CP4/23 - The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms

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Responses are requested by Tuesday 30 May 2023.

Please address any comments or enquiries by email to: CP4_23@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:
Strong and Simple Hub
Prudential Policy Directorate
Prudential Regulation Authority
20 Moorgate
London
EC2R 6DA

1. Overview

1.1 This Consultation Paper (CP) sets out the first phase of the Prudential Regulation Authority’s (PRA) proposed simplifications to the prudential framework that would apply to Simpler-regime Firms.

1.2 As set out in CP 5/22 – ‘The Strong and Simple Framework: a definition of a Simpler-regime Firm’ and Discussion Paper (DP) 1/21 – ‘A strong and simple prudential framework for non-systemic banks and building societies’, the PRA seeks to mitigate the ‘complexity problem’ that can arise for smaller banks and building societies. This occurs when the same prudential requirements are applied to all firms, but the costs of understanding, interpreting, and operationalising those requirements are higher relative to the associated public policy benefits for smaller firms than for larger firms. The PRA’s ‘strong and simple’ initiative seeks to simplify the prudential framework for small, domestic banks and building societies, while maintaining their resilience and reducing barriers to growth.^{footnote [1]}

1.3 Since this would cause a major change in prudential policy applying to banks and building societies (‘firms’) in the UK and is likely to take a number of years to develop and implement, the PRA intends to implement it in stages. The PRA has started by developing a ‘simpler regime’ for the smallest firms. CP16/22 – ‘Implementation of the Basel 3.1 Standards’ sets out the proposed criteria that small firms should meet in order to qualify for the simpler regime. In summary, the proposed Simpler-regime criteria focus on:

• the size of a firm’s total assets;
• whether its assets are primarily located domestically;
• the small scale of its trading and foreign exchange activities;
• an absence of holdings of commodities or commodity derivatives;
• a firm not applying an internal ratings based (IRB) approach to credit risk;
• a firm not providing certain clearing, settlement, or custody services;
• a firm not being an operator of a payment system; and
• certain requirements that relate to the firm’s parent and consolidation group being met.^{footnote [2]}

1.4 The PRA proposes to split the development of the simpler regime into two phases:

• a Phase 1 that is focused on non-capital related prudential measures; and
• a Phase 2 that is focused on capital-related prudential measures.

1.5 This CP sets out the first phase of proposed simplifications that would apply to Simpler-regime Firms. These proposals consist of the following:

• new liquidity requirements for the application of the net stable funding ratio (NSFR);
• revisions to the application of Pillar 2 liquidity add-ons;
• a new, streamlined Internal Liquidity Adequacy Assessment Process (ILAAP) template;
• the removal of certain liquidity reporting templates;
• new Pillar 3 disclosure requirements for Simpler-regime Firms; and
• simplifications to certain proportionality approaches currently applicable in the PRA Rulebook.

1.6 These aspects were raised as significant by firms in their feedback to DP1/21. By taking a phased approach, the PRA aims to ensure the benefits of prudential simplification can be experienced by a large number of firms as soon as possible and respond to previous feedback from small firms on non-capital issues around liquidity, reporting, and disclosure.

1.7 This CP should be of interest to PRA-authorised banks and building societies, and prospective entities interested in, and currently applying for, authorisation as a deposit-taker.^{footnote [3]} It should be of particular interest to firms that expect to meet the proposed Simpler-regime criteria and firms that would wish to be treated in the same way as firms meeting those criteria.

Background

1.8 In DP1/21, the PRA sought views on developing a simplified prudential framework. The combined objectives of this framework would be to maintain the resilience of those firms, and the stability of the UK financial sector, while using simplified prudential regulation by removing or adapting rules which offer little prudential value for firms in scope. This could enhance effective competition and enable a dynamic and diverse banking sector in the UK, without making the sector more fragile, thereby increasing the sector’s efficiency and productivity, and contributing positively to its ability to facilitate the growth of the UK’s economy.

1.9 DP1/21 suggested the PRA could construct a strong and simple framework consisting of a series of layered prudential regimes, with requirements expanding and becoming more sophisticated as the size or complexity of firms increase. This approach would reflect the diversity of sizes and business models of firms that the PRA does not consider systemically important or internationally active. Given this new framework would represent a significant shift in the design of prudential regulation of firms, the PRA has started with the development of the layer for the smallest firms – the simpler regime. These are the firms most likely to experience the complexity problem.

1.10 In CP5/22, the PRA proposed draft scope criteria, which would be used to identify firms that may be eligible to enter the simpler regime. The PRA considered responses to CP5/22 and in CP16/22 proposed revised draft scope criteria – referred to as the ‘Simpler-regime criteria’. In this CP, the PRA proposes that firms meeting the draft ‘Simpler-regime criteria’ would be able to become ‘Simpler-regime Firms’ and apply the proposed simplifications.^{footnote [4]}

1.11 When developing the proposals set out in this CP, the PRA considered elements raised in response to DP1/21. Respondents to DP1/21 raised a number of concerns including on liquidity requirements and reporting, and Pillar 3 disclosure.

1.12 There was significant support from respondents for a liquidity framework that would be broadly based on existing rules but possibly with some modifications.^{footnote [5]} A significant number of respondents thought that Pillar 2 liquidity policy should be amended. In particular, respondents considered that the current calculation for intraday liquidity risk was overly complex and the results over-calibrated for the risk. Most respondents supported maintaining ILAAP documents, but advocated simplification, favouring the use of standardised templates and guidance. Additionally, some respondents felt that parts of the ILAAP that were not relevant for small firms could be dropped. Many respondents considered that existing liquidity reporting requirements to be costly and complex, and should be reduced.

1.13 The majority of respondents considered Pillar 3 disclosures to be overly complex and offer little value for small or unlisted firms. Respondents mostly favoured dropping disclosure requirements entirely or subsuming them within annual accounts.

1.14 The PRA has reflected further on these concerns, and on the experience gained this year from applying the NSFR. Therefore, this CP sets out a number of simplified liquidity, disclosure and reporting measures that would address a number of the concerns respondents raised in response to DP 1/21 and could be introduced expeditiously in Phase 1. In addition, the PRA intends to consider possible further changes to liquidity reporting requirements as part of implementing the Bank of England’s (‘the Bank’) plan for transforming data collection. The PRA considers the proposals set out in this CP would advance firms’ safety and soundness and make meaningful progress to reduce the complexity of the PRA approach, as well as improving its proportionality and consistency, by targeting prudential measures more precisely at the risks to which Simpler-regime Firms may be subject.

Structure of the CP

1.15 The implementation of the Simpler-regime would require policy to be made and changed across different topics. The proposals in this CP are structured as follows:

• Chapter 2 – Scope and levels of application – This chapter sets out the PRA’s proposed scope and levels of application for the proposals in this CP.
• Chapter 3 – Net stable funding ratio – This chapter sets out the PRA’s proposals to apply the Net Stable Funding Ratio (NSFR) only to Simpler-regime Firms that are subject to relatively greater stable funding risk, as measured by a new retail deposit ratio (RDR), and to remove the simplified NSFR.
• Chapter 4 – Pillar 2 liquidity – This chapter sets out the PRA’s proposals to generally not apply Pillar 2 liquidity guidance to Simpler-regime Firms, except where warranted in the case of a particularly material idiosyncratic risk or risks, and introduces a new ILAAP template for Simpler-regime Firms.
• Chapter 5 – Liquidity reporting – This chapter sets out the PRA’s proposals to exclude Simpler-regime Firms from the requirement to report four of the five Additional Liquidity Monitoring Metrics (ALMM) returns and adjust the remaining ALMM return.
• Chapter 6 – Disclosure (Pillar 3) – This chapters sets out the PRA’s proposals to streamline Pillar 3 disclosure requirements for firms with listed financial instruments and remove them for firms without listed financial instruments, and to remove the Small and Non-Complex Institution disclosure requirements.

Changes to PRA rules and policy materials

1.16 The proposals set out in this CP would result in changes to the following parts of the PRA Rulebook and existing policy materials: ^{footnote [6]}

Table A: Changes to PRA rules and policy materials

1.17 The amended SS and the new and amended SoPs are included in Appendices 2-5. Appendix 6 of this CP sets out the proposed draft rules in full. Where the text is being restated and not amended, it does not form part of this CP. In the draft ‘PRA Rulebook: CRR Firms: Simpler Regime Instrument’, annexes A and B show the full proposed new Simpler Regime – General Application Part of the PRA Rulebook and associated amendments to the Glossary, including the draft rules proposed in CP16/22. In Annexes A and B of the draft instrument, the further changes being consulted on in this CP are highlighted in yellow. In other Annexes of the draft instrument all proposed changes are being consulted on in this CP.

Impact on mutuals

1.18 The PRA has a statutory obligation to give an opinion on the impact of its proposals on mutual societies (s138K FSMA), hereafter ‘mutuals’, which refers to building societies, friendly societies, co-operative, and community benefit societies.^{footnote [8]} For the purpose of this CP, all references to ‘mutuals’ refer to building societies, which are the only group of mutuals within the proposed scope of application as set out in Chapter 2 of this CP.

1.19 FSMA requires that the PRA assess whether, in its opinion, the impact of the proposed rules on mutuals will be significantly different from the impact on other firms, and if so, provide details of the difference. The PRA anticipates the proposed scope for the simpler regime would capture a significant number of building societies, which would benefit from a simpler prudential regime. For the NSFR proposals, the proposed approach may require mutuals to calculate the RDR in addition to the funding limit present in the Building Societies Act (BSA). The PRA considered whether it would be more proportionate not to apply any funding standard to such firms, given this existing limit. However, the PRA decided to consult on applying the RDR framework to mutuals as the BSA funding limit is designed to place a restriction on the nature of mutual societies, and not as a mitigant for funding risk. As such the BSA limit does not include all sources of funding in its calculation.^{footnote [9]} For all other proposals, the PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

1.20 In making its rules and carrying out its policies, services, and functions, the PRA is required by the Equality Act 2010 to have due regard to the need to eliminate discrimination, to promote equality of opportunity, and to foster good relations between persons who share a protected characteristic and those who do not. In line with its responsibility under the Equality Act, the PRA has performed an assessment and considered the equality implications in formulating its proposals. The PRA considers that the proposals do not give rise to equality and diversity implications. The PRA will continue to consider the equality and diversity implications of the proposals during the consultation period, and in relation to further consultation concerning future operative proposals.

