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On 28 October 2025, the PRA published near-final policy (PS20/25) on the 'Strong and Simple Framework' for Small Domestic Deposit Takers (SDDTs). This framework aims to simplify capital and liquidity requirements for smaller UK banks and building societies, reducing regulatory burden while maintaining financial resilience and supporting competition. Building on Phase 1, which addressed liquidity and disclosure requirements, Phase 2 introduces a streamlined capital regime covering minimum capital requirements for credit, market, and operational risk (Pillar 1), additional firm-specific risks (Pillar 2A), a new Single Capital Buffer, simplified Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP), capital deductions, and reporting. The policy statement also revokes the Interim Capital Regime (ICR) and sets an implementation date of 1 January 2027, aligning with the Basel 3.1 international standards.
The Prudential Regulation Authority's (PRA) near-final policy statement (PS20/25), published on 28 October 2025, marks a significant shift for small UK banks and building societies. The 'Strong and Simple Framework' introduces a simplified capital and liquidity regime for Small Domestic Deposit Takers (SDDTs), aiming to reduce regulatory burden, support competition, and maintain financial resilience. The new rules, effective from 1 January 2027, align with international Basel 3.1 standards and replace the Interim Capital Regime.
Why this matters for SDDTs
For SDDTs, the new framework offers a more proportionate approach to prudential regulation. By streamlining capital and liquidity requirements, the PRA seeks to lower compliance costs and administrative complexity, enabling smaller firms to compete more effectively with larger institutions. The framework is designed to ensure that simplicity does not come at the expense of safety, with robust requirements to maintain depositor and financial system confidence.
Key features of the framework
Phased Implementation
The policy builds on a two-phase approach:
- Phase 1 (finalised in 2023) addressed liquidity and disclosure requirements, setting the foundation for a simpler regime.
- Phase 2 (the current policy) introduces a comprehensive, simplified capital regime.
Simplified Capital Requirements
The new regime covers:
- Pillar 1: Minimum capital requirements for credit, market, and operational risk, using standardised approach tailored for SDDTs.
- Pillar 2A: Additional capital for firm-specific risks not captured under Pillar 1, with a simplified calculation process.
- Single Capital Buffer (SCB): Replaces multiple buffer requirements with a single, transparent buffer, making capital planning more straightforward.
Streamlined Processes
- Internal Capital Adequacy Assessment Process (ICAAP) and Internal Liquidity Adequacy Assessment Process (ILAAP) are simplified, reducing the documentation and modelling burden on SDDTs.
- Capital Deductions and Reporting: The framework clarifies which items must be deducted from capital and introduces proportionate reporting requirements, further easing compliance.
Revocation of the Interim Capital Regime
The Interim Capital Regime (ICR), which previously applied to some SDDTs, will be revoked. All eligible firms will transition to the new framework from 1 January 2027.
Eligibility and scope
The framework applies to SDDTs—UK banks and building societies that meet specific size and complexity thresholds. The PRA has set clear criteria to ensure only firms with simple business models and limited risk profiles benefit from the regime. Firms must assess their eligibility and prepare for transition well ahead of the implementation date.
Commercial implications and next steps
Opportunities for SDDTs
- Reduced Compliance Costs: Simpler rules should mean less time and resource spent on regulatory compliance.
- Enhanced Proportionality: By applying more proportionate requirements to SDDTs, smaller firms can focus on growth and innovation.
- Greater Clarity: The single capital buffer and streamlined processes may make capital planning and risk management more predictable.
Key Actions for Firms
- Eligibility Assessment: Firms should review the PRA's criteria, seek modification by consent and confirm they meet the SDDT criteria.
- Gap Analysis: Assess current capital, liquidity, and reporting processes against the new requirements.
- Implementation Planning: Develop a roadmap to transition to the new regime by 1 January 2027, including staff training and system updates.
Key policy details
Eligibility Criteria
Firms must meet thresholds on size, complexity, and business model simplicity. The PRA will provide further guidance on the application process and ongoing compliance monitoring.
Capital and Liquidity Calculations
The framework prescribes standardised approaches for risk-weighted assets and liquidity coverage, tailored for the SDDT sector.
Supervisory Expectations
The PRA will continue to supervise SDDTs proportionately, with a focus on ensuring that simplified requirements do not lead to increased risk-taking.
Conclusion
The PRA's 'Strong and Simple Framework' represents a major step forward for small UK banks and building societies. By reducing regulatory complexity while maintaining robust prudential standards, the regime supports a more dynamic and competitive banking sector. SDDTs should act now to assess their eligibility and prepare for a smooth transition to the new rules, ensuring they can fully benefit from the opportunities the framework provides.
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