1.1 This Prudential Regulation Authority (PRA) policy statement (PS) provides feedback to responses to consultation papers (CP) 4/23 The Strong and Simple Framework: Liquidity and Disclosure requirements for Simpler-regime Firms and CP14/23 – Pillar 3 remuneration disclosure. In regard to the Small Domestic Deposit Takers (SDDTs) criteria, it also provides feedback to responses to CP16/22 – Implementation of the Basel 3.1 Standards and further feedback to responses to CP5/22 – The Strong and Simple Framework: a definition of a Simpler-regime Firm. It also contains the PRA’s final policy, as follows:
- amendments to the Liquidity Part of the PRA Rulebook (Appendix 1);
- amendments to the Reporting Part of the PRA Rulebook (Appendix 1);
- amendments to the Disclosure Part of the PRA Rulebook (Appendix 1);
- updated supervisory statement (SS) 24/15 – The PRA’s approach to supervising liquidity and funding risk (Appendix 2);
- updated statement of policy (SoP) – Liquidity and funding permissions (Appendix 3)
- updated SoP – Pillar 2 Liquidity (Appendix 4); and
- introducing a new SoP – Operating the Small Domestic Deposit Taker regime (Appendix 5).
1.2 The PRA has decided to rename Simpler-regime Firms to Small Domestic Deposit Takers (SDDTs), and Simpler-regime consolidation entities to SDDT consolidation entities. These firms will be called SDDTs and SDDT consolidation entities in the final rules and policy documents, as well as in any future Strong and Simple publications. To avoid confusion, throughout the rest of this policy statement, the PRA will refer to SDDTs, SDDT consolidation entities, the Small Domestic Deposit Takers regime or SDDT regime, and SDDT criteria, rather than Simpler-regime Firm, Simpler-regime consolidation entities, simpler regime, and Simpler-regime criteria, even when referring to past consultations.
1.3 This PS is relevant to PRA-authorised banks, building societies, CRR consolidation entities, and entities prospectively interested in, or currently applying for, authorisation as a deposit-taker and prospective CRR consolidation entities. It should be of particular interest to firms and CRR consolidation entities that expect to meet the SDDT criteria and SDDT consolidation criteria respectively, and to firms and CRR consolidation entities that would wish to be treated in the same way as those meeting the criteria. It should also be of particular interest to firms that expect to meet the criteria for small CRR firms in the Remuneration Part of the PRA Rulebook (small remuneration firms).
1.4 In CP5/22, the PRA proposed a set of criteria to define a type of UK bank or building society (hereafter ‘firm’) that would be subject to a simpler, but robust, set of prudential rules in the future. Following the responses to CP5/22, the PRA proposed a revised set of criteria in CP16/22, which proposed to use the criteria for determining eligibility for the Transitional Capital Regime (TCR).
1.5 The revised SDDT criteria proposed in CP16/22 are set out in Table A.
Table A: SDDT criteria proposed in CP16/22
Maximum size threshold of £20 billion.
At least 85% of a firm’s credit exposures must be to obligors located in the UK.footnote 
Limited trading activity
A firm must have an on- and off- balance sheet trading business that would be equal to, or less than, both £44 million and 5% of the firm’s total assets.
The sum of a firm’s overall net foreign exchange position must be equal to or less than 2% of the firm’s own funds.
A firm must not hold any positions in commodities and commodity derivatives.
Internal ratings based approach
A firm must not use an IRB model for credit risk.
Exclusion of firms providing certain clearing, settlement and custody services
A firm must not provide clearing, settlement, custody or correspondent banking services.
Exclusion of firms operating a payment system
A firm must not operate a payment system.
Any parent of the firm must be a UK entity.footnote 
The criteria must also be met in respect of the CRR consolidation entity on a consolidated basis, and in respect of each UK bank and building society in the consolidation group.
1.6 In CP4/23, the PRA proposed a series of simplifications to liquidity and disclosure requirements for firms meeting the revised SDDT criteria. The PRA proposed that eligibility for those simplifications would be determined by reference to the proposed criteria as published in CP16/22.footnote  Firms meeting the criteria would be able to consent to a rule modification to become SDDTs.footnote  The proposed simplifications were;
- introduction of a new Retail Deposit Ratio (RDR), and 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 or amendment of certain liquidity reporting templates;
- new Pillar 3 disclosure requirements for SDDTs; and
- transitional arrangements for firms currently disclosing and reporting under the Small and Non-Complex Institution definition that will not meet the SDDT definition.footnote 
1.7 Both CP4/23 and CP5/23 stated that the PRA would consider the interaction of disclosure and remuneration proposals for small firms, and intended to consult on new remuneration disclosure requirements in a subsequent CP. In CP14/23, the PRA proposed simplifications to remuneration disclosure requirements for SDDTs and small remuneration firms, using the criteria proposed in CP4/23 and CP5/23. The final criteria for small remuneration firms are set out in PS16/23 – Remuneration: Enhancing proportionality for small firms.
Summary of responses
1.8 The PRA received 19 responses to CP5/22. Respondents generally welcomed the PRA’s proposals but made a number of comments and requests for clarifications on specific criteria. These were considered and resulted in the changes to the SDDT criteria outlined in CP16/22. The PRA received 14 responses to CP16/22 relating to the SDDT criteria. Respondents generally supported the proposed changes to the SDDT criteria as set out in CP16/22 but made a small number of comments and requests for clarification that are outlined in Chapter 2.
1.9 The PRA received 13 responses to CP4/23. Respondents generally welcomed the PRA’s proposals. In a small number of areas there were some comments and requests for clarifications that are set out in Chapter 2.
1.10 The PRA received 3 responses to CP14/23. Respondents supported the PRA’s proposals, although one respondent asked for a number of clarifications that are set out in Chapter 2.
1.11 Where the final rules differ from the draft in the CP in a way which is, in the opinion of the PRA, significant, the Financial Services and Markets Act 2000 (FSMA) footnote  requires the PRA to publish details of the difference together with a cost benefit analysis. Where the final rules differ from the draft in the CP the PRA is required to publish a statement setting out in the PRA’s opinion whether or not the impact of the final rules is significantly different from the impact of the draft rules: (i) on mutuals; and (ii) on mutuals as compared with other PRA-authorised firms.
1.12 After considering the responses, the PRA has made the following changes to the draft rules:
- Renaming Simpler-regime Firm to SDDT (Small Domestic Deposit Taker), Simpler-regime Consolidation entity to SDDT consolidation entity, Simpler Regime to SDDT regime and Simpler regime criteria to SDDT criteria.
- Changing the modification by consent process for consolidation groups, so that the responsibility for certifying that the group meets the SDDT criteria on a consolidated basis and that the other firms in the group meet the SDDT criteria sits with the group’s CRR consolidation entity, rather than the solo entity. The SDDT consolidation entity is also responsible for notifying the PRA if the SDDT criteria cease to be met on a consolidated basis or by any firms in the group.
- Setting the implementation dates as 1 January 2024 for the rules relating to the definition of an SDDT, the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with glossary changes, application rules, definitions, as well as the disclosure rules, and as 1 July 2024 for the liquidity rules.
- Other minor drafting changes to the rules to correct minor errors and improve readability.
1.13 The PRA has also made changes to the SoP – Operating the Small Domestic Deposit Taker regime. Originally information on how firms would access the SDDT regime was set out in a SoP that also covered how firms would access the TCR. The PRA has moved the content on the SDDT regime into a separate standalone SoP, as the TCR is still yet to be finalised. The text remains the same as in the previous joint SoP, subject to changes to reflect the changes set out above in paragraph 1.13 and minor drafting changes to improve readability.
1.14 The PRA considers that the changes to the final rules are not significant and will not materially alter the cost benefit analysis presented in the CPs.
1.15 The PRA considers that SDDT is a more appropriate name as it is more informative about the type of firm that would be in the simpler prudential regime. The changes to the SoP are not substantive in nature, and simply allow the PRA to finalise this SoP alongside the rules to which it refers. The minor drafting changes to the rules are intended to correct minor errors and improve the clarity of the rules, but not to amend the substance of the provisions. The PRA considers that there will be no change to the cost benefit analysis as a result of these changes.