Interaction with other frameworks

1.21 In CP16/22, the PRA set out a proposal that firms that met the Simpler-regime criteria would not have to apply the proposed implementation of the Basel 3.1 standards. Instead, the PRA proposed that these firms could choose to enter a transitional regime based on current CRR provisions (the ‘Transitional Capital Regime’) during the interim period between the proposed implementation date for the Basel 3.1 standards and the future implementation date for a permanent risk-based capital regime for Simpler-regime Firms. The PRA also proposed that firms that met the Simpler-regime criteria would be able to choose to be subject, without delay to the proposed implementation of the Basel 3.1 standards should they prefer to do so.

Implementation

1.22 The PRA considers that the implementation date for the measures set out in this CP should be set to give eligible firms sufficient time to consent to a rule modification enabling them to become Simpler-regime Firms and prepare to implement the simplifications. The PRA also considers that the date should be set so firms that are subsidiaries of non-UK groups, but which otherwise meet the proposed Simpler-regime criteria, would have sufficient time to apply for the necessary modification. Therefore, the PRA proposes, based on these considerations, that the implementation date for the simplifications set out in this CP would be in early H2 2024.

1.23 The PRA also proposes to make available the rule modification enabling eligible firms to become Simpler-regime Firms at least six months before the implementation date for the simplifications set out in this CP. The PRA proposes to bring into force the proposed rules in the Simpler Regime – General Application Part at the same time as making the modification available.

1.24 The final implementation date for the simplifications outlined in this CP would be set when final rules are made.

Q1: Do you have any comments on the proposed implementation date and whether it would strike an appropriate balance between allowing firms to implement the measures set out in this CP quickly and providing sufficient time to implement the measures?

Further simplification proposals

1.25 As outlined in CP 5/22, the PRA plans to publish proposals for simplified prudential requirements in distinct phases. The proposed second phase for the simpler regime will focus on the capital framework. The PRA is making the planning assumption that the Basel 3.1 Pillar 1 approach to credit risk would be the starting point for designing the simpler-regime risk-based capital framework. This is because the PRA considers the proposed Basel 3.1 Pillar 1 approach to credit risk to represent an improvement over the current capital rules; they would be more risk sensitive and would facilitate competition without compromising safety and soundness.^{footnote [10]}

1.26 The PRA intends in Phase 2 to focus on simplifications to Pillar 2 and buffer requirements for Simpler-regime Firms. These elements would be considered together to support the development of a coherent, simple, and proportionate risk-based capital framework for Simpler-regime Firms. The PRA expects to consult on Phase 2 measures in 2024 H1. Additionally, the PRA is considering how to enhance the proportionality of prudential regulation more generally for these firms. For instance, at the same time as this CP, the PRA is publishing proposals for simplifications to remuneration requirements for small banks and building societies. Firms meeting the Simpler-regime criteria, as well as some other small firms, would be in scope of these proposed measures.

1.27 DP1/21 suggested that the PRA could develop a Strong and Simple framework comprised of several layers. As development of the simpler regime progresses, the PRA is considering whether and how to build out other layers of the Strong and Simple Framework for larger firms that are not internationally active and intends to engage with relevant stakeholders about this during 2023.^{footnote [11]} In addition, as proposals for simplified prudential requirements are developed under the simpler regime, the PRA will consider whether its objectives would be advanced by applying any of these proposals to a wider range of firms.

Q2: Do you have any comments on potential future changes to the content, clarity, and presentation of PRA rules and policies that could help to achieve the aims of Strong and Simple?

Responses and next steps

1.28 This consultation closes on Tuesday 30 May 2023. The PRA invites responses on the any aspect of the proposals set out in this consultation, as well as any data or evidence that is pertinent to such proposals. The CP includes a number of questions to which the PRA would welcome specific responses, but the PRA would welcome responses on all aspects of the CP (see Appendix 1 for a full list of specific questions). The PRA also invites stakeholders to bring to the PRA’s attention any relevant issues that are not addressed in the proposals set out in this CP. Please address any comments or enquiries to CP4_23@bankofengland.co.uk.

1.29 Please indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.30 Unless otherwise stated, any remaining references to EU or EU-derived legislation refer to the version of that legislation which forms part of retained EU law.^{footnote [12]}

2. Scope and levels of application

2.1 This chapter sets out the PRA’s proposed scope and levels of applications for the proposals outlined in this CP.

2.2 The proposals in this chapter would affect the scope and levels of application of the Liquidity (CRR), Reporting (CRR), and Disclosure (CRR) Parts of the PRA Rulebook.

2.3 The proposals would result in the creation of a new chapter in a proposed new Part of the Rulebook which is being consulted in CP16/22 – Simpler Regime – General Application Part of the PRA Rulebook.  

Scope and levels of application

Scope of application

2.4 The proposed Phase 1 measures set out in this CP would apply to Simpler-regime Firms and Simpler-regime consolidation entities.

2.5 The PRA proposes that firms meeting the proposed Simpler-regime criteria as set out in CP16/22 are eligible for the provisions in this consultation.

2.6 A firm that meets those criteria would be invited to consent to a modification to become a Simpler-regime Firm, provided that any other bank or building society in a firm’s consolidation group is willing to consent to the modification at the same time. If all PRA-authorised firms in a consolidation group are Simpler-regime Firms, the CRR consolidation entity would be considered a ‘Simpler-regime consolidation entity’.^{footnote [13]}

2.7 A firm that is part of a group based outside of the UK – whether a subsidiary of a foreign headquartered banking group or a firm with a foreign holding company – could not meet all the Simpler-regime criteria, but could apply for a modification of the criteria that would enable it to be subject to the proposed provisions. The draft SoP included in Appendix 2 sets out the proposed circumstances in which the PRA considers that it is likely to be possible, subject to the statutory conditions being met, to grant a modification to the Simpler-regime criteria that would enable a firm that is part of a group based outside of the UK to consent to the modification for application of the proposed provisions.

2.8 The draft SoP also covers other aspects of how the PRA proposes to operate the Simpler-regime criteria. This draft SoP updates the draft SoP that was published alongside CP16/22,^{footnote [14]} which was focused on the operationalisation of the Simpler-regime criteria in relation to the proposed Transitional Capital Regime. The draft SoP in Appendix 2 incorporates minor changes to the SoP that was published alongside CP16/22 and additional material that relates to the operationalisation of the Simpler-regime criteria in relation to the measures set out in this CP, which is highlighted in the document.

2.9 Several responses to CP5/22 stated that the thresholds based on Pound Sterling amounts in the scope criteria should be indexed to give more room for nominal balance sheet growth. The draft SoP in Appendix 2 sets out how the PRA plans to review the Simpler-regime criteria by the end of 2028, including the calibrations of the thresholds within those criteria, to ensure that they continue to reflect the attributes of smaller, less complex firms.  

2.10 The PRA also proposes a minor correction to rule references in the NSFR reporting instructions. This proposal is relevant to all firms that apply the NSFR, not just firms in scope of the simpler regime.

Levels of application

2.11 The PRA proposes that prudential requirements may be applied at the level of an individual firm, its consolidated group, or a sub-group of which it is a member.

2.12 The PRA’s proposals related to changes to NSFR requirements set out in this CP, including the Retail Deposit Ratio (RDR), follow the level of application specified in the Liquidity (CRR) Part and the Reporting (CRR) Part of the PRA Rulebook, and the SS 24/15 and the SoP Liquidity and funding permissions.

2.13 The PRA’s proposals related to changes to ALMM returns set out in this CP follow the same level of application outlined in the Reporting (CRR) Part and the Liquidity (CRR) Part of the PRA Rulebook.

2.14 The PRA proposes that the level of application of the proposal on Pillar 2 liquidity set out in this CP would be the level of application of Pillar 2 guidance as defined in the SoP on ‘Pillar 2 liquidity’. Pillar 2 guidance applies at individual and consolidated levels. In general, the level of application for setting guidance for a firm under Pillar 2 would be aligned with that of Pillar 1. Pillar 2 consolidated guidance would continue to be calculated based on the sum of individual guidance, plus any additional Pillar 2 risk identified as arising at the level of the consolidated group. The PRA may continue to consider some netting of solo Pillar 2 guidance to a limited extent, where appropriate.

2.15 Similarly, the PRA proposes the level of application of the proposals for the ILAAP template set out in this CP would be the level of application as it is currently defined in SS24/15 – ‘The PRA’s approach to supervising liquidity and funding risks’. The ILAA rules, including the requirement to carry out an ILAAP, apply on an individual basis and on a consolidated basis where firms must comply with Part Six (Liquidity) of the Capital Requirements Regulation (CRR) on a consolidated basis. This enables the PRA to apply the Liquidity Supervisory Review and Evaluation Process (L-SREP) and any supervisory measures at both individual and consolidated level, where appropriate.

2.16 The proposals related to changes to Pillar 3 disclosure requirements set out in this CP follow the level of application specified in the Disclosure (CRR) Part of the PRA Rulebook.

Cost benefit analysis

2.17 The later chapters set out the benefits and costs associated with the simplifications set out in this CP. The PRA considers basing the scope of application of those simplifications on the Simpler-regime criteria would increase the net benefits as outlined in later chapters. The PRA considers that firms meeting the Simpler-regime criteria find current prudential regulation more complex and for which it would be possible to support resilience under simpler prudential rules.

2.18 The PRA considers the proposed levels application would increase the net benefits of the simplifications because they would mean firms would be able to apply the simplifications at all of the consolidation levels at which the rules and policies that these measures simplify apply.

