On 29 April 2022, the PRA published Consultation Paper 5/22 ‘The Strong and Simple Framework: a definition of a Simpler-regime Firm’ (CP5/22).
In CP5/22, the PRA sets out proposals for introducing a definition of a ‘Simpler-regime firm’ and follows on from Discussion Paper 1/21. The PRA’s implementation of a definition would be the first step in designing a strong and simple framework. A Simpler-regime firm would be subject to a simpler, but robust, set of prudential rules in the future. The PRA also considers that publishing the proposed definition also provides the benefit of giving firms early visibility of a key building block of the future simpler regime.
The PRA proposes to introduce a number of objective and transparent criteria for assessing whether a firm meets the definition of a Simpler-regime firm. The PRA proposes a firm must meet all of the scope criteria:
- A maximum size threshold of £15 billion of total assets, where total assets are as defined in the financial reporting framework and calculated using the average of the firm’s total assets it was required to report during the previous 36 months in accordance with Rule 7.1 of the Regulatory Reporting Part of the PRA Rulebook.
- A firm must have an on-and off-balance sheet trading book business that would be equal to, or less than, both of the following thresholds: (i) 5% of the firm’s total assets; and (ii) £44 million.
- The sum of a firm’s overall net foreign exchange position, as defined in Article 351 in the Capital Requirements Regulation (CRR), must be equal to or less than 2% of the firm’s own funds; and a firm must have no commodity positions.
- A firm must not have any internal ratings based (IRB) approvals to meet the definition of a Simpler-regime firm. Firms that wish to develop IRB models and submit an IRB application would be able to do so, while continuing to meet the Simpler-regime Firm definition. A firm would only cease to meet the definition when the model has regulatory approval, and hence will be using the model to calculate its capital requirements going forward.
- The firm’s activity is primarily based in the UK, and focused on UK-based customers or counterparties. The PRA proposes that at least 85% of a firm’s credit exposures must be to obligors located in the UK, where exposures means the exposures reported in COR001a, table C 09.04. In calculating these exposures to UK obligors and to obligors in all countries, a firm should use the geographical location of exposures reported in COR001a , table C 09.04, and exclude the exposure classes referred to in points (a) to (f) of Article 112 of the CRR.
The PRA proposes to exclude from the definition of a Simpler-regime firm firms providing certain clearing, settlement and custody services (excluded services):
- Firms that, as any part of their business activity, provide clearing, settlement, custody or correspondent banking services (including by acting as an intermediary) to another bank or building society, wherever based. The affected services would include providing the other bank or building society with access to the facilities or services of financial market infrastructure (FMI) of which the firm is a direct or indirect member or participant, and also providing access to an exchange, other trading facility, payment system of any other financial market utility or infrastructure.
- Firms that operate payment systems.
The PRA proposes that the assessment of whether a firm is a Simpler-regime firm should be made at the highest level of the UK consolidation group. This would mean a firm meets the definition if it and the UK consolidation group of which it is part, and all the banks and building societies within the UK consolidation group, meet the scope criteria. This is achieved when the criteria other than the excluded services are met by the firm, the UK consolidation group on a consolidated basis, and each of the banks and building societies within the UK consolidation group; and the criteria concerning excluded services are met by the firm and each of the banks and building societies within the UK consolidation group.
The PRA is minded to propose in future consultations that a Simpler-regime firm would be automatically in scope of the intended simpler regime. It would also look to consult on a mechanism that allows firms to opt out of the regime.
The deadline for comments on CP5/22 is 22 July 2022.
The PRA plans to consult on other aspects of the simple regime layer of the strong and simple framework, including the requirements that would apply under this regime, in early 2023. The second set of proposals are likely to follow in 2024.
The PRA will publish a Policy Statement on the definition of a Simpler-regime late 2022 or early 2023.