1.16 The PRA considers that the change to the role of CRR consolidation entities in the rules for the modification by consent process ensures that the most appropriate entity is certifying that the group meets the criteria on a consolidated basis and that other firms in the group meet the criteria. It also ensures that an approved holding company that will be an SDDT consolidation entity is explicitly consenting to become such an entity. The PRA considers that the additional costs to firms from such an approach will be minimal as firms would have always needed to certify that both the solo entity and the group met the SDDT criteria. This change only alters where the responsibility lies for certifying that the consolidated SDDT criteria are met and notifying the PRA when they cease to be met.
1.17 The PRA considers that the split implementation date will allow sufficient time for eligible firms to transition to the SDDT regime, whilst responding to feedback received around the timing of the implementation of disclosure rules. The PRA considers that bringing forward the implementation date for the disclosure rules will not incur any additional costs for either firms or the PRA beyond those discussed in CP4/23. Firms with a financial year-end between 1 January and 1 July who opt into the SDDT regime before they would have published their 2023/24 annual disclosures will be able to benefit from the reduced disclosure requirements in the same way as discussed in CP4/23, but one year earlier.
1.18 The PRA considers that the impact of the final rules is not significantly different from the impact of the proposed rules on mutuals, or on mutuals as compared with other PRA-authorised firms following these changes.
1.19 When making rules, the PRA is required to comply with several legal obligations, including considering responses to consultation and publishing an explanation of the PRA’s reasons for believing that making the proposed rules is compatible with its objectives and with its duty to have regard to the regulatory principles.footnote  In CP4/23 the PRA set out the required explanations in paragraphs 2.17-2.26, 3.26-3.37, 4.12-4.26, 5.11-5.21 and 6.20-6.35, and in CP14/23 this was set out in paragraphs 2.13-2.26. In CP5/22, these were set out in Chapter 3: The PRA’s statutory obligations, in CP16/22 these were set out in Chapter 2: Scope and levels of application, Box A.
1.20 Since the publication of CP4/23, the PRA’s new secondary competitiveness and growth objective and regulatory principle in relation to the UK net zero emissions target have come into force. As set out in CP4/23, the PRA was able to anticipate these new requirements when preparing its proposals. The PRA has had regard to the new regulatory principle. The PRA set out in CP4/23 (paragraphs 2.26, 3.37. 4.26, 5.21 and 6.35) how its proposals, now finalised, would facilitate the international competitiveness of the UK economy and its growth in the medium to long term.
1.21 The explanations provided in the CPs of how the PRA’s proposals were compatible with its objectives, and of how they have been affected by matters to which the PRA has been required to have regard, apply also to the final policy and rules. The following further points are also relevant to how the PRA’s obligations in relation to its objectives and duties to have regard to matters have affected the final policy and rules.
1.22 The PRA considers that the change in the role of the CRR consolidation entities would further the PRA’s safety and soundness objective by ensuring that the CRR consolidation entity has an appropriate role in relation to the application of consolidated prudential requirements. The PRA considers that this change is also in line with the Legislative and Regulatory Reform Act (LRRA) 2006 principle to carry out regulatory activities in a way which is consistent.
1.23 The PRA considers that the change to the implementation date would not impact how the rules are compatible with the PRA’s objectives and duty to have regard to the regulatory principles, relative to the explanations set out in CP4/23. This is because the change does not alter the rules themselves, only when they take effect for SDDTs and because the earlier implementation date reduces the burden on firms.
1.24 The PRA must also publish a summary of the purpose of the proposed rules.footnote  This is set out in CP4/23 (background section) and in CP14/23 (background section). The rules are intended to establish a materially simpler prudential regime for small banks and building societies that are simple in nature and focus on UK domestic lending, starting with simplifications for liquidity and disclosure requirements. The regime is looking to address the ‘complexity problem’, where the same prudential requirements are applied to all firms, but the costs of understanding, interpreting, and operationalising those requirements are higher for small firms, relative to the associated public policy benefits.
1.25 The rules relating to the definition of an SDDT, and the ability for eligible firms and consolidation entities to become SDDTs and SDDT consolidation entities, along with Glossary changes, application rules and definitions will take effect from 1 January 2024. The rules on disclosure will take effect from 1 January 2024. The other rules in this PS will take effect from 1 July 2024.
1.26 The PRA intends to consult on simplifications to Pillar 2 and buffer requirements for SDDTs and SDDT consolidation entities in Q2 2024. When the PRA consults on further potential simplifications for SDDTs and SDDT consolidation entities, it intends to do so on the basis of proposing that simplifications would apply to SDDTs and SDDT consolidation entities without SDDTs or SDDT consolidation entities needing to consent to a further modification. For example, the PRA has taken this approach to propose exempting SDDTs and SDDT consolidation entities from the proposed requirement to manage step-in risk in CP23/23 – Identification and management of step-in risk, shadow banking entities and groups of connected clients.
1.27 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 
2.1 Before making any proposed rules, the PRA is required by FSMA to have regard to any representations made to it. The PRA must publish an account, in general terms, of those representations and its feedback to them.footnote 
2.2 The PRA has considered the responses received to CP4/23 and CP14/23, as well as responses received to CP5/22 and relevant responses to CP16/22. This chapter sets out the PRA’s feedback to those responses, and its final decisions.
2.3 The sections below have been structured broadly along the same lines as the chapters of the CPs, with some areas rearranged to better respond to related issues. The responses have been grouped as follows:
- The SDDT scope criteria
- The level of application
- Operationalisation of the SDDT regime
- Implementation date for the SDDT regime
- Net Stable Funding Ratio (NSFR)
- Pillar 2 Liquidity
- Liquidity Reporting
- Pillar 3 Disclosures
- Future policy developments for SDDTs
- Other comments
The Small Domestic Deposit Taker scope criteria
2.4 In CP5/22, the PRA proposed a definition of a Simpler-regime Firm. The CP proposed that a firm meeting this definition would be in scope of a simpler prudential regime that the PRA intends to build. To meet the definition, a firm would have to satisfy all of a set of scope criteria. CP16/22 contained revised scope criteria, based on feedback received to CP5/22, which the PRA proposed would determine eligibility for a TCR. In CP4/23 the PRA republished those criteria and proposed that eligibility for liquidity and disclosure simplifications would be determined by reference to those criteria.
2.5 The PRA received the following responses to CP5/22 that did not refer to a specific scope criterion, but nevertheless concerned the definition of a Simpler-regime Firm.
2.6 Seven respondents commented that they supported the overall definition, and ten respondents commented that they supported the overall objectives of the Strong and Simple initiative. One respondent supported the PRA’s proposed intention to base the scope criteria on existing thresholds where possible.
2.7 One respondent suggested the PRA could consider two sliding scales of requirements that would apply to firms on both sides of the thresholds, to avoid cliff-edge effects. Another respondent also favoured the avoidance of cliff edges. One respondent suggested that having multiple layers of a Strong and Simple Framework could make the overall regulatory framework more complex.
2.8 One respondent noted that the PRA will need to be clear how the Simpler-regime Firm definition will work alongside other existing PRA categorisations, such as the definition of a new and growing bank, and systemically important firms. One respondent noted that they would appreciate greater clarity on how the SDDT regime would work in combination with SS3/21 – Non-systemic UK banks: The PRA’s approach to new and growing banks.
2.9 Three respondents commented that it was difficult to fully evaluate the appropriateness of the Simpler-regime firm definition without knowing more about the future proposals for policies applying to such firms.
2.10 One respondent suggested that the PRA should consider a more immediate simplification of the regime for all non-systemic firms whilst the SDDT regime is created. One respondent suggested the PRA should review its prudential regime to take into account the systemic impact of a bank, with a simpler, more proportional regime used for non-systemic banks.
2.11 The PRA acknowledges the difficulty in judging the appropriateness of the SDDT criteria without knowing the proposals that will apply to SDDTs. This is why we have waited to finalise the criteria until there are simplifications to go alongside the definition.