2.19 In terms of how many firms could receive the net benefits of the simplifications set out in this CP, the PRA estimates that 30 banks and 33 building societies would satisfy the Simpler-regime criteria were those criteria in place at the time of publication of this CP.^{footnote [15]}

PRA objectives analysis

2.20 The PRA considers the proposed approach to scope of application would advance its primary and secondary objectives. The PRA considers the current prudential framework is not as simple or proportionate as it could be for small firms that are not systemically important and are focused on deposit-taking from, and lending to, households and corporates in the UK. The Simpler-regime criteria are designed to capture this type of firm. By doing so, these firms’ costs would be lower, which would improve their earnings and ability to build loss-absorbing capacity, as well as potentially incentivising them to take lower risk.^{footnote [16]} Those effects would support the PRA’s safety and soundness objective. Lower costs for these firms might also improve their ability to compete with larger firms.

2.21 The PRA considers that applying the correction to NSFR reporting instructions would advance its safety and soundness objective because it will marginally improve clarity regarding the reporting of the standard by all firms that apply the NSFR.

2.22 The PRA considers that the extent to which the simplifications in this CP would advance its primary and secondary objectives would be enhanced by the proposed approach to levels of application. This is because the proposed levels of application would allow firms to apply the simplifications at all of the consolidation levels at which the rules and policies that these measures simplify apply.

2.23 The PRA considers basing access to the proposed simplifications on whether firms take up a modification by consent would also advance its objectives. For eligible firms that choose to adopt the simplifications, consenting to the modification should be straightforward and entail minimal cost; if the cost to accessing the proposed simplification were high, this could have a negative effect on the safety and soundness of a firm, either directly or indirectly by deterring it from accessing the simplifications. Firms that meet the Simpler-regime criteria but do not expect to do so for very long (eg because they intended to grow quickly), could opt out by simply not consenting to the modification. This would support their ability to grow and compete with larger firms.

2.24 The Financial Services and Markets (FSM) Bill 2022 includes measures to amend the PRA’s objectives by introducing a new secondary competitiveness and growth objective. At the point that those measures come into force, this new secondary objective would require the PRA (in discharging its general functions in a way that advances its primary objectives and so far as reasonably possible) to act in a way that facilitates (subject to aligning with relevant international standards): (a) the international competitiveness of the economy of the UK (including in particular the financial services sector through the contribution of PRA-authorised persons); and (b) its growth in the medium to long term.

2.25 In light of this and the proposed implementation date for the changes proposed in this CP, the PRA has also considered whether the proposals set out in this CP would facilitate the international competitiveness of the UK economy and its growth in the medium to long term. For the same reasons as those set out in paragraphs 2.26, 3.37, 4.26, 5.21, and 6.35, the PRA considers that the proposals will facilitate competitiveness and growth as described in the new objective, and that the proposals would be in the same form if the objective applied at the date of publication of the CP.

‘Have regards’ analysis

2.26 In developing the proposed scope of application, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent in April 2022. Where the proposed new rules are CRR rules (as defined in section 144A of FSMA), the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The Financial Services and Markets Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in shaping the design of the proposed scope and levels of application.

1. Proportionality and different business models (FSMA regulatory principles):

• The PRA considers that basing the scope of the proposed simplifications on the Simpler-regime criteria would ensure that those measures are available to the small firms for which the current regulations may not be sufficiently proportionate.
• The potential cost to firms was a significant factor to the PRA in designing the proposed use of modification by consent to access the proposed simplifications. The PRA considers that a modification by consent would help to ensure the costs of accessing the simplifications would not be disproportionate relative to the benefits to firms of the simplifications. The PRA also considers that the proposed use of modification by consent would mean firms that could meet the Simpler-regime criteria but decided not to adopt the proposed simplifications should not face disproportionate costs because they would only need to select not to take up the modification by consent.
• The PRA considers it would have been disproportionate to have proposed levels of application that differed from the levels of application for the rules and policies that would be simplified by the measures in this CP.

2. Competition/ensuring economic growth (HMT recommendation letters):

• The PRA considers that basing the scope of application of the proposed simplifications in this CP on the Simpler-regime criteria would ensure that they would apply to an appropriately broad set of smaller firms, for which the current prudential framework may not be sufficiently proportionate. The PRA considers that firms that adopted the proposed simplifications should experience lower costs, which may increase their ability to compete with other firms, which could benefit consumers.
• The PRA considers that basing firms’ access to the proposed simplifications on a modification by consent would not create a new barrier to growth for firms that could meet the Simpler-regime criteria but decided not to adopt the proposed simplifications because they plan to grow quickly. In developing the proposals, the PRA was keen to avoid creating a potential barrier to growth. The PRA considers the proposals would achieve this and support the ability of small firms to compete with larger firms, which could benefit consumers.

3. Competitiveness (HMT recommendation letters):

• The PRA’s consideration of competitiveness influenced the PRA’s decision to set out (in the draft SoP in Appendix 2) the circumstances in which the PRA would consider it likely to give a firm that is part of a group based outside of the UK access the proposed simplifications. The PRA considers this would help to support a perception of the UK as an attractive place for small foreign-based banking groups to undertake activity. 

4. Smart regulatory reform (HMT recommendation letter):

• The PRA considers that the proposals set out in this CP would be consistent with the government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

Further simplifications

2.27 The PRA is taking a phased approach to the development of the simpler regime. The measures in the CP represent Phase 1, which is focused on non-capital related measures. Phase 2 would be focused on capital-related measures. The PRA intends to publish the Phase 2 proposals in 2024 H1. The PRA considers this phased approach would facilitate faster progress to enhance the proportionality of the prudential framework than if the PRA waited until the entire package had been developed. It would also allow firms to choose to benefit from Phase 1 simplifications at the earliest opportunity, rather than having to wait until a later point at which all simpler-regime measures were applied.

2.28 When the PRA consults on further potential simplifications for the simpler regime, it intends to do so on the basis of proposing that those simplifications would apply to Simpler-regime Firms and (as relevant) Simpler-regime consolidation entities.

2.29 Such an approach would mean that all the measures of the simpler regime would apply to all Simpler-regime Firms. The PRA considers that such an approach would help to achieve simplicity and consistency and enable the regime to be implemented efficiently. For instance, it would reduce the administrative burden on small firms that wanted to be subject to the simpler regime as they would not need to consent to additional modifications when new simplifications were introduced. It would also make efficient and economic use of PRA resources, as it would mean that the PRA would not have to process additional modifications by consent for firms that are already Simpler-regime Firms.

2.30 The PRA recognises that a phased approach to developing the simpler regime creates potential regulatory uncertainty; for instance, the Phase 2 simplifications would not be finalised by the time of the intended implementation of Phase 1 in early H2 2024. The PRA acknowledges the possibility that a firm that had chosen to adopt the Phase 1 measures set out in this CP could wish not to be subject to the further simplifications, including those likely to be introduced in Phase 2, and could wish to withdraw from the simpler regime (by asking for its modification by consent to be revoked). In order to avoid a significant adverse impact on a firm in such circumstances, when it consults on further simplifications the PRA intends to include proposals for appropriate transitional arrangements in such cases that would ensure a smooth transition from the simpler regime to the full prudential framework.

Q3: Do you have any comments on the PRA’s proposals for the scope and level of application for the simplifications set out in this CP?

3. Net stable funding ratio

3.1 This chapter sets out the PRA’s proposal not to apply the net stable funding ratio (NSFR) to a Simpler-regime Firm and Simpler-regime consolidation entity (referred to as ‘Simpler-regime Firms’ in this Chapter) when certain conditions relating to their funding structure are met.

3.2 The PRA considers the proposals in this chapter would promote safety and soundness, by applying the NSFR to Simpler-regime Firms in a more targeted way – ie only in specific circumstances – and enhance the proportionality of the PRA’s regulatory regime.

3.3 The PRA considers that its proposals would facilitate effective competition by reducing the complexity and cost of the regulatory regime for Simpler-regime Firms.

3.4 The proposals in this chapter would amend:

• the Liquidity (CRR) Part of the PRA Rulebook (Appendix 6, Annex D);
• the Reporting (CRR) Part of the PRA Rulebook (Appendix 6, Annex E);
• the Disclosure (CRR) Part of the PRA Rulebook (Appendix 6, Annex C);
• SS24/15 – ‘The PRA’s approach to supervising liquidity and funding risk’ (Appendix 3); and
• the SoP ‘Liquidity and funding permissions’ (Appendix 5).

The NSFR

3.5 The PRA introduced the NSFR on 1 January 2022. The NSFR is intended to help to ensure that firms maintain a stable funding profile in relation to the composition of their assets. It seeks to limit overreliance on short-term wholesale funding, encourage better assessment of funding risk across all on- and off- balance sheet items, and promote funding stability. A sustainable funding structure reduces the likelihood that disruptions to a firm’s regular sources of funding could erode its liquidity position and increase the risk of its failure. Stability in a firm’s longer-term funding enhances the safety and soundness of firms, in line with the PRA’s objectives.

3.6 The PRA applies the NSFR to banks, building societies, and PRA-designated investment firms. Firms that qualify as small and non-complex institutions can, at present, choose instead to apply a simplified NSFR (sNSFR) that is simpler than, and at least as conservative as, the NSFR. It is simpler because it is calculated based on a smaller number of data points. However, in practice it has not been commonly chosen by small firms.

3.7 Informed by supervisory reporting on the NSFR, the PRA has considered further the nature, scale, and complexity of smaller firms’ funding structures, the stability of their funding profiles, and the effects of the NSFR requirement. The PRA has also considered possible alternative means of ensuring Simpler-regime Firms have sufficient stable funding that could promote their safety and soundness in a simpler, more proportionate way.

3.8 The PRA proposes to:

• apply to Simpler-regime Firms a new ‘Retail Deposit Ratio’ (RDR) to measure the extent of their use of relatively more stable retail funding;
• disapply the NSFR to a Simpler-regime Firm where the RDR condition is met (ie where the four-quarter moving average of its RDR is greater than or equal to 50% for four consecutive quarters); and
• otherwise apply the NSFR.

