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ComplianceFinanceMarch 26, 2024

PS15/23 and Basel 3.1: A guide for small UK domestic deposit takers

The Basel 3.1 standards introduced by the UK Prudential Regulation Authority (PRA) in November 2022 are focused on the recalibration of risk-weighted assets (RWAs) and capital ratios, tailored to accommodate the unique dynamics of the UK market. These reforms are expected to be fully implemented by July 1, 2025, factoring in a six-month extension from the original deadline of January 1, 2025. 

As part of the reform process, the PRA proposed a simpler set of standards for smaller firms. In its latest policy paper PS15/23, the PRA has elaborated on how a “smaller firm” is defined. This set of companies, previously known as “Simpler-regime Firms,” is now referred to as “Small Domestic Deposit Takers,” or SDDTs.

Simple framework for small financial institutions 

Under Consultation Paper CP5/22, published on April 29, 2022, the PRA proposed an initiative to simplify the prudential framework for non-systemic domestic banks and building societies, starting with the development of a “simpler regime” for the smallest firms, so that the benefits of simplification could be experienced by the largest number of firms as soon as possible. 

Subsequently, in CP16/22, published in December 2022, the PRA addressed the responses received to CP5/22. The new consultation paper proposes changes to the Capital Requirements Regime (CRR) section of the PRA Rulebook, specifically introducing a Transitional Capital Regime (TCR) for qualifying smaller and simpler firms. The aim is to exempt these firms from adhering to the Basel 3.1 standards until a permanent risk-based capital framework for the simpler regime is implemented in the future. Instead, these firms will continue to operate under the existing CRR provisions. Additionally, the proposal raises the total asset threshold from £15 billion to £20 billion and excludes firms offering certain clearing, settlement, and custody services from this group.

The CP4/23 was published in April 2023, addressing the phase-1 changes that primarily focused on non-capital-related prudential measures. These changes included the proposed elimination of specific liquidity reporting templates, the introduction of new Pillar 3 disclosure requirements for smaller firms, and the implementation of a streamlined Internal Liquidity Adequacy Assessment Process (ILAAP) template. 

Finally, in July 2023 the CP14/23 was published, proposing a reduction in the number of Pillar 3 remuneration disclosures required for smaller banks and building societies.

The scope of the recently published near-final Policy Statement PS15/23 incorporates the feedback from previous consultation papers, including CP5/22, CP16/22, CP4/23, and CP14/23. The two major changes outlined are,

  • Renaming the Simpler Regime: 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 and in any future Strong and Simple publications.
  • Implementation dates: 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 took effect on January 1, 2024. The rules regarding disclosures also became effective on the same date. The remaining rules in this policy statement will become effective on July 1, 2024.

PRA’s Feedback to responses to consultations 

  • SDDT scope, criteria, and timeline: To be classified as an SDDT, a firm must meet all the criteria outlined in CP16/22. If a firm is a small part of a larger UK consolidation group, the PRA can apply the SDDT definition if every firm within the group meets the criteria. The proposed approach to UK subsidiaries of foreign groups will also be maintained. Eligible firms can choose to opt into the SDDT framework at any time, with no specific deadline for making that decision. 
  • Operationalization of the SDDT regime: The PRA recognizes that the final capital rules for SDDT firms have not been consulted on at the time of this policy statement. After considering the feedback received, the PRA has decided to implement a “modification by consent” process for firms to access the SDDT regime. This means that there may be firms that meet the SDDT criteria but are not included in the SDDT regime. This decision was made intentionally as part of the design of the regime. 
  • Net Stable Funding Ratio (NSFR): The PRA has chosen to maintain its proposals on the Net Stable Funding Ratio (NSFR) and the Retail Deposits Ratio (RDR) as outlined in CP4/23. This includes a requirement for a four-quarter moving average RDR above 50% for four consecutive quarters. Additionally, the PRA will proceed with the removal of the simplified NSFR. 
  • Pillar 2 liquidity: The PRA has decided to maintain its proposals on Pillar 2 liquidity as outlined in CP4/23. This means that Pillar 2 add-ons will not be set for SDDTs, and a new, streamlined ILAAP template will be used.
  • Liquidity reporting: SDDTs are exempt from the requirement to report the C67, C69, C70, and C71 returns as outlined in CP4/23. The PRA has also made amendments to the C68 return. While the cost savings from this measure may be small, it simplifies the reporting process for SDDTs while ensuring their safety and soundness. The PRA is currently reviewing the data it needs to collect, especially from smaller firms, and this review may result in further changes to reporting requirements for SDDTs in the future.
  • Pillar 3 disclosures: The PRA has proceeded with the policy outlined in CP4/23 and CP14/23 for Pillar 3 disclosures. SDDTs that have listed financial instruments are required to use the UK OV1 and UK KM1 disclosure templates. However, SDDTs without listed instruments are not obligated to issue a Pillar 3 disclosure report.

Next steps for small financial institutions  

The "Simpler Regime" allows small non-systemic firms, now known as Small Domestic Deposit Takers (SDDTs), to opt for a more streamlined reporting process instead of the complex Basel 3.1 reporting regime. The PRA has established the criteria for qualifying as an SDDT firm and is completely optional for firms. The first phase of these regulations, which focuses on non-capital and disclosure aspects, has been defined by the PRA and will come into effect on July 1, 2024. The second phase, which will address capital requirements, will be published in the second quarter of 2024. The PRA will also continue to explore opportunities to further simplify these policies in the future.

We recommend you start now and engage with your trusted software solutions partner. They will have the expertise and knowledge to guide you through the process of understanding and adapting to the Basel 3.1 standards. Familiarize yourself with the new requirements and guidelines outlined in PS15/23 and ensure compliance with the defined criteria for SDDTs. By taking proactive steps now, you can navigate the regulatory landscape effectively and ensure the continued success and stability of your small financial institution.

Yogesh Patil
Lead Technical Product Manager, Regulatory Reporting, Wolters Kluwer FRR
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