2.12 The PRA has favoured a ‘streamlined’ approach to developing the SDDT regime, to help avoid a large burden for firms that need to transition out of the regime.footnote  Further, the PRA considers that in many cases a firm will be able to prepare for ceasing to meet the SDDT criteria and to move away from the SDDT regime (in part because the metrics in some of the criteria are based on moving averages). In the future, the PRA may introduce other layers to the Strong and Simple Framework. As part of the development of any future layers, the PRA would consider how best to manage firms transitioning between layers, and whether the addition of future layers would add any undue complexity.
2.13 The PRA is committed to success of the Strong and Simple Framework and considers that this will be the main way by which small firms would access simplified prudential rules and expectations. However, proportionality is a key consideration in the policy-making process for the PRA across all areas. Therefore, there could be elements of proportionality included in PRA policies even where those policies are not specific to the SDDT regime.
2.14 The PRA intends that any policies introduced as part of the SDDT regime will fully align with other areas of existing policy, including SS3/21. As demonstrated in CP4/23, the PRA has sought to ensure that being a new or growing firm is not in itself a barrier for accessing the SDDT regime and have considered where approaches to SDDT policies will need to be adapted to be accessible for these firms (eg paragraph 3.21 in CP4/23 on how the disapplication of NSFR provisions would be adapted for new firms).
2.15 In CP5/22 the PRA proposed a maximum size threshold of £15 billion of total assets, where total assets were as defined in the financial reporting framework (FINREP) and calculated using the average of the firm’s total assets during the previous 36 months. Where a firm had not been required to report its total assets at least once in the previous 36 months, the PRA proposed that a firm would meet the size criterion if it forecast that it would meet the size threshold on the first occasion it was required to report.
2.16 The PRA received the following comments in response to CP5/22.
2.17 Four respondents suggested that a £15 billion threshold would become a barrier to growth, with two of these respondents advocating for a £25 billion threshold instead. One respondent wanted to understand how the £15 billion threshold had been calibrated, and queried whether the proposed calibration was because the PRA thought risk increases with size, or whether it was related to the PRA’s view of when a firm could be considered systemic. One respondent raised the concern that setting the threshold at £15 billion would set the definition of a systemic firm as being one with total assets of over £15 billion. One respondent suggested that there was insufficient evidence that firms became riskier or more complex when they reach a balance sheet size of £15 billion, and that setting the threshold at this level could negatively impact mid-tier firms.
2.18 Another respondent stated that the PRA should consider how various regulatory thresholds align, stating as an example the £15 billion size threshold suggested in CP5/22 and the £15-25 billion range for the indicative total assets threshold in the Bank of England’s Statement of Policy on its approach to setting a minimum requirement for own funds and eligible liabilities (MREL).
2.19 One respondent supported the proposed size threshold on the grounds that it would give firms adequate room for growth.
2.20 Two respondents thought that the proposed size threshold was too high and might reduce the degree to which the PRA would be able to simplify prudential regulation for small firms, with one of these respondents suggesting a £5 billion threshold instead.
2.21 Two respondents agreed that it was sensible to use the FINREP definition for total assets for the size criterion. Four respondents supported using a 36-month rolling average, with one respondent supporting the PRA’s proposal to take a different approach in inorganic growth situations, eg mergers, acquisitions, and divestments. One respondent suggested that the size threshold should be periodically indexed to take into account inflation and economic growth.
2.22 Three respondents suggested that exposures to central banks should be excluded from the size criterion, to align with the approach taken in the leverage ratio calculation, or to avoid firms either inadvertently being brought out of scope because of holdings of extra liquidity, or to prevent a scenario where firms are discouraged from holding sufficient liquidity, due to concerns about breaching the maximum size threshold. One respondent suggested the PRA consider using risk weighted assets for the size criterion, or otherwise give credit to firms with excess capital or liquidity when taking into account size. Another respondent suggested that the PRA should consider using the total-asset measure alongside other measures, such as size of net loans or level of retail deposits, and risk-weighted asset density, to consider whether a firm should be considered too large for the SDDT regime.
2.23 After considering these responses, in CP16/22 the PRA proposed to increase the maximum size threshold in the SDDT criteria to £20 billion total assets. The PRA considered that this change would give firms further room to grow while still meeting the criteria, but at the same time would not inhibit the PRA’s ability to simplify regulation for small firms while maintaining resilience. CP16/22 also stated the PRA’s intention to explain, when publishing the proposals for the first phase of the SDDT regime, how it would review the scope criteria, including the thresholds contained within the criteria. In CP4/23 the PRA proposed to review the criteria by the end of 2028, which would allow for any necessary rebasing on account of inflation. The PRA’s approach to reviewing the SDDT criteria is set out in the SoP – Operating the Small Domestic Deposit Taker regime.
2.24 In response to the changes proposed in CP16/22, six respondents supported the increase in the maximum size threshold to £20 billion. One respondent questioned whether the increase was sufficient to capture a large enough proportion of mid-tier banks. Two respondents were concerned that increasing the size criterion to £20 billion may mean that larger and more complicated firms are in scope, which may limit the simplifications that are possible. Two respondents requested that the size threshold was increased to £25 billion to align with the top of the indicative total assets threshold in the MREL policy. One respondent suggested that the PRA should consider how the size criterion will be adjusted for inflation.
2.25 The PRA also received some comments on the size criterion in response to CP4/23.
2.26 Two respondents felt the £20 billion threshold was too high and would prevent the PRA being able to make the regime appropriately proportionate. One of these respondents suggested that the PRA should consider a lower threshold of £5 billion, or else should introduce an additional layer of the Strong and Simple Framework for firms below that threshold. One respondent commented that they did not object to the £20 billion size threshold but hoped it would not prevent the PRA being bold in its proposals.
2.27 Having considered the responses, the PRA has decided to maintain the value of the maximum size threshold as set out in CP16/22 and CP4/23. The PRA believes that a size threshold of £20 billion balances the ability to provide significant simplifications for smaller firms, while increasing the size of firms captured and providing further room for growth. All of the SDDT criteria, including the size criterion, will be reviewed no later than the end of 2028, which will allow the opportunity for any necessary rebasing, eg due to inflation.
2.28 With regards to the suggestion to exclude exposures to central banks from the size criterion the PRA believes that the existing proposal to base the size measure on a 36-month average would help mitigate the risk of firms exceeding the size criterion due to maintaining extra liquidity in times of stress, alongside the increase in the threshold to £20 billion.
2.29 With regards to the suggestion the size criterion be based on further measures of size, the PRA considers that using just one measure of size is simple, which is consistent with the aims of Strong & Simple. The PRA considers using total assets as the measure of size will capture the firms that tend to face higher average costs of understanding, interpreting, and operationalising prudential regulation, but other measures, including the ones suggested by respondents, might not.
Limited trading activity
2.30 In CP5/22, the PRA proposed three criteria that would imply SDDT have limited trading activity.
2.31 First, the PRA proposed that a firm must have an on- and off-balance sheet trading book business that would be equal to, or less than, both of the following thresholds: 5% of the firm’s total assets; and £44 million. These thresholds are aligned with the threshold used in the Trading Book (CRR) Part of the PRA Rulebook to define a small trading book business.
2.32 Second, the PRA proposed that the sum of a firm’s overall net foreign exchange (FX) position, as defined in Article 351 in CRR, must be equal to or less than 2% of a firm’s own funds.
2.33 Third, the PRA proposed that a firm must have no commodity positions.
2.34 The PRA received the following comments in response to CP5/22.
2.35 Five respondents supported having a limited trading activity criterion, with one of these respondents suggesting that the limit may need to be periodically rebased to account for inflation and growth over time.
2.36 Three respondents agreed with the proposal to have an FX criterion. However, one of these respondents suggested that a 2% threshold may be too low, as it would not provide enough allowance for remittances. Another respondent suggested that the 2% threshold was too low and suggested instead that the threshold could be raised to 5% of own funds, with firms exceeding 2% own funds to continue to calculate an own funds requirement for FX risk in accordance with existing CRR rules.