3.9 Where the NSFR provisions are disapplied, a Simpler-regime Firm's reporting and disclosure requirements corresponding to those NSFR provisions are also disapplied, and NSFR reporting, and disclosure instructions should be read accordingly.

The retail deposit ratio

3.10 The PRA proposes to define the RDR as the ratio of a Simpler-regime Firm’s retail funding to its non-capital funding:

where:

• total retail deposits = the sum of liabilities to natural persons, and certain liabilities to SMEs with an aggregate limit on SME deposits of £880,000;^{footnote [17]} and
• total funding = total retail deposits and wholesale funding (where wholesale funding = the sum of liabilities that do not qualify as retail funding).^{footnote [18]}

3.11 The RDR is intended to be a simple measure that would be calculated using definitions and data points from quarterly liquidity reporting that firms already submit to the PRA.^{footnote [19]} The PRA considers that the use of definitions and data points used in liquidity reporting would be clear, prudent, and proportionate.

3.12 The PRA considers a 50% RDR to be a reasonable proxy for the point at which the nature of a firm’s funding structure shifts from being predominantly retail in focus to being predominantly wholesale in focus. As the share of wholesale funding in a bank’s liabilities increases, the risk of a lack of sufficient resiliency to future funding stress becomes more relevant. The NSFR is intended to mitigate this risk. This underlies the PRA’s judgement that applying the NSFR if a firm’s RDR falls below 50% would be prudent. The PRA considers that it would also be straightforward and proportionate.

3.13 In addition, the PRA considers that calculating the RDR using the moving average of the RDR across four quarters would address the risk that a Simpler-regime Firm with an RDR near to 50% might otherwise fluctuate in and out of scope of the NSFR.

3.14 The PRA considers that requiring a Simpler-regime Firm to have a moving average RDR greater than or equal to 50% for four consecutive quarters before the NSFR could be disapplied would address the risk that shorter term fluctuations in funding profile may trigger the disapplication of the NSFR prematurely.

3.15 In order to ensure the calculation of the RDR is proportionate from the outset, the PRA proposes to clarify that a Simpler-regime Firm may choose to use data from return C68 – ‛concentration by product type’ – from the period prior to the simpler regime effective date in its RDR calculations covering that earlier period. This would avoid it having to reproduce C68 data for that period to includes all liabilities, not only those that are greater than 1% of total liabilities. Chapter 5 discusses the PRA’s proposal to amend the return C68 – ‘concentration by product type’ – to enhance its proportionality by requiring Simpler-regime Firms to report liabilities from all relevant product type, rather than only liabilities arising from products that comprise greater than 1% of their total liabilities.

3.16 These proposals apply to Simpler-regime Firms as well as to Simpler-regime consolidation entities on the basis of their consolidated situation.

Notification requirement

3.17 The PRA proposes to require firms to notify the PRA without delay if their quarterly reporting shows they cease to meet the RDR condition. The PRA also proposes to amend SS24/15 to clarify that it expects firms to notify the PRA if their funding model shifts materially towards wholesale funding intra-quarter, further to Fundamental Rule 7 of the PRA Rulebook.

Implementation period

3.18 The PRA proposes to require a firm that has a four-quarter moving average RDR that falls below 50% to implement the NSFR within one year beginning the day after the remittance date. The PRA considers that this one-year implementation period would strike an appropriate balance between providing firms with sufficient time to implement the standard, and mitigating the risks to safety and soundness that could arise where a firm used significant wholesale funding but did not apply the NSFR standard. The PRA proposes to amend SS24/15 to clarify how the implementation period should operate in practice. The PRA also proposes to amend SS24/15 to clarify that, if it believes that a firm’s funding position could pose shorter-term risks, it may consider using its powers to require the firm to implement the NSFR over a shorter implementation period.

3.19 The PRA proposes that the one-year implementation period would not apply to a firm that applied the NSFR immediately prior to the implementation of the Simpler-regime and that did not meet the RDR condition on the latest remittance date before the first day on which simpler regime NSFR measures apply.

3.20 The PRA proposes that 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.

New firms

3.21 The PRA proposes that a Simpler-regime Firm may disapply the NSFR provisions if its four most recent four-quarter moving average RDRs are all greater than or equal to 50%. The PRA recognises that firms which have been only recently authorised by the PRA (‘new firms’) will not have reported sufficient historical data to calculate four four-quarter moving average RDRs. For new firms that are eligible for, and intend to enter, the simpler regime, the PRA recognises that, in many cases, it may not be appropriate for them to be required to apply the NSFR. As part of the new firms authorisation process, firms may apply to the PRA for a modification which would temporarily disapply the NSFR. The PRA considers that, in cases where such a modification were justified, it should be in place until the firm has reported sufficient data points that it can calculate its fourth four-quarter moving average RDR from the time when it is authorised to operate without restrictions preventing it from accepting deposits exceeding an aggregate of £50,000. The PRA proposes to include guidance on its proposed approach in SS24/15.

The simplified NSFR

3.22 In order to enhance the proportionality of the NSFR, the PRA’s implementation of the standard in January 2022 included a version of the NSFR that small and non-complex firms can choose to use that is simpler than and at least as conservative as the NSFR – the simplified NSFR (sNSFR). The sNSFR is calculated based on a limited number of data points, and is intended to reduce the complexity and cost of the NSFR for such firms.

3.23 The PRA proposes to remove the sNSFR from the Liquidity (CRR) Part of the PRA Rulebook. The PRA considers this overall policy to be appropriate given the proportionate proposed approach to the NSFR set out in this chapter, and the need to avoid the complexity of having multiple definitions and stable funding treatments of smaller firms.

Q4: Given the simplified approach to stable funding under the simpler regime that is set out in this chapter, do you have any comments on the appropriateness and proportionality of the proposed approach to the sNSFR?

Minor correction to reporting instructions

3.24 The PRA proposes a minor correction to rule references in its reporting instructions. The rule references in the instructions for row 1070 in Annex XIII – ‘Instructions for reporting on stable funding’ – are incorrect. The PRA proposes to update the instructions to replace the references with the correct NSFR article references from the Liquidity (CRR) Part of the PRA Rulebook.

3.25 This proposal is relevant to all firms that apply the NSFR, not only firms in scope of the simpler regime.

PRA objectives analysis

3.26 The PRA considers that the proposals in this chapter would advance the PRA’s primary objective of safety and soundness by applying the NSFR where a firm’s funding model indicates its stable funding risk is higher due to a higher proportion of wholesale funding. Furthermore, the RDR provides a simple way to identify firms that are exposed to the risks that the NSFR is intended to address, advancing safety and soundness. The reduction in costs for retail-funded Simpler-regime Firms that would not have to apply the NSFR could also improve safety and soundness if they used the costs-savings to increase their financial resilience.

3.27 This proposal also advances the PRA’s secondary competition objective in the following ways:

• reducing the complexity and cost of the regulatory regime for small retail-funded firms, including new firms;
• ensuring that a Simpler-regime Firm that makes greater use of wholesale funding as it increases in scale becomes subject to the same NSFR requirement as firms outside the simpler regime; and
• enabling such firms to continue to benefit from other aspects of the simper regime.

3.28 The PRA considers that the proposal for the minor correction to rule references in the NSFR reporting instructions would also support the PRA’s primary objective of safety and soundness, as it marginally improves clarity regarding the reporting of the standard. The PRA considers that this proposal has no material bearing on the secondary competition objective beyond the considerations already given in CP5/21 and PS17/21 to advancing that objective in the application of the NSFR.

Cost benefit analysis (CBA)

3.29 This section sets out the analysis of the costs and benefits of introducing the proposed changes to NSFR as part of the simpler regime.

3.30 The baseline for comparison in this section is that the simpler regime is not introduced, and firms continue to follow existing PRA rules and supervisory expectations.

3.31 The PRA estimates that nearly all the firms that could be Simpler-regime Firms would currently exceed the 50% four-quarter moving average RDR threshold. This would mean that the NSFR would be switched off for these firms. The benefits and costs considered below would apply only to these firms. Simpler-regime Firms with a RDR below 50% would continue to apply the current NSFR rules.

Benefits

3.32 The PRA considers that the disapplication of NSFR for Simpler-regime Firms that meet the required RDR would reduce compliance and reporting costs for these firms. Calculation of the NSFR requires 758 data points to be reported across three reports.^{footnote [20]} By removing the NSFR requirement and the associated reporting, the PRA estimates that there would be a meaningful cost reduction for Simpler-regime Firms. This reduction in costs would be on an ongoing basis. There may be a one-off cost associated with the removal of this reporting, but the PRA considers this should be minimal, and would be offset by the ongoing cost savings.

3.33 The PRA considers that the resources saved by the reduction in reporting costs could have additional benefits to safety and soundness if firms use the cost savings to become more financially resilient.

Costs

3.34 The PRA considers that there would be minimal costs to firms from the introduction of a new RDR. This PRA considers that the RDR would be based on data items that are already submitted by firms to the PRA as part of regular reporting requirements. There may be some additional costs for firms to implement an internal framework for monitoring the RDR so that they could meet the proposed notification requirement. However, the PRA considers that these costs should be small given that the RDR is a simple metric, and more than outweighed by the cost savings associated with the removal of the NSFR requirement and reporting.

3.35 Similarly, the PRA considers that there would also be a small cost to the PRA associated with the introduction of a new RDR. Again, the PRA considers that costs should be minimal, but there would be a small cost associated with the adaptation of internal reports to monitor the new ratio. The PRA considers that this cost should be small and are more than outweighed by the safety and soundness benefits that the RDR brings.

3.36 The PRA considers that the proposal for the minor correction to rule references in the NSFR reporting instructions has no material bearing on costs and benefits beyond the considerations already given in CP5/21 and PS17/21 in the application of the NSFR.

