), gave a speech in November 2020 introducing plans for a 'simpler' regime of prudential regulation for small banks and building societies.

Mr Woods explained that Brexit allows the PRA to work on bringing in such a regime, but was careful to emphasise that this was not the start of a race to the bottom. Instead, this marks a development of regulatory principles, guided by three 'lodestars': high regulatory standards; responsible openness; and dynamism. With these in mind, the PRA intends to move to a fully prudential graduated regime.

The ultimate goal of a graduated prudential framework would be that the applicable regulatory rules widen and become more complex as a firm grows larger and/or undertakes a wider range of activities that are more complex, converging eventually on the Basel regime.

The PRA proposes putting in place the simplest regime for the smallest firms in the first instance, early on. However, the threshold for the 'smallest' firms is still to be decided, as is the simplification of their applicable requirements. The latter could consist of a simpler framework so that regulatory complexity (and costs) increase as the firm grows, or lower liquidity requirements which increase as the firm's funding model becomes more complex, or a combination of the two.

It is clear that more thinking needs to be done about how this would look in practice. This change seems to be driven by the goal for UK banking regulation to be dynamic and proportionate, and it is reassuring that the PRA is wary of making dramatic regulatory changes immediately upon Brexit and is keen to avoid a race to the bottom. If/when it materialises, this proposed change could be very useful for new entrants into this space, providing them with lower upfront costs in acknowledgement of the limited negative externalities in the event of their failure.