On 6 September 2022, the Prudential Regulation Authority (PRA) published a letter from its CEO, Sam Woods, to Mel Stride MP, Chair of the Treasury Committee, providing a response to an earlier letter from Ms Stride regarding the PRA’s proposed definition of a Simpler-regime Firm.
The letter provides thoughts on the following points but these are not yet firm positions as the PRA is still considering the responses from its earlier consultation on the definition of a Simpler-regime Firm:
- The lack of clarity on what the PRA’s overall strategy would be when developing the Strong and Simple Framework meant that firms did not know whether the Simpler-regime Firm thresholds were appropriate.
The PRA’s current plan, once the definition of Simpler-regime Firm is settled, is to publish a consultation focused mainly on the non-capital aspects in the first half of 2023 and capital related elements in 2024.
At this point, Mr Woods thinks it likely that there will be at least one other layer between the simplest firms captured in its consultation and the full Basel standards that apply to the largest firms.
- The £15 billion balance sheet cap on the Simpler-regime Firm should be – at least – brought into line with the minimum requirement for own funds and eligible liabilities (MREL) £25 billion balance sheet threshold, to prevent additional complexity.
Mr Woods has an open mind on this Strong and Simple threshold question. He notes however, that the crucial point to appreciate is that the threshold will set the limit for the first layer of simplification. Additionally, a higher threshold might be good for those additional firms brought in by the regime, but less good for smaller firms who might experience less simplification.
- By setting upper limit thresholds within the Strong and Simple Framework, cliff-edges are being created, and it is not yet clear how firms would transition between layers within the framework.
The PRA set out some thinking on this issue in its earlier Discussion Paper, and this thinking was reflected in the proposals in its consultation paper. The proposal that the size limit applies to total assets averaged over a 36 month period was designed to give growing firms time to prepare to leave the simpler regime. The basic challenge is that a simpler regime cannot be developed for smaller firms without introducing new thresholds of some kind.
- The requirement for 85% of a firm’s obligors to be based in the UK in order for a firm to qualify for the Simpler-firm regime may lead to existing customers who live abroad being de-banked by their lender, or prospective customers living abroad having fewer lenders from which to secure a mortgage or a loan.
The PRA is considering carefully how the proposed design of this criterion might affect specific types of customer. As it considers the responses, it will also continue to have regard to relevant international standards from the Basel Committee.