‘Have regards’ analysis

3.37 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent April 2022. Where the proposed new rules are CRR rules (as defined in section 144A of FSMA), the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The Financial Services and Markets Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in shaping the design of the proposal:

1. Proportionality (FSMA regulatory principle) and the principle that regulators should base their regulatory activities on risk (Legislative and Regulatory Reform Act 2006):

The proposals in this chapter are designed to enhance proportionality of the liquidity and funding regime by:

• Applying the NSFR on a more targeted basis, based on a firm’s funding model, including specific consideration for new firms;
• Using a simple RDR metric as a measure of a firm’s funding model that is calculated using liquidity reporting data;
• Using a four-quarter moving average RDR to determine when the NSFR should apply. This seeks to prevent the disproportionate application of the NSFR based on uncharacteristic changes in firms’ funding profiles; and
• Setting a one-year NSFR implementation period to afford firms a reasonable period to implement the NSFR with policies, systems, controls, and reporting.

2. Efficient and economic use of resources (FSMA regulatory principles):

The PRA considers that the PRA’s resources would be used most efficiently in the context a simple ratio based on existing data contained in a single return.

3. Diversity of business models (FSMA regulatory principles):

The proposals in this chapter were designed to recognise differences between types of firms by applying the NSFR only where needed, based on a firm’s funding model. The PRA’s proposed calibration of the RDR would help ensure that a range of funding models could be admitted without preference for one model over the other.

4. Competition/encouraging economic growth (HMT recommendation letters) and sustainable growth (FSMA regulatory principles):

In developing the proposals in this CP, the PRA considers the reduced costs for Simpler-regime Firms would in turn lower potential barriers to entry for firms that are entering the market, helping to support competition and encouraging sustainable economic growth.

5. The principles that regulators should ensure clear information, guidance, and advice is available to help those they regulate meet their responsibilities to comply, and should ensure that their approach to their regulatory activities is transparent (Legislative and Regulatory Reform Act 2006):

The PRA’s proposed update to SS24/15 ‘seeks to provide guidance to clarify for firms how the proposed notification requirement for Simpler-regime Firms with RDRs that consistently and significantly exceed 50% would work in practice.

The PRA considers that the proposal for the minor correction to rule references in the NSFR reporting instructions would enhance the transparency of reporting requirements by clarifying the reporting instructions. It would also contribute to ensuring that clear information is available to help firms that apply the NSFR meet their responsibilities to comply with the standard.

6. Competitiveness (HMT recommendation letters):

The PRA considers that the proposals in this CP would reduce the regulatory compliance costs for international firms established in the UK that qualified as Simpler-regime Firms. The proposals may help to enhance the attractiveness of a UK as a place for small firms to do business, which may promote inward investment into the UK. However, the extent of the potential impact of this is unclear.

7. Smart regulatory reform (HMT recommendation letter):

The PRA considers that the proposals set out in this CP would be consistent with the government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

3.38 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this set of proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for this set of proposals.

4. Pillar 2 liquidity

4.1 This chapter sets out the PRA’s proposals to generally not set Pillar 2 add-ons for Simpler-regime Firms and Simpler-regime consolidation entities (referred to as ‘Simpler-regime Firms’ in this Chapter), and to introduce a new, streamlined template that Simpler-regime Firms could use to describe their ILAAP.

4.2 The proposals in this chapter would amend:

• the PRA’s SoP ‘Pillar 2 liquidity’ (Appendix 4); and
• SS24/15 – ‘The PRA’s approach to supervising liquidity and funding risk’ (Appendix 5)

Pillar 2 liquidity

4.3 The PRA’s Pillar 2 liquidity approach is intended to complement the Pillar 1 regime by considering liquidity risks not captured, or not fully captured, under Pillar 1. The PRA’s approach to assessing liquidity risks under Pillar 2 is set out in the PRA’s SoP ‘Pillar 2 liquidity’.

4.4 In line with the Overall Liquidity Adequacy Rule (Rule 2.1 of the Internal Liquidity Adequacy Assessment (ILAA) Part of the PRA Rulebook; see also the subsequent Rule 3.1), firms are required to undertake their own assessment of liquidity risks, including Pillar 2 risks, and to take appropriate measures to reduce or manage these risks. Where the PRA assesses that a firm is exposed to such risks, it may consider it necessary to apply individual guidance to the firm, including applying an ‘add-on’ to liquidity coverage ratio (LCR) guidance to address aspects of liquidity risk. These aspects include franchise viability risk and intraday liquidity risk. The add-ons take the form of additional high quality liquid assets (HQLA).

4.5 The PRA’s Pillar 2 approach applies in a way that is proportionate to each firm’s business model and to the risk that each firm poses to the PRA’s objectives. Where a supervisor judges a firm’s Pillar 2 risks to be relatively immaterial compared to its Pillar 1 risks or the amount of HQLA they hold, the supervisor may choose not to apply Pillar 2 guidance. If, having reviewed a firm’s ILAAP document, a supervisor judged that the risks to the PRA’s objectives from a particular firm were immaterial, the supervisor could also choose not to review the firm for Pillar 2 risks.

4.6 The PRA considers that Simpler-regime Firms would be limited in the breadth of their activities. Based on the PRA’s experience and consideration of the nature, scale, and complexity of smaller firms’ activities, and the risks which they are subject to, Simpler-regime Firms would generally be unlikely to run Pillar 2 risks that are material compared to their Pillar 1 risks. Accordingly, the PRA considers there to be scope further to enhance the proportionality of its general approach to Pillar 2 liquidity for Simpler-regime Firms.

4.7 The PRA proposes to generally not apply Pillar 2 liquidity guidance to Simpler-regime Firms, except where warranted in the case of a particularly material idiosyncratic risk or risks. If, having reviewed a firm’s ILAAP document, a supervisor judges that this is the case, they could choose to review the firm for Pillar 2 risks.

4.8 In line with the Overall Liquidity Adequacy Rule and the ILAA Part of the PRA Rulebook, the PRA proposes to continue to require Simpler-regime Firms to undertake their own assessment of the risks to which they are or may be exposed, including risks that are not captured by the LCR, and use that assessment to determine the quantity of HQLA they hold.

ILAAP document template

4.9 PRA rules require firms to have in place robust strategies, policies, processes, and systems that enable them to identify, measure, manage, and monitor liquidity and funding risks over an appropriate set of time horizons.^{footnote [21]} Firms must carry out these processes in accordance with the ILAA Part of the PRA Rulebook. PRA rules require firms to make a written record of their ILAA process – an ILAAP document.^{footnote [22]}

4.10 In SS24/15, the PRA sets out the expectations with which it expects a firm’s ILAAP document to comply. This includes an expectation that the ILAAP document should be updated at least annually. SS24/15 (Appendix 3) provides a template that a firm could use as a guide to produce its ILAAP document. It includes a potential structure for the document, and a limited amount of guidance on the information and analysis that could be included in it.

4.11 To enhance the clarity and proportionality of the PRA’s ILAA expectations, the PRA proposes to introduce a new ILAAP template that could be used as a guide by Simpler-regime Firms when producing their ILAAP documents. The proposed new template:

• merges sections of the previous template that could be duplicative for Simpler-regime Firms;
• reorders the overall template, placing greater emphasis on stress testing;
• includes guidance on how Simpler-regime Firms can conduct their risk assessment proportionately in the context of their business model; and
• includes guidance on the information included in each section.

PRA objectives analysis

4.12 The PRA considers that the proposals in this chapter would advance the PRA’s primary objective of promoting the safety and soundness of firms, by applying Pillar 2 liquidity guidance where warranted in the case of a particularly material idiosyncratic risk or risks, and providing clearer guidance to improve the effectiveness of firms’ ILAA processes and the focus and clarity of their ILAAP documents. The PRA also considers that increased clarity would facilitate the efficient submission of appropriate information on Simpler-regime Firms’ liquidity risks. Pillar 2 methodologies can be particularly complex and therefore costly for smaller firms to apply. Reducing the cost burden for smaller firms without adversely affecting the management of their risks would also help to improve their safety and soundness.

4.13 The PRA considers that the proposals would also advance the PRA’s secondary objective of facilitating effective competition as they would reduce the resources required by firms to assess risks that are generally immaterial to Simpler-regime Firms. It would also increase the proportionality of the Pillar 2 liquidity approach by affording greater recognition of the smaller scale and generally lower complexity of the activities of Simpler-regime Firms, and facilitate effective competition by reducing the complexity and cost associated with the application of the PRA’s general approach to setting Pillar 2 add-ons. The PRA considers that these resources could otherwise be used for assessing and managing the key risks relevant to Simpler-regime Firms’ business models and risk profiles or to contribute to their profitability. Such a reduction in resources would also reduce potential barriers to entry for small firms.

Cost benefit analysis (CBA)

4.14 This section sets out the analysis of the costs and benefits of introducing the changes to Pillar 2 liquidity approach as part of the simpler regime.

4.15 The baseline for comparison in this section is that the simpler regime is not introduced, and firms continue to follow the existing PRA liquidity rules and guidance, as set out in the SoP ‘Pillar 2 liquidity’ and SS24/15.

4.16 Under the PRA’s proposed approach to Pillar 2 liquidity add-ons, the PRA expects that add-ons would not apply to most Simpler-regime Firms. Under the proposed approach, to apply Pillar 2 liquidity guidance to a Simpler-regime Firm, the firm’s supervisor would judge that Pillar 2 risks to be particularly material for that firm compared to Pillar 1 risks. The PRA anticipates this would be likely to occur only in outlier cases. Therefore, the cost benefit analysis below should apply to most Simpler-regime Firms.

4.17 All Simpler-regime Firms would be able to use the simplified ILAAP template, although it would be their choice to do so, as the PRA does not propose to require the use of the template. The cost benefit analysis for the simplified ILAAP template therefore applies to all Simpler-regime Firms.

Benefits

4.18 The PRA considers that not applying Pillar 2 guidance to the majority of Simpler-regime Firms would result in a cost reduction for these firms, as they would no longer be required to complete the templates the PRA uses to calculate Pillar 2 add-ons as part of the Liquidity Supervisory Review and Evaluation Process (L-SREP) process.