2.37 Two respondents suggested that the PRA should consider including some smoothing or averaging mechanism in the FX criterion.
2.38 One respondent commented that fintechs may offer services to consumers that involve a degree of trading and FX activity, and that the PRA should consider whether the limited trading activity criteria might discourage firms from seeking to provide such services to retail customers, or else encourage them to do so via third party providers, which could increase complexity and operational risk, and reduce operational resilience. One respondent suggested that including a limited trading activity criterion could discourage diversification among this cohort of firms.
2.39 Two respondents agreed with the PRA’s proposal to exclude firms with commodities positions, although one of these respondents suggested that the PRA should consider if setting a de minimis threshold would be more suitable than the requirement that firms have no commodities exposures.
2.40 After considering these responses, in CP16/22 the PRA proposed to maintain the thresholds for the trading book and FX positions. However, the PRA stated its intention that these thresholds would be considered as part of the review of the criteria it intends to carry out by the end of 2028.footnote 
2.41 In CP16/22 the PRA proposed to allow smoothing around the thresholds. For both the trading book and FX criteria, the PRA proposed that a firm would meet each criterion unless it has been above the relevant threshold for more than three months in succession, or more than half of the months in the past year. For the FX criterion, the PRA also proposed a ceiling of 3.5% own funds, to prevent firms with large fluctuations in FX positions being able to meet the criterion.
2.42 The PRA did not propose any changes to the commodities criterion in CP16/22. The PRA continues to consider that commodity positions are not consistent with the aims of the SDDT regime.footnote 
2.43 The PRA did not receive any responses to CP16/22 about the proposed changes on the limited trading activity criteria. The PRA did not propose any changes to these criteria in CP4/23. However, one respondent requested that the PRA clarify that the banking book versus trading book designation is the basis for the trading-book threshold.
2.44 The PRA has decided to maintain the limited trading activity criteria as consulted on in CP16/22. The PRA can confirm that the basis for the trading criteria thresholds is the banking book versus trading book designation as set out in Article 94 the Trading Book (CRR) Part of the PRA Rulebook.
2.45 In CP16/22, as part of the Basel 3.1 package, the PRA consulted on the inclusion in the PRA Rulebook of a more explicit designation of what is considered a non-trading book instrument. Although the final policy for Basel 3.1 has not yet been determined, the proposed rules would identify in a clear way those positions and instruments that most appropriately captures trading activity.
No internal ratings based approach
2.46 In CP5/22 the PRA proposed that a firm must not have any internal ratings based (IRB) approvals to meet the definition of an SDDT. However, firms that wish to develop IRB models and submit an IRB application could do so while continuing to meet the definition. A firm would only cease to the meet the definition when its IRB application is approved, and the PRA revokes its modification direction.
2.47 Three respondents supported this criterion. Two respondents supported the idea that firms could submit an IRB application while remaining in the SDDT regime. One respondent argued that the PRA should consider dropping the IRB criterion, as firms who meet all the other criteria should not be prevented from accessing simplifications, especially given they may rely on the lower capital requirements under IRB.
2.48 The PRA did not propose any changes to this criterion in CP16/22. One respondent to CP16/22 advocated for the removal of the IRB criterion, citing that firms with a relatively simple business model and limited systemic impact should be able to benefit from the SDDT regime despite having an IRB model.
2.49 After considering these responses, the PRA has decided to maintain the IRB criterion as set out in CP5/22, CP16/22 and CP4/23. Use of IRB models for regulatory capital calculation purposes is governed by an extensive and complex set of prudential rules and guidance, and therefore excluding firms that use IRB models to calculate regulatory capital from meeting the SDDT criteria will increase the PRA’s ability to implement simplifications for SDDTs, without reducing safety and soundness. Furthermore, the PRA considers that IRB models can be complicated to develop and validate, and consequently are generally only used by firms that have sufficient scale and skilled resource to be able to meet the development and model approval process costs. Consequently, these are not typically the firms most affected by the complexity problem, as described in CP5/22.
Exclusion of firms providing certain clearing, settlement, and custody services, and operating a payment system
2.50 In CP5/22 the PRA proposed the Simpler-regime Firm definition would exclude firms that, as any part of their business activity, provide clearing, settlement, custody, or correspondent banking services (including by acting as an intermediary) to another bank or building society. It also proposed that a Simpler-regime Firm must not operate a payment system.
2.51 Two respondents supported the exclusion of firms providing clearing, settlement, custody, or correspondent banking services. One respondent was neutral as to the exclusion of firms providing settlement, clearing, and custody services, but argued that provision of basic correspondent banking services to another SDDT should not disqualify a firm from the regime. One respondent argued that the PRA should consider whether firms providing correspondent banking services to a parent should be prevented from meeting this criterion.
2.52 One respondent asked for confirmation that a firm providing payment or current account facilities to their customers would not be excluded from being an SDDT.
2.53 Two respondents supported the exclusion of firms providing payment systems.
2.54 After considering the responses to CP5/22, the PRA proposed to amend this criterion in CP16/22 so that the provision of these services in sterling to another UK bank, building society or a non-UK credit institution in the firm’s immediate group is permitted. This is because the PRA considers that provision of these services to another part of the group does not increased interconnectivity with the wider financial system or create specific risks to the same extent as when those services are provided to third-party banks and building societies.
2.55 The PRA did not receive any comments concerning this criterion following the publication of the proposed revised criteria in CP16/22.
2.56 The PRA has decided to maintain this criterion as proposed in CP16/22 and CP4/23. The PRA can confirm that a firm providing payment or current account facilities to their customers, unless those customers are other UK banks, building societies or non-UK credit institutions, would not exclude a firm from becoming an SDDT.
2.57 In CP5/22 the PRA proposed that at least 85% of a firm’s credit exposures must be to obligors located in the UK for a firm to be an SDDT.footnote  This excludes exposure classes referred to in points (a) to (f) of Article 112 of the CRR.
2.58 Four respondents supported the inclusion of a criterion that captures domestic-focused firms only. Two respondents suggested applying the criterion on a rolling average basis, to avoid inadvertent breaches due to exchange rate fluctuations, with one of these respondents suggesting 36 months for the length of the averaging period.
2.59 One respondent argued that the criterion could deter small firms from seeking to expand their business overseas. They contrasted this with other government and regulatory initiatives, eg the Ring-fencing Panel Review’s recommendation to remove the restrictions on ring-fenced banks from establishing operations or servicing customers outside of the EEA.
2.60 Two respondents suggested the PRA consider aligning the domestic criterion to the criterion restricting international activity in the ‘Small and Non-Complex Institution’ definition instead.footnote 
2.61 Three respondents raised that under the criterion mortgage lending to expatriates on property in the UK would be classed as overseas lending, and they felt that it should be classified as domestic lending instead. Respondents pointed out that this treatment would cause some firms to be ineligible for the SDDT regime.
2.62 Two respondents raised that firms’ loans to overseas Special Purpose Vehicles (SPVs) may result in an overstatement of their overseas exposures, as the SPV may be domiciled outside the UK even when most credit exposures by assets are in the UK, including residential buy to let properties. One of these respondents suggested that the geographical location of collateral may be a better approach that would alleviate this problem.
2.63 One respondent suggested that financial institution or bank trade loans should be excluded from the definition of credit assets in the domestic criterion.
2.64 Four respondents argued that exposures to obligors in the Crown Dependencies and Gibraltar should be treated as domestic for the purposes of this criterion because this activity is generally operated through the UK, and because of the close links between these jurisdictions and the UK.
2.65 Two respondents suggested alternative data sources the PRA could use to evaluate the domestic criterion. These included the Financial Conduct Authority’s (FCA) mortgage lending and administration return (MLAR) and FSA015. It was suggested that MLAR could also be used as a supplement for those with expatriate lending, in order for these firms to demonstrate they meet the domestic criterion if expatriate lending were classed as domestic exposures.
2.66 One respondent queried how the 85% cut-off was determined, arguing that exposures to obligors in non-UK jurisdictions is not necessarily an indicator of complexity, especially in cases where exposures are primarily fee accruals awaiting settlement from funds that they control or temporary overdrafts due to timing differences on client stock trades. One respondent argued that the domestic criterion was too restrictive and would prevent UK subsidiaries of non-UK banks from being able to benefit from a strong and simple regime, even though they still face the complexity problem.
