The Prudential Regulation Authority (PRA) has issued PS15/23 covering The Strong and Simple Framework: Scope Criteria, Liquidity and Disclosure Requirements, finalising the first wave of rules for small firms. It’s also issued PS16/23, alongside the Financial Conduct Authority (FCA), on Remuneration: Enhancing proportionality for small firms.
Collectively, these papers reflect the regulator’s move towards a simplified regulatory landscape, in line with a firm’s size, scale and activities.
The most immediate change to the strong and simple framework relates to the overall regime and category names. Simpler-regime firms will now be called Small Domestic Deposit Takers (SDDTs), and simpler-regime consolidation entities will be called SDDT consolidation entities. This includes referring to the simpler-regime as the Small Domestic Deposit Takers (SDDT) regime. There are otherwise few changes to the previous consultation paper.
The SDDT regime – at a glance
The PRA has retained the £20 billion total asset threshold for firms to stay within the SDDT regime. It considered that anything over that threshold could pose a greater risk to financial stability and prevent meaningful simplifications to the prudential regime. Any lower thresholds could limit growth and negatively affect competition.
There are no changes to the limitations on trading activities, which are:
The PRA has also retained its domestic activity criteria, which requires at least 85% of SSDT credit exposures to be to UK obligors, including residential loans to individuals secured against UK land and buildings. It has also kept the smoothing mechanism for firms to meet that threshold over a 36-month average, without dropping below 75%.
These measures aim to avoid capturing international firms, which are potentially more complex and would fall under the Basel standards. Firms that don’t meet that criterion from 1 January 2024 over a 36-month period (but would over a shorter time-frame), or firms with overseas exposures that are either fees awaiting settlement or temporary overdrafts on client stock trades, can apply to the FCA for a modification.
The PRA will review the threshold criteria by the end of 2028.
The scope criteria will apply on a solo basis for firms that aren’t part of a consolidated UK group, and on a solo and group basis for firms that are. For UK consolidated groups, every firm must individually meet the scope criteria. While the SDDT regime is predominantly aimed at smaller firms, UK subsidiaries of foreign groups that meet the criteria on a solo basis can apply for a modification to qualify for the SDDT regime.
Staying consistent with previous consultations, small firms will need to opt into the final SDDT rules rather than falling into the regime by default. This is to allow small firms to follow Basel 3.1 if it is more appropriate for their unique business model.
The regulator is also conscious that the final SDDT capital rules aren’t final yet, and some firms may want to delay opting in until then, or they may want to opt in now but opt out further down the line.
The PRA will also allow firms to apply for the regime at any time, and is making provisions for a smooth transition out of the regime.
Timelines haven’t changed in the final rules and firms can apply to opt in from 1 January 2024. The phase 1 implementation date will be in H2 2024. While many firms may not be ready to opt in without further clarity over the capital requirements, the PRA doesn't see this as a significant barrier and has given flexibility for firms to join later.
Responding to industry feedback, the PRA has changed the Pillar 3 disclosure date for firms with year-ends between 1 January and 1 July 2024, that adopt the SDDT regime before that date. These firms can apply the reduced disclosure requirements for the 2023/24 year end.
Staying consistent with its earlier proposals, the PRA has kept the new retail deposit ratio (RDR) as a replacement for the simplified net stable funding ratio (NSFR) under the Basel standards.
In the final SDDT rules, the PRA has retained its plans to remove Pillar 2 capital add-ons and to simplify the internal liquidity adequacy assessment process (ILAAP) template.
The PRA has confirmed that SDDT firms won’t need to complete four of the five additional liquidity monitoring metrics (ALMM) returns (C67, C69, C70 and C71), and the remaining return (C68) will be simpler.
Other non-capital reporting will remain the same, and SDDTs meeting the retail deposit ratio requirements will no longer need to complete the net stable funding ratio template.
Transitional arrangements that allow small and non-complex institutions (SNCIs) that aren’t SDDTs to report quarterly, rather than monthly, will end on 20 June 2027.
The PRA hasn’t updated the proposed Pillar 3 disclosure rules. As such, listed SDDT firms must submit Pillar 3 disclosures covering liquidity ratios, risk-weighted assets and capital. Non-listed SDDT firms won’t need to make any Pillar 3 disclosures.
SNCIs will have an initial transition period, after which point they won’t need to make Pillar 3 disclosures either, but will be subject to the disclosure requirements for other institutions as per the PRA Rulebook for CRR firms (section 433c on Disclosures).
Alongside the above, the PRA and FCA have published their final rules on remuneration policies for small firms – with some clarifications. The aim is to create more proportionate remuneration rules for small firms, including exemptions on malus and clawback requirements, while applying consistency across groups.
The final rules include clarifications to the definition of small CRR firms and small third-country CRR firms.
There are also clearer rules on eligibility for firms that are part of a group that includes larger institutions, namely: in-group firms that are in-scope on an individual basis must have total average assets of £4 billion or less, and/or if they’re part of a UK consolidated group then that group must have average assets of £4 billion or less.
Alternatively, all in-group firms that are in-scope on an individual basis must have total average assets of £20 billion or less. If they’re part of a UK consolidated group then that group must have total average assets of £20 billion or less. They must also meet additional criteria in chapter 2A.1 or 2B.1 of the Remuneration Part of the PRA’s Rulebook.
The final rules took effect from 8 December 2023.
The PRA will publish details on phase two of the SDDT regime in Q2 2024, focusing on capital requirements, Pillar 2 and buffer requirements. Eligible firms will need to decide whether to opt into the new rules, or wait for further clarity on capital requirements before applying.
In the meantime, you can follow the transitional capital regime (also still to be finalised) or adopt Basel 3.1 and switch to the SDDT regime later.
It’s also important to remember that you can move out of the SDDT regime as more details emerge and you're better able to assess the implications for your unique business model.
For more insight and guidance, contact Kantilal Pithia and Paul Young.
