The PRA's first consultation on its proposed simplified regime for smaller non-systemic banks and building societies (the Small Banks Regime), published earlier in 2022, has generated a fair amount of feedback from different stakeholders. As well as banks operating in the UK, this includes industry bodies, such as UK Finance, and the UK's Parliament's Treasury Committee which scrutinises government and regulatory activity in the UK financial services sector. Following our post earlier this year, this post considers the regulator's proposals further and the feedback so far received.

Introduction

The PRA’s consultation deliberately focuses on the scope of the Regime that would apply to the smallest firms subject to it (the Simpler Regime). This is partly because these firms form the majority of smaller firms that would be subject to the Regime and would, therefore, mean that the largest number of firms would benefit from simplification as soon as possible. It is also intended to provide relevant firms with early visibility of, and the opportunity to feed back on, a key building block of the Simpler Regime, and allow both the Simpler Regime, and the Small Banks Regime as a whole, to evolve alongside the introduction of further prudential regulation, in particular the Basel 3.1 standards (scheduled for January 2025).

Simpler Regime – proposed scope

The proposed scope of the Simpler Regime is intended to capture existing and new small banks which operate primarily in UK domestic markets and are focused on deposit-taking from, and lending to, UK corporates and households. The PRA has developed a definition of ‘Simpler Regime firm’ based on objective and transparent criteria reflecting this population and indicates that it would capture 61 firms, including 34 building societies, of the 198 firms it regulates (as at 01.12.22). Key aspects of the criteria include:

• size: average total assets of £15bn or less across the previous three reporting years (and if not yet subject to reporting requirements, a reasonable forecast of not more than £15bn at the bank’s first reporting point);
• domestic activity: at least 85% of credit exposures are to UK counterparties;
• trading activity: an on and off balance sheet trading book business of not more than: (i) 5% of the bank’s total assets; and (ii) £44m;
• internal ratings based (IRB) approach: the bank does not apply the IRB approach to calculating risk-weighted amounts for credit risk; and
• clearing, settlement and custody services and payment system operation: the bank does not provide any of these services, including as an intermediary to another bank or building society wherever based, or operate a payments system.

Application of scope criteria

To fall within the definition, a firm must meet all the criteria and it should be applied on a solo basis for a standalone firm and, where a firm is part of a UK consolidated group, at the highest level of that group – which means that the firm, any other banking entity within the group, and the UK consolidated group on a consolidated basis [1] need to meet the criteria. Where a firm is a subsidiary of a non-UK entity, but otherwise meets the definition criteria, it will be permitted to apply for a waiver or modification to be deemed a ‘Simpler Regime firm’.

While, in general, if a firm meets the criteria it will be a Simpler Regime firm, the PRA makes clear that it may need to assess, on a case-by-case, basis, a firm’s eligibility and potentially exclude it from the Regime if the firm’s complexity or risk profile is not consistent with it.

Industry reaction

The PRA’s feedback statement indicated that the majority of respondents support the regulator’s proposals on the Small Banks Regime as a whole and it will, of course, be important to await the PRA’s consultation response for comprehensive feedback to the Simpler Regime’s proposed scope (scheduled for late 2022/early 2023). That said, respondents, including UK Finance, the Treasury Committee having launched an inquiry and issued a call for evidence, and a number of banks operating in the UK, have raised several points for the PRA’s consideration. These include:

• size: increasing the £15bn threshold to be raised to £25bn to: (i) be in line with the upper end of the MREL £15 - 25bn balance sheet threshold; and (ii) allow the few additional firms that are above the £15bn threshold and best placed to compete effectively with the UK’s larger systemic banks, but also hit with disproportionately high prudential requirements’ compliance costs (commonly known as a the ‘squeezed middle’), to benefit from the Simpler Regime and thereby be in position to more easily provide the greater competition and consumer choice needed in the UK banking sector.

It will be interesting to see how the PRA responds to this point – its consultation specifically asks for views on whether the threshold is sufficiently high, which would suggest it is minded to raise it, but the feedback statement, in response to its discussion paper, also notes that the most commonly suggested threshold was £5bn. The regulator indicated in early September 2022, through a letter to the Treasury Committee, that it remains ‘open minded’ on the threshold;

• domestic activity: reconsidering the 85% UK exposures criteria, given this may lead to existing and new overseas customers being dropped, not taken on or having more limited loan and mortgage choices. Lending services to UK expatriates secured on a UK property or exposures in the Channel Islands, Gibraltar or the Isle of Man could be included in the definition of ‘UK exposures’ given they are all closely linked to the UK and arguably less, or no less, risky than lending to UK residents. The PRA indicated in the same letter to the Treasury Committee that it will continue to consider carefully the implications of the domestic activity threshold, which has been designed to ensure international banks do not unintentionally avoid application of the Basel standards.
• timing: working to implement the Simpler Regime at the same time as the Basel 3.1 standards so that firms meeting the scope of the Regime are aware in advance of the capital requirements under both regimes, able to assess these against their projected rate of growth and make an informed decision as to which regime to join.

Given this is the first building block in a regime which would be entirely new in the UK and take a number of years to deliver, it will be interesting to see the extent to which the PRA revises its proposals in light of feedback, particularly in relation to the entry threshold, and the extent to which the shape of the Simpler Regime, and the Small Banks Regime as whole, starts to change as a result.

[1] The criteria in relation to clearing, settlement and custody services and payments services operation does not need to be met by the UK consolidated group.