What sparked the debate
A fresh Innovate Finance paper criticises parts of the UK prudential regime as “logic-defying” for challenger banks, warning that layering complex Basel 3.1-style requirements onto smaller firms risks dampening SME lending and competition.[1]
Innovate Finance’s post, Challenger Banks: A British Success Story, frames the positive macro story (competition, SME finance, consumer choice) while calling for a more proportionate prudential approach for smaller, domestically focused banks.[2]
At the same time, the PRA and Bank of England have advanced several reforms intended to lighten and target burdens: the Strong & Simple framework for SDDTs, a higher MREL threshold as part of the government’s Leeds Reforms, and proposals to raise the leverage-ratio threshold for retail-deposit takers.[3][4][5]
So, are challenger banks facing “logic-defying” red tape, or are we already on a path to proportionate rules?
What the PRA has already changed
Three live moves matter:
- Strong & Simple (SDDT), a multi-phase programme to simplify prudential requirements for smaller, UK-focused banks while maintaining resilience. It narrows calculation complexity, aims to streamline buffers and methodologies, and is slated to sit alongside Basel 3.1 from 2027.[3:1]
- MREL threshold uplift to £25–40bn total assets, up from the prior calibration, to reduce cliff-edges that forced fast-growing mid-tiers to raise costly loss-absorbing debt too early.[4:1]
- Leverage-ratio threshold consultation to move the retail-deposits trigger from £50bn to £70bn, reflecting nominal growth so smaller lenders are not pulled into the regime merely by inflation.[5:1]
These changes are explicitly positioned as proportionality and competitiveness measures, not deregulation. They are signalling from the Bank and PRA that growth and resilience must be balanced.
Where Innovate Finance’s critique still bites
From an industry perspective (as Wonderful Payments Ltd., we are members of Innovate Finance and deeply engaged across UK payments initiatives), several frictions remain:
- Methodology inheritance: Even in “simplified” regimes, core Basel methodologies can leak through. If simplification becomes only a lighter veneer atop Basel 3.1, the promised cost reduction may be muted for smaller banks. That is consistent with the concern reported by City A.M. that Strong & Simple risks replicating complexity rather than redesigning it.[1:1]
- Cliff-edges and sequencing: Uplifting MREL and leverage thresholds helps, but threshold clustering can still create growth traps just below the lines. The calibration needs periodic indexing (which the BoE signalled for MREL) and clarity on transition paths to avoid capital hoarding that suppresses SME credit.[4:2][5:2]
- Policy overlap: Capital, liquidity, resolution, remuneration and conduct changes can interact in ways that increase operational drag for smaller firms, even if each rule is defensible in isolation. The recent bonus-rule reforms show the regulators can move quickly for competitiveness; the question is whether prudential calibrations move at the same cadence for challengers.[6]
The Asima view: proportionality is design, not a slogan
Proportionality should be observable in unit economics, not just stated in policy aims. For challenger banks serving SMEs, two tests matter:
- Complexity budget: Can a bank under the SDDT perimeter operate with materially lower model, reporting and compliance complexity than under Basel 3.1, without hidden equivalences creeping back in? Strong & Simple should deliver design simplification, not only documentation simplification.[3:2]
- Growth runway: Do MREL and leverage calibrations create a predictable runway where growth does not trigger step-change capital needs faster than earnings can fund, provided risk is well managed? The £25–40bn MREL band and proposed £70bn leverage threshold point in the right direction, but need durable indexation and transparent transition plans.[4:3][5:3]
Policy principle: If a smaller, domestically focused bank with good risk controls cannot profitably grow SME lending because of regulatory cliff-edges, the calibration is off. That is a fixable design problem, not a binary choice between growth and safety.
Why this matters for competition and payments
Challenger banks dominate SME lending growth, a segment critical to productivity and regional development.[1:2][2:1] When prudential design becomes a growth brake, credit tightens where it is most productive. In parallel, the UK is advancing open banking and commercial VRP with industry funding and governance workstreams, where challenger banks are key participants and innovators.[7]
If prudential design nudges market share back toward incumbents, both competition in lending and innovation in payments risk stalling. A proportionate prudential regime is therefore not a special favour to challengers, it is a precondition for policy goals the government has set for growth and competitiveness.
What good looks like from here
- Finish Strong & Simple with genuine simplification: lock in simpler risk weights, buffers and Pillar 2 methods for SDDTs, and avoid re-importing Basel complexity by another name.[3:3]
- Maintain indexation and transition clarity: keep MREL/leverage thresholds aligned to macro variables to avoid stealth tightening; publish phase-in roadmaps that reassure boards planning multi-year balance-sheet growth.[4:4][5:4]
- System-level view of burden: sequence prudential tweaks alongside conduct, operational resilience and remuneration reforms so the combined load on smaller firms is proportionate.
- Outcomes measurement: track whether SME credit availability and challenger market-share are stable or improving under the revised regime; if not, recalibrate.
Innovate Finance is right to insist that proportionality be real, not rhetorical. The PRA is right that resilience cannot be compromised. Those aims are not in conflict if simplification is structural, thresholds are predictable and indexed, and transitions are practical. That is the road to a challenger ecosystem that competes on service and risk discipline, not balance-sheet gymnastics.
- City A.M., “Fintech industry takes aim at ‘logic-defying’ banking watchdog,” 20 Oct 2025. Link ↩︎ ↩︎ ↩︎
- Innovate Finance, “Challenger Banks: A British Success Story,” Oct 2025. Link ↩︎ ↩︎
- Bank of England / PRA, “Strong and Simple” prudential framework for small, domestic-focused banks (SDDT). Link ↩︎ ↩︎ ↩︎ ↩︎
- HM Treasury, “Leeds Reforms… back BoE reforms to raise the MREL threshold to £25–40bn,” 15 Jul 2025. Link ↩︎ ↩︎ ↩︎ ↩︎ ↩︎
- Reuters, “BoE consults on exempting more small lenders from leverage rule (threshold to £70bn),” 5 Mar 2025. Link ↩︎ ↩︎ ↩︎ ↩︎ ↩︎
- Financial Times, “BoE/FCA loosen banker bonus rules to bolster competitiveness,” Oct 2025. Link ↩︎
- Open Banking Limited, “31 firms commit to fund initial work for a cVRP company,” 2 May 2025. Link ↩︎
