1. Introduction
   1. Innovate Finance supports the introduction of a simpler regime for smaller, non-systemic firms because in our experience they tend to face disproportionately high costs in. understanding, interpreting, and implementing prudential regulation, which can act as a barrier to competition and impede growth.
   2. We appreciate that this is the first in a series of consultations and that further detail will
      follow. However, we found it challenging to comment on the appropriateness of the definition without knowing more about the proposed regulatory regime, and what being within it will mean.
   3. We would welcome the opportunity to participate in further consultations on the “Simpler regime Firm” definition as details of the regime are developed and the PRA considers how various chapters of prudential regulation will apply differently to these firms.
2. Relationship to the wider prudential regime
   1. We note that with the introduction of a “Simpler-Regime Firm” the PRA would create a new category of firm alongside “new and growing banks”, firms that will fall outside the proposed regime – systemically important firms, including those applying the ring-fencing regime.
   2. The risks of firms within a given category are likely to vary. For example, the risks to which a firm is exposed change during its life cycle: those for a new and growing firm or a smaller
      mono-line firm differ from those for an established or a large diversified firm.
   3. The proposed regime will need to be clear regarding how these different categories will work for risk, scale and maturity (for example both a new, growing bank and an established bank may both be Simpler-regime Firms, but they face different types and levels of risk). The PRA will also need to consider how various prudential measures will apply in simplified form, such as the Recovery and Resolution framework, including the Minimum Requirement for own funds and Eligible Liabilities (MREL), and Operational Continuity in Resolution requirements; Operational Resilience; and the Senior Managers and Certification Regime.
   4. A key part of the prudential regime is qualitative supervisory assessment of the strength of
      governance and risk management. This applies to all firms of all sizes. We expect that the new regime will address how this assessment will interact with (i) quantitative aspects such as capital and liquidity requirements and (ii) evolving supervisory expectations as a firm grows and becomes more complex.
   5. A fully streamlined approach could take the existing prudential framework as a starting point and modify those elements that appear unnecessarily complex for smaller firms – such as, elements that do not add significantly to overall resilience. For capital adequacy requirements, this might be achieved by simplifying the current Pillar 1 and Pillar 2A risk-based capital requirements. Similarly, for liquidity requirements this could involve simplifying the Liquidity Coverage Ratio (LCR) and Net Stable Funding Ratio (NSFR) requirements.
   6. Separately, we consider that there needs to be careful thought as to how the various regulatory thresholds align. For example, with £15 billion of assets being proposed as a threshold criterion for the regime (see 3.1(a) below), how will this interact with the two thresholds for MREL (banks with £15 billion to £25 billion of assets, and banks with over £25 billion of assets)? What are the implications for those firms which are too big to be a Simpler-regime firm, but are not to be considered to be systemically important for Leverage Ratio purposes unless the firm has £50 billion of retail deposits?
3. Criteria for definition
   1. We note the use of existing thresholds/tests to determine the extent to which a firm may fall within the scope of the regime. We support such an approach to avoid introducing further monitoring requirements. However, we have the following comments on the appropriateness of these particular thresholds, and the risk that these might result in unintended consequences:
      1. Size
         It would be helpful to understand how the figure of £15 billion of assets averaged over a three-year period was selected. For example, is there a basis for assuming that risk to a firm increases with size or does it follow from the PRA's view of the overall systemic risk for this group of banks? There is a risk that the £15 billion asset limit could inhibit growth and competition if banks see disadvantages in growing larger, even if the increase does not change their risk profile (i.e. the business model remains unchanged). If leaving the “Simpler-regime” means a significant uplift and expense to meet more intensive prudential requirements, firms may be incentivised to stay below the threshold.
         Ultimately this may result in less choice for consumers and reduced competition. Recently, we have seen new entrant deposit-takers enjoy strong growth and then reduce deposit interest rates to avoid crossing the threshold for ring-fencing requirements.
         We also recommend that the PRA indicate how frequently the size threshold would be reviewed. The PRA estimates that 61 firms would qualify as simpler-regime firms with an asset threshold of £15 billion. However if the threshold was raised to £25 billion, only an estimated four more non-systemic firms would be captured (CP5/52). We recommend that the PRA consider increasing the threshold to £25 billion to encourage growth and reduce complexity.
      2. Nature of the threshold
         The risk profile of banking assets can vary considerably from firm to firm and between business lines. For example, a building society’s secured assets are less risky than the unsecured assets of a credit card company. Similarly, the soundness of a particular firm will vary depending on, for example, its required capital and liquidity ratios and the buffers it holds. Has the PRA considered the extent to which the £15 billion threshold for assets would be better expressed in risk-weighted terms or whether credit could be given for holding excess capital or liquidity? For example, the approach to capital requirements could involve a simple standard capital requirement measure that is conservatively calibrated and together with a single macro-prudential buffer set at the same level for all simpler firms. Similarly, the approach could involve simpler liquidity and funding requirements, rather than the existing LCR and NSFR requirements, again with conservative calibration.
