Newly proposed measures take advantage of the Brexit freedom. It’s time for other decision makers to follow.
Earlier this year, the Prudential Regulatory Authority (PRA) published its ‘strong and simple’ Discussion Paper, proposing a simpler regulatory system for smaller building societies. The Paper has been welcomed by the BSA and a number of societies for promising to create a more proportionate and effective prudential regime for smaller deposit takers.
With Brexit providing the UK with freedom from the EU’s ideological desire for single market uniformity, it’s refreshing to see the PRA seize this opportunity to pursue genuine proportionality. We hope that as the PRA has shown the way with this bold and ground-breaking initiative, other decision makers will learn and follow.
Why we support a strong and simple approach
The BSA and its members support the PRA’s objective of a strong and simple approach to prudential regulation. In our view, the simple regime proposed in the Discussion Paper should be based on a straightforward size measure, such as total assets size (e.g. <£5bn). The ceiling should then rise in line with the overall growth of the banking sector, with bands for individual firms determined on a rolling average to avoid a flip-flopping effect as a result of small changes crossing banding lines.
We advocate that this strong and simple approach should be designed for the smallest, standalone domestic UK firms only, with subsidiaries of large groups remaining subject to consolidated supervision at group level. We also suggest that eligible firms should have the choice to opt in, and out, of the simpler regime.
One of the main benefits of a more proportionate approach will be a reduction in the cost burden which arises from the complexity of the current regulation and reporting. There are two elements to these costs; the initial set-up costs and annual running costs.
To gain maximum value from costs already sunk into the current regime, in the short-term we favour an interim, more streamlined version of this imperfect system, which carves out swathes of unnecessary regulation and reporting. However, in the long-term some smaller firms may consider that additional cost may be a small price to pay for a simpler, risk-weighted system which brings a stream of substantial benefits.
Other ‘quick wins’ the BSA would recommend
Impatient to see the benefits of this new approach from the PRA, we have identified other ‘quick wins’ that could be considered for firms that are expected to be in-scope for the strong and simple regime:
- ICAAP simplification
- Switching off parts of certain returns that add no or little value
- Removal of Pillar 3 reporting
- Creating templates to demonstrate regulatory expectations
Such changes would enable the Boards of these firms to concentrate more on making better reasoned and challenged, risk-controlled, strategic decisions.
We would also recommend reform of the Building Societies Sourcebook, which was introduced as a reaction to the weaknesses identified in our sector following the financial crisis. It’s now, however, a major barrier for societies, with no equivalent constraints imposed on smaller banks. We believe that having achieved its original mission, the PRA should consider if now is the time for it to be formally stood down – in an honoured and respectful way of course!
If the Sourcebook is to remain with us, we see three options:
- Keep the Sourcebook (revised) and apply one or more parallel Sourcebooks to banks that qualify under the strong and simple regime.
- Discard the Sourcebook for building societies, so societies are on the same footing as banks.
- Keep the Sourcebook for building societies only and translate this into a significant explicit discount (relative to banks) on the final iteration of the strong and simple regime.
A major step in the right direction
The strong and simple initiative is very warmly welcomed by the BSA and member societies, who stand ready and waiting to help the PRA develop this new approach. This is truly an historic opportunity that will substantially benefit the majority of building societies, for which we applaud the PRA – and cross our fingers for a similar refreshing approach from other regulators and government departments.
For further information, contact Kate Creagh on [email protected].
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