2.67 After considering these responses, in CP16/22 the PRA proposed to maintain a domestic activity criterion within the SDDT criteria. As set out in CP5/22, the PRA considers the extent of international banking activity may be an indicator of a firm’s complexity. Furthermore, this criterion is consistent with UK adherence to the Basel standards for internationally active banks, which contributes to global financial stability and in turn supports the safety and soundness of PRA-authorised firms and UK financial stability.footnote 
2.68 The PRA did, however, propose to amend the domestic activity criterion so that exposures that are residential loans to individuals, secured on UK land and buildings (for the purposes of the MLAR) may be treated as exposures located in the UK for the purposes of testing whether a firm meets the domestic activity criterion (if they would not otherwise be treated as located in the UK). The PRA considered this change could allow additional firms to benefit from the SDDT regime and recognises that expatriate mortgage lending is primarily based in the UK rather than overseas.
2.69 The PRA also proposed to modify the domestic criterion to introduce a smoothing mechanism, so that a firm’s 36-month average ratio of credit exposures to UK obligors to credit exposures to obligors in all jurisdictions must be at least 85% but the ratio should never drop below 75%. The PRA considered that smoothing around the threshold reduces the risk of firms inadvertently failing this criterion and that the 75% floor implies that this criterion would still exclude internationally active firms.
2.70 The PRA received the following comments in response to CP16/22 on the domestic criterion.
2.71 Two respondents supported the inclusion of smoothing in the updated domestic criterion. One of these respondents suggested that the 36-month average should not apply for the initial assessment from the implementation of the SDDT regime however, as some firms may make changes to their business model to allow them to become an SDDT. They proposed that the initial assessment be a point-in-time assessment as of 31 December 2023, or that the average is only calculated back to Q2 2022 (when the PRA first published the intention to have a domestic activity criterion), transitioning to a 36-month average over time. One respondent challenged the 85% threshold for UK exposures as they felt it was too high, and questioned how it was determined.
2.72 One respondent supported the change to the domestic criterion to include expatriate mortgages as domestic exposures. One respondent suggested that the PRA should consider extending the MLAR adjustment for non-resident loans to corporate entities, as well as individuals, where these entities also have buy-to-let residential mortgages. One respondent suggested that the PRA should consider changing the eligible credit exposures used to calculate the domestic criterion to include exposures to central governments or central banks.
2.73 The PRA did not propose any further changes to the domestic criterion in CP4/23, but received some further comments on this criterion in response to the CP.
2.74 One respondent suggested that the PRA should consider allowing business conducted in the Crown Dependencies and Gibraltar to be included in the domestic activity criterion, as that business is generally operated through the UK. One respondent supported the changes made to the domestic criterion in CP16/22 to include expatriate mortgages and include a smoothing provision.
2.75 After considering the responses to CP5/22, CP16/22 and CP4/23, the PRA has decided to maintain the revised domestic activity criterion as proposed in CP16/22 and CP4/23. The PRA considers that setting the domestic activity criterion threshold so that a firm’s 36-month average ratio must be at least 85% and the ratio should never drop below 75% is consistent with the reasons for including this criterion and is more important than aligning with restrictions in other existing definitions, such as in the small and non-complex institution definition.
2.76 The PRA considers that for the purpose of a criterion that seeks to limit the SDDT regime to firms that are not internationally active, in part because of the application of Basel standards to internationally active firms, it is most appropriate to classify exposures to obligors in Crown Dependencies and Gibraltar as overseas exposures.
2.77 With regards to the comment that some firms’ overseas exposures will be primarily fee accruals awaiting settlement, or temporary overdrafts due to timing difference on client stock trades, the PRA considers that this specific type of exposure is unlikely to be relevant for most small firms and that it would not be proportionate to change the criterion in a way that makes it more complex for all firms in order to change the geographical classification of this type of exposure. A firm that considers that this classification of exposures would cause it to not meet the SDDT definition would be able to apply for a modification to be treated as an SDDT and the PRA would consider any such applications.footnote 
2.78 While the PRA understands the reasoning behind the suggestion made on how to calculate average domestic exposures at the start of the regime, the PRA considers making this change would be unnecessary for the majority of SDDTs and would make the criterion less simple. If any firm considers that measuring the domestic criterion on a 36-month average from 1 January 2024 would cause them to not meet the SDDT definition when they would meet it with a shorter average or point-in-time assessment, they would be able to apply for a modification to be treated in the same way as an SDDT, as described in paragraph 2.77 above.
The level of application
2.79 CP5/22 proposed that standalone firms that are not part of a UK consolidation group would apply the scope criteria on a solo basis. Where a firm is part of a larger group, the PRA proposed that the scope criteria should be assessed at the highest level of the UK consolidation group, and would meet the definition if it, the UK consolidation group of which it is part and all the banks and building societies within the UK consolidation group meet the scope criteria. For UK subsidiaries of foreign-headquartered banking groups or foreign holding companies, CP5/22 suggested that a firm meeting the criteria on a solo basis would be able to apply for a waiver or modification to participate in the SDDT regime, and the PRA would consider whether the size and activities of the group at a global level are consistent with the SDDT criteria.
2.80 In response to CP5/22, two respondents supported the level of application of the scope criteria proposed in CP5/22, with one other respondent supporting the proposal that the scope criteria should be met at a group level.
2.81 Two respondents supported the proposal that firms that are UK subsidiaries of foreign groups or holding companies will be able to be captured within the SDDT regime. One respondent supported the proposal that a waiver process would be used for UK subsidiaries with a foreign parent to access the regime.
2.82 One respondent requested that the PRA consider making a provision for the application of the scope criteria to be measured at an individual level if appropriate, for example in situations where the UK subsidiary is part of a larger non-banking group, and therefore operates as if independent with regards to meeting prudential requirements.
2.83 CP16/22 did not propose any changes to the level of application for the SDDT regime; however, one respondent commented that applying the total assets criteria at the group level seemed punitive for small UK subsidiaries of larger non-UK groups. They requested the PRA consider applying a separate dual-criteria to these firms which would allow smaller sized UK subsidiaries of larger non-UK groups to be eligible, for example having a lower total asset size threshold (eg £5 billion) for the subsidiary to be eligible if they are part of a non-UK group above the SDDT size threshold. They referenced the significant regulatory requirements placed on small UK subsidiaries that aim to ensure those firms are able to exercise and evidence sufficient control away from their parent group (eg SS2/21 on outsourcing) as evidence that these firms are not able to leverage the size of their parent in the same way as might be possible for small subsidiaries of large UK groups.
2.84 CP4/23 proposed that with relation to the proposals in the CP, 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. The CP proposed that the level of application for the proposals within the CP would follow the same levels already set out in the relevant rules or policy documents for that area of policy.
2.85 The PRA received the following comments to CP4/23. One respondent commented that any firm in the same group as a non-SDDT firm should not be eligible to be an SDDT. One respondent welcomed the possibility that a firm that is part of a non-UK group may be subject to provisions and wondered whether alternative criteria could be applied to these groups to increase the number of foreign subsidiaries that would qualify for the regime, suggesting for example a smaller size criterion of £10 billion, and a lower threshold of the domestic criterion of 60%. One respondent commented that immaterial regulated firms that are part of UK groups could benefit from the application of the SDDT regime at the solo level and queried whether where the parent reports activities on a consolidated basis, could the solo firm apply to be part of the SDDT regime.