4.19 The PRA considers that there also would be a positive resource impact to the PRA in the removal of standard Pillar 2 liquidity add-ons. By removing the quantitative assessment of Pillar 2 risks the PRA currently undertakes for all firms, it would be able to reallocate the resource previously used to complete these assessments to assess other risks which are more prevalent for these firms.

4.20 The PRA considers that there would be an ongoing cost reduction for Simpler-regime Firms from the introduction of a more focused ILAAP template. This is because the proposed new template removes areas of the previous template that were not relevant to Simpler-regime Firms, allowing them to focus on the risks that are most pertinent to their business.

4.21 The PRA also considers that the increased guidance would reduce the time and resources Simpler-regime Firms would need to understand and meet PRA expectations concerning ILAAP documents. Increased clarity should reduce the uncertainty, and therefore unnecessary costs to firms in preparing appropriate ILAAP documents.

4.22 The PRA considers that the resources saved by the reduction in costs could improve operating efficiencies and may have additional benefits to safety and soundness if firms use the cost savings to support risk management activities. Alternatively, reduced costs could improve profitability, which could also help to enable a firm to add to its capital resources.

Costs

4.23 Although Simpler-regime Firms may incur a one-off cost when switching to the new ILAAP template, the PRA considers that this would be exceeded by the ongoing benefit of a simpler template. Additionally, if a Simpler-regime Firm considered that the one-off cost associated with the PRA’s proposal to change to the new template was too great, they could remain on the old template, as use of the new template is not mandatory.

4.24 The PRA considers that there would be some reduction in information the PRA receives due to the disapplication of Pillar 2 add-ons for the majority of Simpler-regime Firms. However, as discussed in the proposals above, Simpler-regime Firms would still be expected to consider any material liquidity risks they may be exposed to and explain them in their ILAAP document. Consequently, the PRA expects to maintain broad visibility of Pillar 2 risks, and therefore considers that any reduction in information should have a minimal impact on firms’ safety and soundness.

4.25 Furthermore, the PRA would retain the ability to apply Pillar 2 guidance where warranted in the case of a particularly material idiosyncratic risk or risks, mitigating risks to safety and soundness.

‘Have regards’ analysis

4.26 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent April 2022. The Financial Services and Markets Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in shaping the design of the proposal:

1. Proportionality (FSMA regulatory principles) and the principle that regulators should base their regulatory activities on risk (Legislative and Regulatory Reform Act 2006):

The PRA considered how to adapt its approach to liquidity and funding risks to give greater recognition to the nature, scale, and complexity of Simpler-regime Firms. The Pillar 2 add-on proposals in this chapter enhance the proportionality of the regulatory regime by reducing the complexity and cost associated with applying the PRA’s general approach to Pillar 2 add-ons, and with producing an ILAAP document.

In developing the ILAAP template proposals in this Chapter, the PRA sought to design the proposed template and guidance in a way that would make it easier and more efficient for firms to complete The PRA considers that the costs that firms could incur were unlikely to be material. The PRA also considers that the proposed revised template would result in ongoing cost savings for firms when producing ILAAP documents.

2. Different business models (FSMA regulatory principles):

The PRA considers that Simpler-regime Firms typically have business models that tend not to generate the material Pillar 2 risks. The PRA took this into account in developing its Pillar 2 proposals.

Smaller firms also tend to have less complex business models, that may not be subject to all the risks that ILAA information typically seeks to capture. The PRA took this into account in its proposals for a streamlined ILAAP template.

3. Competition/encouraging economic growth (HMT recommendation letters) and sustainable growth (FSMA regulatory principles):

When developing the proposals in this CP, the PRA considered competition to the extent that could reduce costs for Simpler-regime Firms, and in doing so could serve to reduce potential barriers to entry for firms that are entering the market, helping to facilitate competition, and encouraging sustainable economic growth.

4. Transparency (FSMA regulatory principles and Legislative and Regulatory Reform Act 2006):

The PRA considers its ILAAP proposals in this chapter would enhance the transparency of the regulatory regime by providing further information to firms about the PRA’s expectations in respect of ILAAP documents.

5. Efficient and economic use of resources (FSMA regulatory principles):

The PRA considers that the proposals in this chapter would enhance the efficiency with which the PRA can assess firms’ ILAA processes, and reduce the PRA resources associated with the general application of the Pillar 2 add-on framework.

6. Competitiveness (HMT recommendation letters):

The PRA considers that the proposals in this CP would reduce the regulatory compliance costs for international firms established in the UK that qualified as Simpler-regime Firms. The proposals may make the UK a more attractive place for small firms to do business, which may promote inward investment into the UK, although the extent of the potential impact of this is unclear.

7. Smart regulatory reform (HMT recommendation letter):

The PRA considers that the proposals set out in this CP would be consistent with the government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

4.27 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this proposal, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.

5. Liquidity reporting

5.1 This chapter sets out the PRA’s proposals to exclude Simpler-regime Firms and Simpler-regime consolidation entities (referred to as ‘Simpler-regime Firms’ in this Chapter) from certain requirements for liquidity reporting. The proposals in this chapter would result in not requiring Simpler-regime Firms to report four of the five additional liquidity monitoring metric (ALMM) returns. Chapter 3 sets out the PRA’s proposals in respect of reporting for the net stable funding ratio (NSFR).

5.2 The Bank recently published a plan for transforming data collection, including three high level reforms, based on feedback from industry engagement: integrated reporting, common data standards, and modernising reporting instructions. The PRA considers its proposals in this chapter would align with that plan.

5.3 The proposals in this chapter would amend:

• the Reporting (CRR) Part of the PRA Rulebook (Appendix 6, Annex E); and
• the Liquidity (CRR) part of the PRA Rulebook (Appendix 6, Annex D).

Additional liquidity monitoring metrics (ALMM) returns

5.4 The ALMM returns are a set of liquidity risk monitoring tools that measure various dimensions of a firm’s liquidity and funding risk profile that are not captured by the liquidity coverage ratio (LCR) or NSFR. The returns capture data related to firms’ cash flows, funding and product concentrations, funding costs, and available unencumbered collateral. Submission of the returns is required on at least a quarterly basis.

5.5 The PRA has reviewed the ALMM returns and considered:

• the extent to which their use would promote safety and soundness for Simpler-regime Firms;
• the nature of the risks to which such firms may be exposed;
• the PRA’s approach to supervising such firms, including in the context of the Liquidity Supervisory Review and Evaluation (L-SREP) process;
• reporting costs; and
• alternative sources of information that are available to PRA supervision.

5.6 Based on consideration of these factors, the PRA proposes to exclude Simpler-regime Firms from the requirement to report the following ALMM returns:

• C67 – Concentration of funding by counterparty;
• C69 – Prices for various lengths of funding;
• C70 – Roll-over of funding; and
• C71 – Concentration of counterbalancing capacity.

5.7 These returns identify: significant sources of wholesale funding the withdrawal of which could cause prudential concerns; identify potential funding stresses that materialise through changes in funding costs or tenor; and provide a measure of the quantity of funding that a firm could raise during a stress. If having reviewed a firm’s ILAAP document, supervisors were to judge that such information would facilitate effective supervision of the firm, they could request it in a form readily available to the firm.

5.8 The PRA considers that not applying these reporting requirements to Simpler-regime Firms would further enhance the proportionality of the reporting framework and better facilitate effective competition by reducing the complexity and cost of the regulatory regime for Simpler-regime Firms.

5.9 In respect of the ALMM return for concentration by product type (C68), the PRA proposes to amend the provision whereby firms include only liabilities arising from products that comprise greater than 1% of their total liabilities. Instead, the PRA proposes to require firms to report liabilities arising from all relevant product types. The PRA considers that this would reduce reporting costs to firms because although more liabilities would be reported, it would remove the need to check whether each product type exceeded the current reporting threshold 1% of total liabilities.

5.10 The PRA proposes to introduce a three-year transition period in which small and non-complex institutions that meet all of the conditions set out in point (145) of Article 4(1) of the CRR as at the implementation date in 2024 H2 but are not eligible for the simpler regime would be able to continue to report all information on additional liquidity monitoring metrics with a quarterly frequency. The PRA considers this would help to facilitate smooth transition for such firms to a monthly reporting frequency.

PRA objectives analysis

5.11 The proposals in this chapter promote the PRA’s primary objective of ensuring the safety and soundness of firms, as the PRA would continue to assess the risks that the ALMM returns are intended to capture, both on an on-going basis and during L-SREP reviews. The reduction in costs for Simpler-regime Firms from these proposals is also directionally positive for safety and soundness, as cost savings could be used to increase profitability and financial resilience.

5.12 The PRA considers that these proposals would facilitate effective competition by reducing the complexity and cost of the regulatory regime for Simpler-regime Firms. Such a reduction would also reduce barriers to entry for small firms.

Cost benefit analysis (CBA)

5.13 This section sets out the analysis of the costs and benefits of introducing the changes to liquidity reporting as part of the simpler regime.

5.14 The baseline for comparison in this section is that the simpler regime is not introduced, and firms continue to follow existing PRA rules, as set out in the Reporting (CRR) and the Liquidity (CRR) Parts of the PRA rulebook.

5.15 The PRA considers all Simpler-regime Firms would benefit from the changes to liquidity reporting, and therefore the cost benefit analysis below applies to all Simpler-regime Firms.

Benefits

5.16 The PRA considers that not requiring Simpler-regime Firms to report the C67, C69, C70, and C71 ALMM returns would eliminate the cost of producing these returns. The combined effect of the proposals would reduce the data points firms are required to report by 4294 points.

5.17 The European Banking Authority (EBA) conducted a cost of compliance survey in 2021 that focused on the costs and challenges firms faced in meeting EBA supervisory reporting requirements. This study then made recommendations for simplifications in several areas, including ALMM. The EBA survey concluded that their proposal to exempt ‘small and non-complex institutions’ (SNCI) firms from C68, C69, and C70 would reduce reporting costs associated with the EBA reporting framework by an average of 2-3% per SNCI firm. The total reduction in data points from their proposals would be 4,166. Although the EBA’s proposals on ALMM differ from the PRA’s proposals set out in this CP, they would result in a similar overall reduction in data points reported. The PRA therefore believes that it is reasonable to assume the reduction in reporting costs from the PRA’s proposals would be similar. The EBA’s study also found that, in respect of the C68’s 1% threshold, it was burdensome and complex for firms to calculate all of the potentially reported data points, to check whether each product type exceeded 1% of total liabilities.

