UK PRA near-final rules on a simplified capital regime for SDDTs

The UK Prudential Regulation Authority (PRA) has published near-final policy statement PS20/25, marking the second and final phase of its "strong and simple" framework. This introduces a simplified capital regime for smaller, domestically focused banks and building societies, referred to as small domestic deposit takers (SDDTs). The framework aims to reduce regulatory complexity and compliance costs for these firms while maintaining their financial resilience. Phase 1, which focused on liquidity and disclosure simplifications, was finalised in the December 2023 policy statement. Phase 2, as outlined in this near-final policy statement, builds on phase 1 and incorporates feedback from the 2024 consultation.

Key reforms include:

• Simplifications to Pillar 1 and Pillar 2A capital requirements, including the use of the Basel 3.1 standardised approaches to credit and operational risk.
• Introduction of a Single Capital Buffer replacing the current buffers framework which consists of Capital Conservation Buffer and Countercyclical Capital Buffer for SDDTs.
• Streamlined expectations for the Internal Capital Adequacy Assessment Process and Internal Liquidity Adequacy Assessment Process.
• Tailored reporting requirements aligned with the simplified regime.
• Revocation of the Interim Capital Regime (ICR).
• Adjustments to methodologies for operational risk, credit concentration risk calibration and capital deduction rules.

The final policy statement is expected in Q1 2026, to be published alongside or shortly after the final rules on the full Basel 3.1 package. The new SDDT capital regime will take effect from 1 January 2027, aligning with the UK's extended timeline for Basel 3.1 implementation. However, certain changes, specifically to Statement of Policy (SoP) 2/23 and the expectations around ICAAP and ILAAP frequency, will apply from the date of the final policy statement's publication. With the alignment of implementation dates for Basel 3.1 and the SDDT regime, the ICR is no longer needed and will be revoked, including the removal of related definitions and SoP3/23. Firms wishing to enter the SDDT regime must notify the PRA by 31 March 2026 to benefit from the simplified framework at implementation. The Bank of England's Financial Policy Committee has published a statement on the same day of the publication of the near-final rules, welcoming the PRA's approach.

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