On 12 November, Sam Woods (CEO of the PRA) used his Mansion House speech (the Speech) to discuss the merits of introducing a new “strong and simple” regime of prudential regulation for small banks and building societies in the wake of the UK’s exit from the EU, as well as providing some general commentary on the PRA’s post-Brexit approach.
Post-Brexit prudential regulation
Mr Woods reaffirmed that the PRA has “absolutely no intention” of using Brexit as an opportunity to weaken prudential regulation, noting that the UK has a “global responsibility” to maintain high standards given London’s position as a global financial centre.
While he was keen to stress that the ultimate form of the post-Brexit prudential regime was for the Government and Parliament to decide, Mr Woods put forward three “lodestars” for any future regulation:
- high regulatory standards;
- responsible openness (maintaining the UK’s openness to financial services while ensuring this works safely); and
- dynamism (the ability to innovate, adapt to new developments and allow firms to enter and exit the market).
The Speech also contained a warm welcome for HM Treasury’s recent policy statement – which confirmed that the Government will largely delegate responsibility for the implementation of Basel 3.1 and the UK CRR II to the PRA. Mr Woods noted that this demonstrated a shift to a “more British” style of regulation, in which the rules were formed by regulators rather than being set in law.
(On 16 November 2020, HM Treasury, the FCA and the PRA also released a joint statement confirming that the introduction of the UK’s Investment Firms Prudential Regime and the implementation of Basel 3 reforms which make up the UK equivalent to CRR II will be delayed until 1 January 2022. The postponement follows industry concern about the large volume of significant regulatory reform scheduled for 2021.)
A graduated prudential regime
Mr Woods noted that the UK’s exit from the EU provided an opportunity to reconsider the current European approach of applying the “full weight” of regulation to firms of all sizes to ensure harmonisation. A more proportional approach could be achieved with a “graduated regime” in which banks migrate from a very simple prudential regime to the full Basel framework as they become larger or involved in more complex activities.
The first step in implementing such a regime would be the introduction of the simplest regime for the smallest firms, which could be followed by additional steps in a fully graduated regime in due course.
‘Strong and Simple’ regime for small banks
Mr Woods set out two key decisions in designing this new regime for small banks and building societies:
- which firms should fall within it – this could be determined by a combination of size measured by total assets and satisfaction of other criteria; and
- how the existing requirements could be simplified – either by replacing the most complex existing requirements with simpler versions or narrowing the set of applicable requirements.
If the Speech sparks a debate on the correct prudential approach for small banks, Mr Woods indicates that the PRA would produce a discussion paper in the Spring setting out some initial proposals.
The Speech follows the PRA’s consultation paper on its approach to challenger banks which it launched in July 2020 and appears to fit into a broader regulatory theme in the UK – focussing on calibrating regulation to the size and scale of the relevant firm. The development of the PRA’s thinking in this area will be of great interest to challenger banks (including fintechs) and to smaller banks and building societies.
The PRA’s focus on simplifying regulation where possible reflects a growing theme amongst other global regulators, including the US CFTC, which has launched the similarly-titled ‘Project Keep It Simple, Stupid’ to make rules and regulations less burdensome and costly.