         The approach could include supervisory judgement overlays to compensate for reduced risk-sensitivity of simpler prudential requirements.
      3. Cliff-edge effectsWe appreciate that there would be a trade-off between the lower prudential requirements in the simplified regime and the step-change and cost incurred to cross the threshold beyond £15 billion. Growing firms that expect to exceed the threshold would anticipate the change and prepare in advance (for example, by strengthening governance or implementing new risk systems). We would therefore recommend that the PRA consider two sliding-scales of requirements that would apply to firms in the categories on both sides of the threshold – in the run-up to crossing the threshold and in the early years in the next category. This will help avoid cliff-edge effects and smooth the implementation of any new infrastructure over the transition period.
      4. Limited activityWe note the restrictions on trading and FX activity. One of the benefits of FinTech and the uptake in digital services (a trend accelerated by the pandemic) is that consumers now have greater access to financial services considered hitherto to be more suited to affairs of the privately banked, or more sophisticated customers. This includes access to services beyond more “vanilla” services such as current and savings accounts and may involve a degree of trading and FX activity. There is a risk that simply considering these activities as "risky" but other activities as "less risky" oversimplifies matters. We would invite the PRA to consider the extent to which these particular thresholds serve to discourage firms from seeking to provide valuable services to retail customers in a risk-averse way, or encourage them to do so through third-party providers (which may add additional complexity to the service, increase operational risk and reduce operational resilience).
         The PRA should also consider the extent to which participation in the regime might serve to limit future ambitions for business diversification (or a scale of business) that would become the preserve of full-scope firms for practical purposes. For example, the restriction on trading services means that a firm that wants to take advantage of the regime may not be able to develop this aspect of its business until it has more than £15 billion in assets.
      5. No use of internal ratings based modelsFirms typically rely on an internal ratings based approach to achieve greater risk sensitivity in regulatory capital calculations. To participate in the regime, such firms may be required to hold additional regulatory capital as a result of using the Standardised Approach, although their risk profile does not change. We appreciate the difference in capital requirements between Standardised and Advanced Internal Ratings-Based (A-IRB) approaches have reduced; however, it would be useful for the PRA to consider: how many firms that could meet the Simpler-regime definition currently rely on the IRB approach, and the expected capital shift that could result from opting-in to the regime.
         This is particularly relevant for firms offering prime residential mortgages. For some small firms, a transition to A-IRB may be part of their growth strategy. We suggest the PRA consider whether smaller firms that are permitted to use the A-IRB approach could still be eligible for the new regime. A-IRB banks have to meet a wide range of requirements to be approved and should have stronger risk management capabilities than a standardised firm. This refinement would maintain those capabilities and support competition in the mainstream mortgage market.
      6. Required capital ratiosIn setting capital ratios for simpler firms, the PRA will need to consider a variety of factors. We think an important consideration is to avoid penalising smaller firms. As they are not systemic, they should have lower capital ratios than for comparable business in a systemic firm (everything else being equal). The PRA does not operate a zero-failure regime and should be comfortable with a higher degree of prudential risk in a smaller firm.
         It may seem logical to apply a higher capital ratio to compensate for simplified supervision, but this could have unintended consequences that inhibit growth and competition. In particular, the ratio for a simple and growing firm should not disadvantage it compared to a competitor firm in the next category but close to the threshold.
      7. 85% UK focusWe note the PRA’s proposal that at least 85% of a Simpler-regime Firm’s relevant credit exposures are located in the UK.
         These are defined as credit exposures as referred to in point (a) of Article 140(4) CRD, which in turn include all those exposure classes, other than those referred to in points (a) to (f) of Article 112 of Regulation (EU) No 575/2013, that subject to own funds requirements for credit risk under Part Three, Title II of that Regulation. This includes:
         - exposures to corporates;
         - retail exposures;
         - exposures secured by mortgages on immovable property;
         - exposures in default;
         - exposures associated with particularly high risk;
         - exposures to covered bonds, securitisation positions, institutions and corporates with a short-term credit assessment,
         - exposures in the form of units or shares in collective investment undertakings (‘CIUs’); and
         - equity exposures.
         We appreciate the focus of simplifying the UK prudential regime should be UK institutions; however, we are concerned that this may serve to limit UK firms that are sufficiently well established, but still below the £15bn threshold, from seeking to expand their business overseas.
         Recent Government messaging has been around steps that could be taken to facilitate the UK becoming a leading hub for FinTech businesses and “Global Britain” being open for business.
         Separately, we note one of the ring-fencing panel review’s recommendations was to remove the blanket geographical restrictions that prevent ring-fenced banks from establishing operations or servicing customers outside of the EEA.
         It would be useful to understand the rationale for the 85% figure in light of the above efforts to attract and encourage businesses to establish in the UK, and the extent to which the PRA has considered whether existing incumbents that would otherwise fall below the threshold would be unable to take advantage of the regime if they have overseas ambitions or existing overseas business.
         We suggest the PRA also consider permitting a lower percentage rate if the firm is able to demonstrate sufficiently robust risk management and governance in terms of risk from its overseas operations.

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