2.86 After considering the responses to CP5/22, CP16/22, and CP4/23, the PRA has decided to apply the scope criteria on a solo basis for firms without a wider UK consolidation group and on a solo and group basis for firms that are part of a UK consolidation group, where every firm within the group will also need to meet the scope criteria. The PRA has also decided to maintain the proposed approach to UK subsidiaries of foreign groups. The SDDT regime is intended for small firms, not small parts of larger groups. However, for firms with an unusual group structure, whereby the firm is operating as if they were a solo entity with regards to meeting prudential requirement and feel they would benefit from the SDDT regime, they can apply for a modification to be treated in the same way as an SDDT and the PRA will consider any such applications.footnote 
2.87 After further consideration of the role of approved holding companies in certifying eligibility for the SDDT regime, the PRA has decided to change the proposed rules so that there is an explicit role for consolidation entities in certifying the CRR consolidation entity meets the SDDT criteria on a consolidated basis and the other UK banks or building societies in the group meet the SDDT criteria on a solo basis. The PRA considers that this change will bring the SDDT regime into line with other PRA rules and is more consistent with the role of approved consolidation entities.
2.88 The PRA has decided to maintain the level of application as consulted on CP4/23, where the levels of application of SDDT policies will follow the same levels of application already set out in the relevant rules or policy documents for that area of policy. The PRA considers this will allow for the greatest level of cohesion between the SDDT regime and other PRA rules and expectations.
Operationalisation of the SDDT regime
2.89 CP5/22 did not contain any definitive proposals on how the SDDT regime would be operationalised. However, the CP did set out the PRA’s intention to propose in future consultations that any firm meeting the SDDT criteria would be automatically in scope of the SDDT regime.
2.90 The PRA also set out an intention to consult on an approach that would allow SDDTs the flexibility to either be subject to Basel 3.1 without delay, or to be subject to a transitional regime that would allow them to be subject to currently applicable UK capital requirements regulation (CRR) until such time as the SDDT capital regime was implemented. A proposal consistent with this intention was subsequently consulted on in CP16/22.
2.91 Two respondents welcomed the proposal that SDDT firms could chose to be subject to Basel 3.1 without delay. One respondent supported the PRA’s desire to minimise the frequency of material regulatory changes, including aligning the timing between the introduction of the SDDT regime and Basel 3.1. Another respondent supported implementing the SDDT regime at the same time as the Basel 3.1 standards.
2.92 Three respondents supported SDDT firms being given a carve out from Basel 3.1. One of these respondents expressed concern that they would not be able to opt out until after resources had already been invested in Basel 3.1. One respondent suggested that they would welcome clarity on how transition will be managed for firms who may inadvertently find themselves operating on the old rules for an extended period. One respondent proposed that the PRA should provide clarity to firms on the nature and timing of the transition between the SDDT regime and the Basel 3.1 standards, including what would happen in a situation where the criteria is only temporarily breached.
2.93 Two respondents indicated that they felt firms should be able to opt out of the SDDT regime, with one welcoming the PRA’s proposals on how firms would do this, and for any transitional arrangements that might be required.
2.94 One respondent asked for clarity on how firms would transition into and out of any layers in the Strong and Simple Framework, and how the regime would tie in with other policies, for example MREL or leverage.
2.95 Following further consideration, in CP4/23 the PRA proposed that the SDDT regime would operate on an opt-in basis, rather than operating as the default regime for firms meeting the criteria. The CP proposed that firms would access the SDDT regime by consenting to a modification to become an SDDT, 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. The CP also proposed that a firm that is part of a group based outside the UK could not meet all the SDDT criteria but could apply for a modification of the SDDT criteria that would enable it to be subject to the proposed provisions. The CP also outlined the PRA’s intention to apply future simplifications to SDDTs, without the need for additional modifications by consent.
2.96 One respondent commented that having firms apply to become an SDDT is unnecessary as it creates an additional layer of bureaucracy and may mean that not all eligible firms become SDDTs.
2.97 Two respondents requested clarification on the process for revoking consent to be an SDDT, and one respondent further queried how a decision to revoke their SDDT modification by consent (MBC) after the Phase 2 consultation would impact the time allowed to transition to Basel 3.1.
2.98 In responses to CP5/22, CP16/22, and CP4/23, one respondent asked whether there would be a process whereby a firm which meets all bar one of the SDDT criteria could be opted into the regime and considered as an SDDT.
2.99 After considering the responses, the PRA has decided to proceed with a modification by consent process for firms to access the SDDT regime. The PRA acknowledges that this may mean that there are firms who meet the SDDT criteria yet are not in the SDDT regime. This is a deliberate design choice aimed to allow small firms to follow the prudential regime that applies to other firms if they wish to do so.
2.100 The PRA is conscious that as the final capital rules for SDDT firms have not been consulted on at the time of this PS firms may wish to wait to make a decision about opting into the regime. There is no time limit for when eligible firms need to make the decision whether to take up the SDDT MbC. Although the PRA will be making the SDDT and SDDT consolidation entity MbCs available from 1 January 2024, the PRA intends that eligible firms will be able to take up the modifications at any time going forward. Therefore, if a firm that meets the criteria wishes to wait until the capital simplifications are finalised before taking up the modification, then it will be able to do so.footnote 
2.101 Furthermore, the PRA appreciates that a firm may want to take up the Phase 1 simplifications as soon as they become available, but then may change its mind following publication of the final SDDT capital rules. A firm in this situation will be able to request that the PRA revokes its modification. 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 consideration of how such transitions between the SDDT regime and full prudential framework would be managed.
2.102 The PRA has set out in the SoP – Operating the Small Domestic Deposit Takers Regime its intentions on how a firm would leave the SDDT regime. This SoP sets out that there are no pre-determined transitional arrangements for a firm leaving the SDDT regime. This is because the PRA considers that in many cases a firm will be able to prepare for leaving the SDDT regime in advance. In cases where a firm may reasonably need further time to prepare for leaving the SDDT regime, the PRA will consider whether any transitional arrangements are appropriate when deciding when to revoke the firm’s modification direction.
2.103 If a firm does not meet all of the SDDT criteria, but considers it has a good reason why it should be able to be treated as an SDDT, it will be able to apply for a modification to be treated in the same way as an SDDT, as set out in paragraph 2.77.
2.104 The PRA’s proposals for a TCR, as consulted on in CP16/22, will be finalised in a future policy statement. As part of this, the PRA will address the timing of that regime, and how firms will transition between the TCR and Basel 3.1 standards or the permanent risk-based capital regime for SDDTs.
Implementation date for the SDDT regime
2.105 CP4/23 proposed an implementation date for the Phase 1 simplifications in H2 2024, with firms able to consent to becoming an SDDT at least six months before this date.
2.106 Seven respondents supported the broad proposal for the implementation date. Three respondents commented that firms that can implement sooner than H2 2024 should be allowed to do so. Two respondents raised that due to the gap between when firms will be able to become SDDTs and the simplifications being implemented, non-listed firms with a year-end date that falls between these two implementation dates may have to produce a Pillar 3 disclosure after they are already an SDDT.
2.107 Four respondents were concerned that setting an implementation date in H1 2024 for firms to be able to become SDDTs would mean that firms would have to take the decision on whether to become an SDDT before information on potential capital simplifications would be available and noted it would be hard to decide whether to opt-in until knowing what the proposed capital requirements for SDDTs would be.
2.108 Three respondents noted that ideally all elements of the SDDT regime would be ready for implementation by the Basel 3.1 implementation date, so the PRA should try and expedite its consultation on capital proposals.
2.109 As set out in paragraph 1.25 eligible firms will be able to opt into the SDDT framework from 1 January 2024, and apply the elements of the framework as they are finalised and implemented from that point. As noted above in paragraph 2.100, there is no time limit for when eligible firms need to make the decision whether to take up the SDDT MbC. Therefore the PRA considers that not knowing what the capital element of the regime would be is not a barrier to making the SDDT MbC and SDDT consolidation entity MbC available from 1 January 2024. The PRA acknowledges the point made around the impact on SDDTs with year-end dates between 1 January and 1 July after they have already taken up the modification and has changed the implementation date for the disclosure rules to accommodate this. Firms with a year-end date between 1 January and 1 July 2024 that opt to become SDDTs before they would have published their 2023/24 disclosures will be able to apply the reduced SDDT disclosure requirements for their 2023/24 year-end.footnote  This does not change the disclosure requirements for firms with year-ends occurring before 1 January 2024, even if they become an SDDT before they make their 2023 disclosures.footnote 
Net Stable Funding Ratio
2.110 In CP4/23, the PRA proposed to introduce a new Retail Deposit Ratio (RDR), which would be used to measure firms’ usage of retail funding. The CP proposals reflected the PRA’s view that firms with a four-quarter moving average RDR above 50% for four consecutive quarters would be able to meet the PRA’s standards around the resiliency of funding currently represented by the Net Stable Funding Ratio (NSFR), without needing to monitor the NSFR itself. CP4/23 also proposed the removal of the simplified NSFR and a minor correction to rule references in the NSFR reporting instructions (which would apply to all firms that report the NSFR).