5.18 The PRA considers that the resources saved by the reduction in reporting costs could improve operating efficiencies and may have additional benefits to safety and soundness if firms use the cost savings to support risk management activities to bolster financial resiliency.

Costs

5.19 The PRA considers the cost to firms of removing the reporting requirements to be negligible. Any costs associated with ceasing to report these templates should be more than offset by the reduction in ongoing costs.

5.20 The removal of these reporting requirements would mean a reduction in the amount of information on liquidity risks available to the PRA. However, the PRA considers that the proposed approach would continue to provide sufficient data to monitor the liquidity risks for Simpler-regime Firms, and therefore there would be no loss of prudential benefits to safety and soundness. Where data was needed on an ad-hoc basis, the PRA would request this data, which would have a small cost to firms. However, the PRA considers that the costs of producing data for a specific purpose should be more than offset by the reduction in ongoing reporting costs.

‘Have regards’ analysis

5.21 In developing these proposals, the PRA has had regard to the FSMA regulatory principles, and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022.  During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent April 2022. Where the proposed new rules are CRR rules (as defined in section 144A of FSMA), the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The Financial Services and Markets Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in shaping the design of the proposal:

1. Proportionality (FSMA regulatory principles) and the principle that regulators should base their regulatory activities on risk (Legislative and Regulatory Reform Act 2006):

The proposals in this chapter would enhance the proportionality of the PRA’s regulatory regime by reducing reporting costs for Simpler-regime Firms commensurate to the risk profile, scale, and complexity of these firms, by tailoring the frequency and format of their regulatory reporting.

2. Efficient and economic use of resources (FSMA regulatory principles):

The proposed exclusion of certain returns would reduce costs associated with receiving and processing returns, thereby making more efficient use of the PRA’s resources.

3. Different business models (FSMA regulatory principles):

The PRA considers that the returns it proposes to remove would be systematically less useful to the regulator for firms with structurally simple business models.

4. Competition/encouraging economic growth (HMT recommendations letters) and sustainable growth (FSMA regulatory principles):

The PRA considered how liquidity reporting might be streamlined expeditiously by switching off certain templates where the information provided is already provided in another way, or could be obtained when required. The proposed approach would reduce reporting costs for firms. Such cost reductions could help to enhance competition and reduce potential barriers to entry, encouraging sustainable economic growth.

5. Competitiveness (HMT recommendation letters):

The PRA considers that the proposals in this CP would reduce the regulatory compliance costs for international firms established in the UK that qualified as Simpler-regime Firms. The proposals may make the UK a more attractive place for small firms to do business, which may promote inward investment into the UK, although the extent of the potential impact of this is unclear.

6. Smart regulatory reform (HMT recommendation letter):

The PRA considers that the proposals set out in this CP would be consistent with the government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

5.22 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this set of proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor for this set of proposals.

6. Disclosures (Pillar 3)

6.1 This chapter sets out the PRA’s proposals for new Pillar 3 disclosure requirements for Simpler-regime Firms.

6.2 The proposals in this chapter would amend the Disclosure (CRR) Part of the PRA Rulebook (Appendix 6, Annex C).

6.3 The proposals set out in this chapter would entail:

• for Simpler-regime Firms that have listed financial instruments (‘listed Simper-regime Firms’), introducing a Pillar 3 disclosure requirement to disclose UK OV1 and UK KM1 templates;
• excluding Simpler-regime Firms without listed financial instruments (‘non-listed Simper-regime Firms’) from the requirement to disclose a Pillar 3 report; and
• removing the Pillar 3 rules applicable to small and non-complex institutions (SNCI) after a transitional period, 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.

6.4 The PRA considers that public disclosures by firms are an important component of a well-functioning financial system, and support the ability of market participants, customers, and other stakeholders to monitor the firms in which they invest and with which they transact. Regulatory disclosure requirements help to reduce information asymmetry on the risk profile of firms, the adequacy of regulatory capital, and overall compliance with prudential requirements. By mandating the content and presentation of information to be disclosed by a firm, regulated disclosures aim to reduce co-ordination failure whereby disclosures among firms are inconsistent, and insufficient information is disclosed to facilitate effective market discipline. However, for disclosures to be beneficial and support the effective exercise of market discipline, they need to be focused on information that is of value to investors and other market participants.

Proportionality

6.5 The PRA obtained feedback on Pillar 3 requirements through DP1/21. A significant number of respondents supported removing Pillar 3 requirements entirely, with a sub-set of these responses suggesting that the relevant information could be included instead within annual accounts. Some respondents saw scope for more simplification in the existing Pillar 3 disclosures. A small proportion of respondents thought that the Pillar 3 disclosure requirements should remain unchanged, and one respondent expressed concern that removing Pillar 3 disclosure requirements could result in smaller firms being viewed by the market as riskier, which, in their view, might result in increased funding costs.

6.6 The PRA considers that stakeholders’ use of Pillar 3 disclosures may vary across the population of Simpler-regime Firms, which may in turn cause the effectiveness of market discipline on these firms to vary. For listed Simpler-regime Firms, the PRA considers the ability of market participants to exercise market discipline to be greater, and therefore more effective in promoting firms’ safety and soundness. Capital market participants may hold a greater interest in listed firm disclosures and have more direct means to exert influence over its risk profile (eg voting, resource allocation actions, or the provision of advice to influence the action of others). The PRA’s Pillar 3 disclosure requirements, as updated by PS17/21 – ‘Implementation of Basel standards’, are proportionate by design, and vary in their application to certain firms, and disclosure frequency according to the CRR defined size categories – ‘Small and Non-Complex (SNCI)’,^{footnote [23]} ‘Other’ and ‘Large’; and whether a firm has listed financial instruments.^{footnote [24]} However, the PRA considers there to be scope to increase the proportionality of disclosure requirements for Simpler-regime Firms, in particular for those that are unlisted.

Disclosures by Simpler-regime Firms

6.7 The PRA proposes to introduce disclosure requirements for Simpler-regime Firms that reflect the lower capacity for these firms to cause significant financial disruption (eg through lower complexity of operations, capital market activity, and market share), and difference in stakeholders’ use of public disclosures between listed and non-listed Simpler-regime Firms. These proposals would substantially overlap with, but go further in terms of proportionality than the current SNCI disclosure requirements. These proposals would result in a net reduction in disclosures for SNCI firms that adopted the Simpler-regime. The PRA considers that the proposals set out in this chapter would maintain the existing level of market discipline over potential Simpler-regime Firms, while promoting the PRA’s primary objective of safety and soundness and its secondary competition objective.

6.8 The proposals in this CP would not preclude the PRA from proposing other disclosure requirements for Simpler-regime Firms in the future in order to further the PRA’s primary objective of safety and soundness.

Listed Simpler-regime Firm disclosures

6.9 The PRA proposes to require listed Simpler-regime Firms to make the following Pillar 3 disclosures:

• UK KM1– Key metrics;
• UK OV1 – Overview of risk weighted exposure amounts;

6.10 The PRA considers the proposed disclosure of UK KM1 and UK OV1 by listed Simpler-regime Firms would maintain a baseline level of transparency on key regulatory metrics including risk-weighted assets, capital, leverage, and liquidity ratios for such firms. The PRA considers that this would help to ensure that stakeholders have a core set of information about the risk profiles and regulatory compliance of listed Simpler-regime Firms that could be used by market participants to help them apply market discipline effectively to those firms. These templates are already applied to listed SNCI firms under the Disclosure (CRR) Part of the PRA Rulebook.^{footnote [25]}

6.11 This proposal reflects the PRA’s view that market participants seek disclosures on capital requirements and core regulatory metrics by listed firms, and have a greater ability to use them to apply market discipline to such firms. The PRA considers that the proposed disclosure of templates set out in this chapter would better align the information disclosed with that used by market participants to assess a firm’s prudential situation. It would also help to ensure that the costs of the producing the templates were more proportionate to benefits of market discipline, and its impact on promoting safety and soundness.

6.12 Under the PRA’s proposed approach, listed Simper-regime Firms would not be required to disclose qualitative information on the processes under which regulatory metrics are measured and managed. The PRA considers the prescribed disclosure of qualitative risk management information alongside quantitative information on key metrics may receive less periodic scrutiny by users and may be relatively more burdensome and costly for listed Simper-regime Firms to produce. Given these factors, the PRA considers the benefits of disclosing the existing SNCI qualitative disclosures by listed Simpler-regime Firms to be unlikely to warrant the cost of producing them.

6.13 This CP does not address remuneration disclosures for Simpler-regime Firms. The PRA is consulting separately on elements of the remuneration regime for small CRR firms and small third country CRR firms (small firms) in CP5/23. The PRA intends to consider further the interaction of the disclosure proposals in this CP and the remuneration proposals in CP5/23. This will include considering the remuneration-related disclosures that should be made by Simpler-regime Firms. The PRA intends to consult on its approach to remuneration disclosure requirements in the near future.

Non-listed Simpler-regime Firm disclosures

6.14 The PRA proposes to exclude non-listed Simper-regime Firms from the requirement to disclose a Pillar 3 report.

6.15 The PRA considers that the benefits of disclosure requirements in promoting the safety and soundness of non-listed Simpler-regime Firms may not be proportionate to the costs of producing Pillar 3 reports for those firms. The PRA considers that market participants may not have direct means to use disclosures to exert sufficient influence over non-listed Simpler-regime Firms to warrant the costs of producing the reports. As a result, the potential extent and effectiveness of market discipline upon these firms may be significantly constrained and indirect and dispersed compared to Simpler-regime Firms with listed financial instruments. The PRA considers it would be consistent with maintaining safety and soundness to exclude non-listed Simpler-regime Firms from the proposed Pillar 3 disclosures as part of a proportionate, more targeted approach to disclosure requirements.

