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A strong and simple framework for the regulation of UK banks?

The UK regulator wants to simplify the rules for banks and building societies. How might this work?
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A strong and simple framework for the regulation of UK banks?
chris finney

On April 29, the Bank of England’s (BoE’s) Prudential Regulation Authority (PRA) published a discussion paper titled ‘A strong and simple framework for non-systemic banks and building societies’. Like so many PRA documents, its heavy repetition makes it much longer than it needs to be; however, it is still worth a read — and a response.

The prudential regulation of banks and building societies is complicated. The PRA wants to make it “strong and simple” — the plan is to start with such a framework for firms that are neither systemically important nor internationally active. And, when the PRA has got that right, it wants to simplify the rules for other banks and building societies, where possible.

This might give the impression that the PRA is using its post-Brexit freedoms to make things better, in and for the UK — and, in one sense, it is. But the EU’s prudential rules are largely based on the Basel Core Principles for Effective Banking Supervision, and those principles still apply. This partially explains why the PRA is starting with the smallest banks and building societies, and working its way — albeit a little way — up. Basel has less to say about the very smallest of firms. The other reason is that smaller firms are so disproportionately affected by the sheer volume and complexity of the existing rules, that they will have the most to gain from a new regime, if it can be achieved.

Perhaps counter-intuitively, the PRA takes a detailed look at some of the ways in which the current regime creates difficulty for smaller firms, before fretting that lower barriers to entry and simpler rules for smaller firms will create barriers to growth instead. There is something in this, of course, because if smaller firms are faced with simpler rules and grow, they'll eventually reach a point where they need to comply with the tougher rules — which will be time consuming and expensive.

But new and small banks are, however, almost bound to prefer lower barriers to entry, lower compliance costs and the opportunity to grow into a more complex regime, than a regime that is so complex that it makes it difficult to get established and grow in any event.

Interpreting the rules

Like so many of these things, the PRA’s discussion paper is interesting, both for what it chooses to say and for what it chooses not to say. Three particular examples come immediately to mind.

First, it is difficult to find, interpret and apply the current rules. The PRA deliberately chose to adopt a pure rulebook. Some well-placed rulebook guidance and interpretative provisions would go long way to helping small firms understand their obligations. A rulebook that also includes the PRA’s supervisory statements, and signposts to other sources of law and guidance, would also help. This is especially true at the moment because, as Victoria Saporta, the BoE’s executive director of prudential policy directorate has recognised, “the ‘patchwork’ of primary legislation, statutory instruments, on-shored binding technical standards, and PRA rules and guidance currently in force, is difficult to navigate”; and “a rationalisation of this material will yield benefits for us, as well as firms”.

The PRA’s discussion paper is interesting both for what it chooses to say, and for what it chooses not to say

The second challenge for firms, and for small firms in particular, is the speed with which the rules change. A strong and simple framework and a period of stability would be enormously helpful, even if that would mean less work for regulatory lawyers and other compliance professionals.

And the third? The Senior Managers and Certification Regime. This is not a prudential issue, of course. But, like so many other regulatory policies, it is overly complicated; and the rules have been spread across primary legislation, several parts of the Financial Conduct Authority’s handbook and several parts of the PRA rulebook. This regime is entirely homegrown and could now be simplified with very little regard for Basel.

At this stage, the PRA is seeking views from banks, building societies, lawyers, compliance professionals and others on its ideas, the options it has identified, the industry’s preferences and (perhaps crucially) the unintended consequences its proposals are likely to have. The deadline for responses is Friday July 9, 2021.

I would strongly encourage anybody with an interest in this area to respond, in detail and in good time. When the PRA has considered the responses, it will publish a consultation paper with its main proposals. Experience shows that it is extremely difficult to get the PRA to change its mind once a consultation paper has been published. This could, therefore, be the best opportunity we will get for a very long time.

Chris Finney is a partner at the law firm Fox Williams.

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