2.111 Six respondents supported the PRA’s NSFR proposals for firms meeting the RDR condition. Four respondents specifically supported the introduction of the RDR. Four respondents supported the proposal to use a four-quarter moving average for the RDR threshold, and three respondents supported the threshold being set at 50%. One respondent noted that whilst they supported the RDR, they felt the assumptions used to construct the RDR could be more granular. In particular, with respect to the retail funding mix and the varying stability of retail deposits. Two respondents agreed that the proposed one-year implementation period where a firm breached the RDR limit was appropriate. One respondent noted that they agreed a firm should have to notify the PRA if it breaches the RDR limit.
2.112 One respondent noted that although they favoured the use of the Article 411(2) definition of retail deposits for calculating the RDR, there were several other elements the PRA could consider. They suggested the following elements:
- Sight deposits placed by deposit aggregators could be excluded where the deposit aggregator holds the deposit accounts on trust for their customers, instead of the depositor being the firm’s direct customer, unless the firm can demonstrate that deposits raised through this source are stable;
- SME current account balances in excess of the deposit guarantee scheme limit could be excluded where the firm is not aware that the SME also holds a transactor account with another firm; and
- The deposit guarantee limit for transaction accounts only could be increased.
2.113 One respondent expressed that they felt the NSFR was an extremely useful metric for all firms, and that they would be surprised if firms would want to stop monitoring the NSFR even if the RDR condition was met.
2.114 Two respondents supported the removal of the simplified NSFR, with a third respondent noting that although they currently make use of the provision, they can understand the PRA’s rationale for removing it given the proposed RDR.
2.115 There were no comments received on the minor correction to rule references in the NSFR reporting instructions.
2.116 After considering the responses, the PRA has decided to maintain the proposals on NSFR and the RDR as consulted on in CP4/23. The PRA has considered other methods for calculating the RDR, including those listed above, and also other options, such as using the volume of insured retail deposits (instead of the volume of retail deposits) as the retail deposit ratio numerator. However, the PRA does not consider that these other measures are preferable to the original RDR for the purpose of this policy. The NSFR itself does not differentiate between the stability of different types of retail funding in its calculation. Therefore, the PRA considers that including these measures in the RDR condition may result in a metric which is a worse measure of a firm’s exposure to the risks the NSFR measures.
2.117 The PRA has separately considered whether the RDR proposal should be amended in light of the distress seen in early 2023 among US regional banks, in particular with regards to the stability of uninsured retail deposits. This issue is not unique to SDDTs, and the PRA considers that it will take time to evaluate the measurement of stability of funding for all firms, and whether any changes should be made to the wider regulatory regime as a result. In the meantime, the PRA considers that the RDR should be calibrated with reference to the NSFR as it is currently calculated.
2.118 The PRA has also decided to proceed with the removal of the simplified NSFR. The PRA received no representations on the minor correction to the rule references in the NSFR reporting instructions. Therefore, the PRA has decided that these changes will be implemented as proposed.
Pillar 2 Liquidity
2.119 In CP4/23 the PRA proposed to generally not set Pillar 2 add-ons for SDDTs, and to introduce a new, streamlined template that firms could use to describe their Individual Liquidity Adequacy Assessment Process (ILAAP).
2.120 Four respondents supported the PRA’s proposal to generally not set Pillar 2 add-ons for SDDTs, other than when warranted by idiosyncratic risks.
2.121 Two respondents supported the new ILAAP template. One respondent commented that the proposed template provided a high-level structure which was similar to that already in place, rather than clearly articulating regulatory expectations on stress testing and scenarios.
2.122 Four respondents suggested that the main burden in producing the ILAAP document was the expectation to produce a new document annually and suggested that the PRA consider reducing the required frequency for the ILAAP document, with one of the respondents suggesting the ILAAP could be produced every other year, alternating with the ICAAP, and another suggesting that an ILAAP should be required to be prepared only in a year that a firm would be undergoing a Liquidity Supervisory Review and Evaluation Process (L-SREP).
2.123 After considering the responses to CP4/23, the PRA has decided to maintain the proposals on Pillar 2 liquidity as set out in the CP to generally not set Pillar 2 add-ons for SDDTs, and with the new, streamlined ILAAP template.
2.124 The PRA acknowledges the comments made with regards to the burdens of producing the ILAAP on an annual basis. This work will be taken forward alongside other planned SDDT simplifications, with any potential changes to be consulted on in the future.
2.125 In CP4/23 the PRA proposed to exclude SDDTs from the requirement to report four of the five Additional Liquidity Monitoring Metrics (ALMM) returns:
- Concentration of funding by counterparty;
- Prices for various lengths of funding;
- Roll-over of funding;
- Concentration of counterbalancing capacity.
2.126 The PRA further proposed to amend the remaining ALMM return, concentration by product type, so that SDDTs report liabilities arising from all relevant product types, rather than just those that comprise greater than 1% of their total liabilities as at present.footnote 
2.127 The PRA also proposed to remove the current derogation on reporting frequency for the ALMM returns applicable to Small and Non-Complex Institutions (SNCIs), which allows SNCIs to report quarterly instead of monthly, following a transitional period.
2.128 Four respondents supported the PRA’s proposal to exempt SDDTs from reporting four of the five ALMM returns, although two of these respondents noted that the resultant cost savings would be unlikely to be material. One respondent supported the proposed amendment to the C68 return.
2.129 One respondent asked the PRA to clarify which returns SDDTs would need to report under non-capital prudential measures for SDDTs based on these proposals.
2.130 After considering the responses to CP4/23, the PRA has decided to go ahead with excluding SDDTs from the requirement to report the C67, C69, C70, and C71 returns, and to amend the C68 return. The PRA acknowledges that the cost savings from this measure may be relatively small but considers that this is a simplification which maintains the safety and soundness of SDDTs, and thus it is appropriate to go ahead with the removal of these reporting requirements.
2.131 The PRA can confirm that SDDTs non-capital reporting will remain the same other than the changes to ALMM as described above, with SDDTs that meet the RDR requirements also able to stop reporting the NSFR templates. SDDTs are not required to remit the C67, C69, C70 and C71 returns on 15 July/12 August 2024 in relation to the 30 June 2024 reference date. SDDTs that meet the RDR requirements are not required to remit the C80, C81, C82, C83 and C84 returns on 12 August 2024 in relation to the 30 June 2024 reference date. SDDTs should use the amended C68 returns for submission on and after 15 July 2024.
2.132 The transitional arrangement for SNCIs that are not SDDTs to report the ALMM returns on a quarterly, rather than monthly, basis will end on 30 June 2027. Such firms will be required to start their monthly reporting from 31 July 2027, with the first remittance date for monthly reporting being 16 August 2027.
2.133 The PRA is currently undertaking a review of what data it collects, and what data the PRA will need now and, in the future, known as the Banking Data Review (BDR). As part of the BDR, the PRA will consider the proportionality of data collection, which may lead to further changes in reporting for SDDTs in the future.