Q5: Are there any factors or stakeholders the PRA has not identified or considered sufficiently in respect of the proposed exclusion of non-listed Simpler-regime Firms from Pillar 3 requirements?

Disclosure by small and non-complex institutions

6.16 The PRA proposes to remove from the CRR (Disclosure) Part of the PRA Rulebook the current SNCI disclosure requirements. This would involve removing the disclosure requirements applicable to SNCIs currently set out in Article 433b of the Disclosure (CRR) part of the PRA Rulebook. The PRA considers that the number of firms that would be eligible to apply the disclosure simplifications proposed for Simpler-regime Firms is likely to significantly exceed the firms currently applying SNCI disclosure requirements.

6.17 The proposed approach to disclosure for Simpler-regime Firms would require fewer disclosure templates to be completed than the disclosure requirements currently applied to SNCIs. The PRA considers that applying simpler regime and SNCI disclosure requirements in parallel would result in conflicting disclosure requirements for many Simpler-regime Firms. It would also not be straightforward, consistent, or efficient to maintain two parallel approaches to disclosure simplifications for smaller firms.

6.18 The PRA considers that there is likely to be substantial overlap in the SNCI and potential Simpler-regime Firm populations. However, the PRA considers that some firms currently subject to SNCI disclosure requirements would be unlikely to qualify as Simpler-regime Firms. The PRA proposes that those firms would be subject to an appropriate transition to Pillar 3 disclosure requirements applicable to ‘other’ institutions in Article 433c of the Disclosure (CRR) Part of the PRA Rulebook.

6.19 The PRA proposes that a three-year transition period apply to a firm that meets the definition of SNCI immediately prior to the implementation date in 2024 H2, and continues to meet it, but is not within the simpler regime. The PRA proposes that the current SNCI disclosure requirements would continue to apply to such a firm during that period. The PRA considers that this would help to facilitate a smooth transition to applying the broader requirements of the Disclosure (CRR) Part of the PRA Rulebook applicable to ‘other’ institutions.

PRA objectives analysis

6.20 The PRA has considered how to update the disclosure framework in a way that facilitates the transparency needed to facilitate market discipline for Simpler-regime Firms and promotes safety and soundness.

6.21 The PRA considers its proposal not to require qualitative disclosures for Simpler-regime Firms would promote firms’ safety and soundness by streamlining disclosure requirements and targeting the requirement for a core level of transparency over key prudential metrics more effectively in an accessible and comparable format. The PRA considers the proposal for listed Simpler-regime Firms would provide information on key prudential metrics and ensure that the necessary information, relative to size and the complexity of the firm, would be available for capital market participants to provide market discipline. The PRA also considers that the proposed disclosure requirements would advance safety and soundness by avoiding unnecessary cost burdens. With reduced costs, Simpler-regime Firms may have the opportunity to become more profitable and if such profits were retained, they would consequently be a safer and sounder firm, without the loss of prudential benefits.

6.22 The PRA considers the proposal not to require Pillar 3 disclosures by Simpler-regime Firms without listed financial instruments to promote the PRA’s primary objective, given the less direct and potentially less significant impact of market discipline on these firms. By not requiring disclosures for non-listed Simper-regime Firms and targeting them at listed firms, unnecessary cost burdens could be reduced, which in turn could increase a firm’s potential profitability. That could help to facilitate the strengthening of its capital position if any additional profits were retained.

6.23 The PRA considers the proposals would reduce the potential administrative and assurance work associated with the preparation of the Pillar 3 report, which could in turn reduce operational costs. By potentially lowering costs for Simpler-regime Firms, the proposals could support competition by enabling them to concentrate on using their resources in an efficient manner.

6.24 The PRA considers the proposal to remove the disclosure requirements in respect of SNCI would promote firms’ safety and soundness. SNCI firms that qualified as Simpler-regime Firms would be subject to the proposed, more targeted disclosure requirements; those that did not would be required to disclose under the ‘Other’ institutions category or disclose under the proposed transitional disclosures.

Cost benefit analysis (CBA)

6.25 This section sets out the analysis of the costs and benefits of introducing the changes to disclosure as part of the simpler regime.

6.26 The baseline for comparison in this section is that the simpler regime is not introduced, and firms continue to follow existing PRA rules.

Benefits

6.27 The PRA considers that there would be a cost-saving benefit associated with both the reduction in disclosure requirements for listed Simpler-regime Firms and the removal of Pillar 3 disclosures for non-listed Simpler-regime Firms.

6.28 For listed Simpler-regime Firms, these benefits would stem from the reduction in templates reported. For listed Simpler-regime Firms that currently qualify for the ‘Other' category for disclosure, the PRA considers the cost saving would be significant, as the required templates would reduce significantly in number from 88 to 7. The PRA considers that Simpler-regime Firms that currently qualify as SNCIs would see a more moderate impact, with the required templates reducing in number from 12 to 7. The PRA considers that the qualitative nature of the removed templates may mean that these templates take comparatively longer to complete than the retained templates, which could also have a positive impact on the cost saving.

6.29 For non-listed Simpler-regime Firms, the PRA considers that the removal of Pillar 3 disclosure requirements should result in reduction of the opportunity costs associated with the governance and assurance processes around such disclosures. This reduction could have additional benefits to safety and soundness to the extent that it allows firm senior executives to spend greater time focused on risk management activities.

6.30 The PRA considers that the resources saved by the reduction in costs associated with disclosure could have additional benefits to safety and soundness if firms use the cost savings to support risk management activities and improve operating efficiencies, or to strengthen financial resilience.

Costs

6.31 The PRA considers that the main cost associated with these proposals is related to the reduction of publicly disclosed information about Simpler-regime Firms. Disclosures can be used to maintain a basic and consistent level of information about firms to the market and can allow for market discipline to be exerted on firms.

6.32 For listed Simpler-regime Firms, the PRA considers that the continuing disclosure requirements should be sufficient to satisfy the demand for information on Simpler-regime Firms. The PRA’s consideration of this has been reached in part due to responses to DP1/21, which indicated there is less demand by for this type of information for Simpler-regime Firms. Given this, the PRA considers that the cost of continuing to produce qualitative disclosures is likely not to be outweighed by the benefits for it be proportionate to require them for Simpler-regime Firms.

6.33 For non-listed Simpler-regime Firms, the PRA considers that there is less capacity for market participants to use the information disclosed to exert discipline, and; therefore, the potential for any loss of prudential benefits (to safety and soundness) is likely not to be material. This assessment is informed by responses to DP1/21, which highlighted that disclosures are not frequently used for non-listed Simpler-regime Firms.

6.34 Simpler-regime Firms may assess there is a cost to reduced disclosure, eg they may be required to provide more information on an ad-hoc basis to secure funding and reassure lenders. However, if they were to assess that to be the case, a Simpler-regime Firm could voluntarily disclose such information. The PRA’s proposed disclosure requirements set a minimum that firms must disclose, but they do not prevent firms going further with voluntary disclosures if they so choose.

‘Have regards’ analysis

6.35 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy set out in the HMT recommendation letter from December 2022. During the development of these proposals, the PRA also had regard to the aspects of the Government’s economic policy set out in the HMT recommendation letter from March 2021 and the supplementary recommendation letter sent April 2022. Where the proposed new rules are CRR rules (as defined in section 144A of FSMA), the PRA has also taken into consideration the matters to which it is required to have regard when proposing changes to CRR rules. The Financial Services and Markets Bill 2022 includes a measure to amend the FSMA regulatory principles. If this measure comes into force, it would add a regulatory principle relating to the UK’s net zero emissions target. The PRA has had regard to this matter. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

1. Proportionality (FSMA regulatory principles) and the principle that regulators should base their regulatory activities on risk (Legislative and Regulatory Reform Act 2006):

The PRA considered the effect of size and listing of firms’ instruments, and the information needed for market discipline. The PRA considered whether for smaller and non-listed firms, the safety and soundness benefits of disclosure would be commensurate to the administrative resources required to produce Pillar 3 reports. This affected the PRA’s proposed approach, which seeks to make the disclosure requirements more targeted and proportionate. The PRA also considered whether, if disclosures were made voluntary, firms may still choose to disclose further information and by virtue be self-regulating to the extent that is not proportionate.

2. Different business models (FSMA regulatory principles):

The PRA’s proposed approach recognises that Simpler-regime Firms should have an appropriate level of disclosure requirements commensurate to their size, risk profile, nature, and complexity of the institution.

3. Competition/encouraging economic growth (HMT recommendation letters) and sustainable growth (FSMA regulatory principles):

The PRA considered the time and resources needed by Simpler-regime Firms to comply with disclosure requirements and the effect this would have on their competitiveness and contributions to economic growth. The PRA also considered the resources available to Simpler-regime Firms compared to larger firms, and the impact on resources by having simplified disclosure requirements for Simpler-regime Firms. The PRA’s proposed approach seeks to give firms more time and resources available to be invested into growth and competitiveness.

4. Competitiveness (HMT recommendation letters) and relative standing of the UK (FSMA CRR rules):

In developing its proposals, the PRA considered the administrative burden of complying with Pillar 3 requirements for firms in scope of the proposals of this chapter. The PRA also considered the benefits a new Simpler-regime Firm setting up in the UK may achieve as a result of the lower administrative burden with regard to the production of Pillar 3. The PRA’s proposed approach aims to maintain the application of Basel disclosure standards to internationally active banks, and would not unduly compromise the full implementation of Basel standards by the UK.

5. Smart regulatory reform (HMT recommendation letter):

The PRA considers that the proposals set out in this CP would be consistent with the government’s aim to deliver smart regulatory reform because they would streamline regulatory requirements to target risk more effectively for small domestic banks and building societies.

6.36 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for this disclosure, it is because the PRA considers that ‘have regard’ to not be a significant factor for this proposal.