The PRA’s new ‘Simpler regime’ – Is your firm in or out of scope?

The Prudential Regulation Authority have taken another step towards implementing their vision of managing prudential risk for smaller financial institutions through the publication of CP 5/22, “The Strong and Simple Framework: a definition of a Simpler-regime Firm”. As the name suggests, this latest publication outlines the proposals for the defining characteristics of a firm that will be included in a simpler framework. In this article, I'll provide a summary of the proposals and some thoughts on the likely consequences of the definition.

WHO'S IN AND OUT OF THE PROPOSED NEW SIMPLER REGIME?

The PRA have presented their proposed definition of the type of firm likely to be included in the definition of a Simpler regime.

Two key criteria of ‘a Simpler-regime Firm’ have been outlined as follows:

1. The firm must accept deposits from, and provide lending services to, households and corporates who are registered in the UK (Minimum 85% of obligors should be registered in the UK).
2. The firm is to have a maximum of £15 billion in assets, as defined by the average of the last 36-months FINREP returns. If a bank has been in operation less than 36 months, then the average is taken over the life of the organisation to a maximum of 36 months.

Some of the issues raised in the original discussion paper such as “at what level does a firm become ineligible?” and “how does a firm move from the simpler regime to the more complicated supervisor framework?” have now been resolved. The proposed approach will allow for a more gradual transfer between the simpler framework and the more rigorous framework, should a firm grow in excess of £15 billion in assets.

It should be noted that the proposed definition does not yet suggest a solution for firms that either acquire the assets of another firm or dispose of their assets. These considerations will be addressed in the next stages of the development of the new supervisory regime.

DISQUALIFYING CRITERIA FOR A 'SIMPLER-REGIME FIRM'

If a firm meets the above criteria, they can be considered for inclusion in the simpler regime, but only if they do not participate in any of the following business activities:

1. The firm is Internal Rating Based (IRB). IRB is an advanced method of calculating risk weighted assets and, as such, it is assumed that the firm has the capabilities to meet the broader, more complicated supervisory standards.
2. The firm provides any type of clearing, settlement, or custody services for their customers.
3. The firm does not meet the existing definition of a small trading book business as defined in the Trading Book (CRR) part of the PRA rulebook. 
4. In addition, the size of the trading book must be 5% of the firm’s total assets and less than £44 million in total.

OUTCOME AND FUTURE TIMETABLE OF EVENTS

Based on the analysis completed by the Bank of England, up to 61 firms may be eligible for the Simpler Supervisory Framework, 34 of which are building societies.

Although this is a relatively small subsection of the firms currently under the supervision of the PRA (both in numbers of firms and total asset value), the importance of the PRA’s proposed actions lies in the future development of the UK banking sector.

By bringing the UK more in line with other leading countries’ treatments of smaller, less systemically risky banking organisations, the PRA is hoping to build a more competitive landscape for new entrants in the years to come. This is not a short-term exercise but one which will take many years to implement and, no doubt, many additional years before new banking entities begin to operate.

The consultation period for CP 5/22 closes on 27 July 2022. Following that date, the PRA expects to publish their proposals in two parts. The first part will focus on prudential regulation such as reporting, liquidity, and governance. The second set of proposals, not due until 2024, will focus on capital requirements.

Implementing a new supervisory framework for a subset of banks should never be completed in haste but, once this new approach is established, acknowledging the often overwhelming burden the existing regulations bring to smaller banks will begin to bear fruit.