As promised in early 2022, the PRA is now consulting on the next stage of its work to establish a `strong and simple' prudential framework for non-systemic banks and building societies.
The concept for the framework was set out by Sam Woods in his Mansion House speech in November 2020 and followed by a Discussion Paper (PDF 1.7 MB) in April 2021. In April 2022, a preliminary consultation proposed thresholds for the definition of `Simpler-regime firms' (see our article here), and laid out the timetable for a two-phase development of detailed prudential requirements. The first of these phases, looking at non-capital measures (liquidity and disclosure requirements), is now underway. Phase 2, focusing on capital, will follow in 2024.
The development of the simpler regime should be good news for smaller firms, although where they are already following the broader prudential framework there will be some work required to move to the new approaches. Where possible, the PRA has tried to mitigate cost impacts and the potential cliff-edge between the simpler and standard regimes through the use of transition periods and simplification of existing processes rather than the introduction of entirely new ones.
The story so far — which firms are eligible?
The simpler regime aims to mitigate the 'complexity problem' that can arise for smaller firms when the same prudential requirements are applied to all firms, but the costs of interpreting and operationalising those requirements are higher (relative to the associated public policy benefits) for smaller firms than for larger firms.
The criteria for determining whether firms qualify for the simpler regime are based on:
- Total assets — threshold of £20bn (amended from £15bn following consultation).
- Location of assets — they should primarily be located domestically.
- The scale of trading and foreign exchange activities — these should be minimal.
- An absence of holdings of commodities or commodity derivatives.
- Not applying an internal ratings-based (IRB) approach to credit risk.
- Not providing certain clearing, settlement, or custody services.
- Not being an operator of a payment system.
- Meeting certain requirements that relate to the firm's parent and consolidation group.
The PRA has confirmed (via its consultation on the implementation of the Basel 3.1 standards) that firms meeting the eligibility criteria on 1 January 2024 will be able to choose whether they wish to be subject to a new Transitional Capital Regime or the Basel 3.1 rules. For more on Basel 3.1 and the transitional capital regime, see our article here.
Liquidity and disclosures for Simpler-regime firms
Where a firm meets the Simpler-regime criteria, the PRA proposes the following changes to existing liquidity and disclosure requirements:
- Net stable funding ratio (NSFR)
- Applying a new `Retail Deposit Ratio' (RDR) to Simpler-regime firms to measure the extent of their use of relatively more stable retail funding. The PRA proposes to define the RDR as the ratio of a firm's retail funding to its non-capital funding (i.e. total retail deposits/total funding).
- The RDR is intended to be a simple measure based on definitions and data points already submitted to the PRA in quarterly reporting.
- A Simpler-regime firm would cease to be subject to the NSFR at the point that it had a moving average RDR of greater than or equal to 50% for four consecutive quarters — further guidance will be published on arrangements for new firms which may not have sufficient historical data to perform these calculations.
- The PRA included a simplified version of the NSFR, the sNSFR, in its January 2022 standards. It proposes to remove the sNSFR from the Liquidity (CRR) Part of the PRA Rulebook.
- Pillar 2 liquidity
- Generally, Pillar 2 liquidity guidance would not be applied to Simpler-regime firms, except where warranted in the case of a particularly material idiosyncratic risk or risks.
- A new, streamlined internal liquidity adequacy assessment process (ILAAP) template would be introduced for Simpler-regime firms.
- Liquidity reporting
- Simpler-regime firms would be excluded from the requirement to report four of the five Additional Liquidity Monitoring Metrics (ALMM) returns:
- C67 — Concentration of funding by counterparty.
- C69 — Prices for various lengths of funding.
- C70 — Roll-over of funding.
- C71 — Concentration of counterbalancing capacity.— The remaining ALMM return (C68 - Concentration by product type) would be adjusted to include only liabilities arising from products comprising more than 1% of the firm's total liabilities.
- The remaining ALMM return (C68 - Concentration by product type) would be adjusted to include only liabilities arising from products comprising more than 1% of the firm's total liabilities.
- A three-year transition period to H2 2024 would apply.
- Simpler-regime firms would be excluded from the requirement to report four of the five Additional Liquidity Monitoring Metrics (ALMM) returns:
- · Disclosures (Pillar 3)
- Introducing disclosure requirements that reflect the lower capacity of Simpler-regime firms to cause significant financial disruption.
- Listed Simpler-regime firms would not be required to disclose qualitative information on the processes under which regulatory metrics are measured and managed.
- Listed Simpler-regime firms would be required to make Pillar 3 disclosures for UK KM1 (Key metrics) and UK OV1 (Overview of risk-weighted exposure amounts).
- Non-listed Simpler-regime firms would be excluded from the requirement to disclose a Pillar 3 report.
- The Pillar 3 rules applicable to small and non-complex institutions (SNCI) would be removed after a three-year transitional period to H2 2024, after which SNCIs that are not Simpler-regime firms will be subject to the disclosure requirements applicable to `other' institutions in Article 433c of the Disclosure (CRR) Part of the rulebook.
Remuneration considerations
Alongside CP4/23, the PRA also published CP5/23 — `Remuneration: Enhancing proportionality for small firms'. Proposals in the consultation would:
- Amend the size threshold and wider conditions to define `small firms' in line with the proposed simpler-regime size threshold — meaning that firms meeting the eligibility criteria for the simpler regime would automatically meet the conditions for more proportionate remuneration requirements.
- Remove the requirement for these 'small firms' to apply rules on malus, clawback and buyouts.
- Provide clarity on how disclosure requirements apply for all proportionality rules.
'Small firms' would still be subject to the remaining provisions in the Remuneration part of the PRA Rulebook, including: MRT (material risk taker) identification, group application, remuneration policies, governance and controls, remuneration and capital, exceptional government intervention, risk adjustment (ex-ante), personal investment strategies, performance assessment and guaranteed remuneration and the high earners reporting requirement.
Next steps
Both consultations close on 30 May 2023, with the PRA proposing an implementation date of early H2 2024. The PRA also proposes to make available the rule modification enabling eligible firms to become Simpler-regime firms at least six months before this implementation date.
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