Pillar 3 Disclosures
2.134 In CP4/23 the PRA proposed new Pillar 3 disclosure requirements for SDDTs. For SDDTs that have listed financial instruments, the CP proposed to introduce a Pillar 3 requirement to disclose the UK OV1 and UK KM1 templates. For SDDTs without listed instruments, the CP proposed to exclude them from the requirement to disclosure a Pillar 3 report. The CP also proposed to remove the current Pillar 3 rules applicable to SNCIs, following a transitional period, so that SNCIs which were not SDDTs would become subject to the Pillar 3 rules application to ‘other’ institutions. footnote 
2.135 Five respondents to CP4/23 stated that they supported the PRA’s proposals on disclosure and did not anticipate any issues for stakeholders as a result of them. One respondent to CP16/22 also supported the PRA’s proposals on disclosure in CP4/23. One respondent noted that the proposals may result in a market perception that SDDTs are more risky, due to reduced disclosure requirements. Two respondents expressed a preference for firms to include Pillar 3 disclosures in their annual report and accounts instead of publishing them separately. One respondent to CP16/22 suggested that if non-listed SDDTs do not have to make Pillar 3 disclosures, they should be encouraged to put information on their CET1 ratio and Tier 1 leverage ratio data in their annual reports and accounts. One respondent did not oppose the PRA’s proposals but questioned whether firms would stop making Pillar 3 disclosures simply because they were no longer obliged to by regulation.
2.136 In CP14/23 the PRA proposed remuneration disclosure requirements for SDDTs. For SDDTs that have listed financial instruments (listed SDDT), the CP proposed to introduce a Pillar 3 requirement to disclose parts of the UK REMA template corresponding to paragraphs (a) to (d) of Article 450(1) of the Disclosure (CRR) Part as well as the UK REM 1 template. The PRA further proposed to exclude SDDTs without listed financial instruments (non-listed SDDT) from the requirement to disclose remuneration information within the Pillar 3 report.
2.137 Recognising the interaction between the proposed SDDT and small remuneration firm policy for small CRR firms, the PRA also proposed in CP14/23 to introduce an exception within the current disclosure requirements for ‘other’ institutions that are small CRR firms as per PS16/23, so that such firms are subject to the same remuneration disclosure requirements as SDDTs.
2.138 Two respondents stated that they supported the PRA’s proposals on remuneration disclosures and agreed that such proposals reflect the PRA’s approach to proportionality that considers the nature, scale and complexity of a firm.
2.139 One respondent questioned what the PRA’s plans were to balance a firm’s regulatory burden with adequate transparency and how the proposed disclosure requirements would not compromise the ability to assess risk taking behaviour in firms. The same respondent also believed the proposals should consider the broader implications for competitiveness and growth in the financial sector and questioned what measures are being put in place to support these firms’ growth and contributions to economic growth. The same respondent also asked the PRA to provide more detail on how the proposed disclosure requirements align with international standards and best practice.
2.140 After considering the responses, the PRA has decided to not make any amendments and implement the policy as consulted in both CP4/23 and CP14/23, other than for the implementation date, as previously discussed.
2.141 The PRA considers stakeholders’ use of Pillar 3 disclosures may vary alongside the ability and effectiveness of market discipline on firms with respect to their complexity and size. Firms with listed instruments (listed firms) would still 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. For firms without listed financial instruments (non-listed firms) the PRA considers that the potential extent and effectiveness of market discipline upon these firms may be significantly constrained and indirect and dispersed compared to SDDT’s with listed financial instruments.
2.142 The PRA specifies the requirements for Pillar 3 disclosures, as set out in the Disclosure (CRR) Part of the PRA Rulebook. The form and content of financial statements is mandated under the Companies Act 2006, which does not fall under the remit of the PRA.
2.143 The PRA acknowledges that some SDDTs without listed instruments may still wish to disclose information on their prudential requirements. Such firms are still free to make voluntary disclosures if they wish, however this will not be required by the PRA.
2.144 CP14/23 explained why the PRA considers that the proposals will maintain the existing level of safety and soundness for listed and non-listed firms; by proposing remuneration disclosure requirements that would be better aligned to the expected risk profile of firms in scope of CP14/23, and mechanisms through which market participants are likely to exert market discipline in an efficient manner on such firms. This is explained in paragraphs 2.15 and 2.16 of CP14/23.
2.145 As part of the CP14/23 the PRA considered its secondary competitiveness and growth objective (paragraph 2.19) and had regard to competitiveness (paragraph 3 of have regards analysis). The proposed approach allows for proportionate disclosure requirements which are aligned to the risk profile of the firm and user demand, in turn reducing regulatory burden and allowing for alternative allocation of administrative resources within the firm.
2.146 The PRA’s proposed approach only applies to small, domestic-focussed firms and would not unduly compromise the faithful application of Basel standards in the UK.
Future policy developments for SDDTs
2.147 CP4/23 reaffirmed the PRA’s intention to publish proposals for simplified prudential requirements in distinct phases. The PRA noted its intention for Phase 2 to focus on simplifications to capital requirements, specifically Pillar 2 and buffer requirements, for SDDTs.
2.148 There were several comments received in response to CP4/23 that addressed suggestions for the capital elements of the SDDT regime. We acknowledge the comments made and will consider them as we continue to develop the SDDT regime. The PRA is in the process of developing its proposals for Phase 2 of the SDDT regime and remains on target to consult on these proposals in Q2 2024.
2.149 One respondent to CP4/23 suggested a small number of minor clarificatory drafting changes to the draft rules proposed in the CP, intended to improve the clarity of the rules, and reduce legal ambiguity, but not to amend the substance of the provision.
2.150 The PRA has considered the suggested changes and has made minor drafting changes to the rules in response.
2.151 On 10 August 2022, the Chief Executive of the PRA received a letter from the Chair of the Treasury Sub-Committee (TSC) on Financial Services Regulations, which included questions about the proposals in CP5/22. On 4 May 2023, the Chief Executive of the PRA received a letter from the Chair of the TSC on Financial Services Regulations about CP4/23 (as well as CP5/23). Sam Woods replied to these letters on 31 August 2022 and 18 May 2023 respectively.
As identified using the geographical location of exposures reported in COR001a, table C 09.04
The SoP – Operating the Small Domestic Deposit Taker regime, sets out how firms that are members of foreign groups yet meet all the other SDDT criteria can apply to access the regime through a Modification by Application.
The criteria were republished in CP4/23 in connection with their proposed use for the SDDT regime.
Where relevant, qualifying CRR consolidation entities would become SDDT consolidation entities and be subject to SDDT measures on a consolidated basis.
The disclosure transitional will last 3.5 years, and the reporting transitional will last 3 years, so that both transitionals expire on 30 June 2027. At the expiry of the transitional period, such firms will become subject to the disclosure regime for ‘other institutions’ in Article 433c of the Disclosure (CRR) Part, and will be required to report the Additional Liquidity Monitoring Metrics returns on a monthly basis.
Sections 138J(5) and 138K(4) of FSMA.
Section 138J(2)(d) FSMA.
Section 144D(2) of FSMA.
For further information please see: Transitioning to post-exit rules and standards.
Sections 138J(3), (4) and (4D) of FSMA.
A streamlined approach takes the existing prudential framework as a starting point and modifies those elements that are overcomplex for smaller firms, see discussion paper (DP)1/21 – A strong and simple prudential framework for non-systemic banks and building societies.
The intention to review the SDDT criteria is set out in SoP – Operating the Small Domestic Deposit Taker Regime.
See paragraph 2.13 in CP5/22.
A firm’s foreign credit exposures will be calculated using the exposures and geographical locations reported in COR001a table C 09.04.
This criterion is that at least 75% of a firm’s consolidated total assets and liabilities, excluding in both cases intragroup exposures, must be to counterparties located in the UK.
Paragraph 2.19 in DP1/21.
Section 138A of FSMA.
Section 138A of FSMA.
The firm would need to meet the SDDT criteria at the point it takes up the modification by consent.
And small remuneration firms will be able apply the reduced remuneration disclosure requirements to the same set of disclosures whether or not they become SDDTs.
A transitional provision has been added in Chapter 7 of the Disclosure (CRR) Part to clarify this.
The reporting references are as follows for the ALMM returns: C67 concentration of funding by counterparty, C68 concentration by product type, C69 prices of various lengths of funding, C70 roll-over of funding, C71 concentration of counterbalancing capacity.
CP4/23 proposed a transitional period of 3 years based on an implementation date in H2 2024. The transitional period has been extended to 3.5 years to reflect the earlier implementation of the changes to the disclosure regime.