HMT and PRA consultations on the UK CRR regime — shift to a FSMA model of regulation

Overview

HM Treasury (HMT) and the Prudential Regulation Authority (PRA) have advanced a coordinated package to complete the shift of the UK prudential framework for banks and PRA-designated investment firms to the Financial Services and Markets Act 2000 (FSMA) model. In summary, HMT proposes new legislation to restate or revoke key UK Capital Requirements Regulation (CRR) provisions, including replacing EU “equivalence” with a UK Overseas Prudential Requirements Regime (OPRR), restating selected CRR definitions in legislation, and providing a market risk transitional aligned to the PRA’s Basel 3.1 timetable. The PRA, in turn, is consulting on consequential PRA Rulebook changes to align with the OPRR. Most changes are intended to take effect on 1 January 2027, with certain capital definition revocations and related measures commencing earlier. Firms should prepare for PRA Rulebook migration, revised overseas recognition mechanics, and operational updates to policies, systems and reporting.

1. The FSMA model: where we are now and the timeline ahead

HMT’s programme replaces retained EU law with regulatory rules and certain statutory restatements. In essence, regulatory standards will sit in the PRA Rulebook, with government and Parliament setting the overall framework and certain remaining in legislation.

• Basel 3.1 implementation is targeted for 1 January 2027 through PRA rules. HMT will revoke the necessary CRR articles and preserve continuity through savings provisions so existing PRA permissions continue as if granted under the Rulebook.
• Definition of capital and TLAC provisions are being revoked from the CRR and replaced by PRA and Bank of England policy materials. Draft commencement regulations list the CRR own funds provisions to be revoked, with savings to carry across existing supervisory permissions.
• Capital buffers legislation is being restated. The Countercyclical Capital Buffer (CCyB) and O‑SII buffer frameworks are retained in statute, while the Systemic Risk Buffer is removed as a tool in the UK. Amendments will allow simpler buffer requirements for Small Domestic Deposit Takers (SDDTs), consistent with the Strong and Simple framework.

2. Overseas Prudential Requirements Regime (OPRR): replacing CRR equivalence

HMT has published draft OPRR regulations and is seeking technical comments through 2 April 2026.

• Scope and mechanics: HMT may designate overseas jurisdictions for specific prudential purposes. Legal effects are set out for: exposures to overseas credit institutions, investment firms and exchanges; treatment of overseas central governments, central banks, regional authorities and public sector entities; recognition of overseas eligible covered bonds; and capital instruments of overseas intermediate financial holding companies.
• Continuity with targeted changes: Existing equivalence decisions will generally be preserved as OPRR designations. However, exposures to overseas exchanges will be treated as exposures to institutions only where the banking regulator in the designated jurisdiction permits that treatment. HMT will not publish a list of exchanges meeting this criterion, firms must assess applicability case by case.
• Covered bonds: HMT introduces a power to designate jurisdictions for capital purposes in relation to overseas covered bonds. This enables alignment of risk weights with UK “CRR covered bonds” where policy objectives are met. For liquidity, the PRA has clarified firms may continue to include certain non‑UK covered bonds in Level 2A HQLA.
• Investment firms definition: The CRR concept of “third‑country investment firm” is replaced with “overseas investment firm” tailored to the post‑IFPR landscape, without altering substantive effect.

Firms will need governance to track OPRR designations, embed a control to assess when exposures to overseas exchanges qualify as “institutions”, and maintain inventories of exposures that rely on OPRR effects, including covered bonds and public sector exposures.

The PRA’s consultation (closing 2 April 2026) proposes targeted amendments across multiple CRR Parts of the Rulebook to reflect OPRR effects while largely preserving existing outcomes. Firms should note the proposed amendments to the Large Exposures Part, including those which slightly change the operation of Article 395.

Implementation is planned for 1 January 2027, alongside the wider Basel 3.1 package.

3. Basel 3.1 market risk transitional and related CRR clean‑up

To provide certainty, HMT will insert a new CRR Article 465A establishing a transitional period from 1 January 2027 to 31 December 2027 for the internal model approach to market risk. During this period, certain PRA Market Risk IMA rules are disapplied and firms may continue using existing models under PRA rules. HMT can extend the transitional by regulations. Respondents raised concerns about running systems in parallel; the PRA has explained how it aims to mitigate operational burdens in its associated materials.

Separately, HMT will revoke a wide set of CRR provisions needed to implement Basel 3.1 in the Rulebook.

4. Restating key CRR definitions in legislation and handing own funds to the PRA

HMT’s draft regulations restate selected CRR Article 4 definitions in FSMA and connected legislation with the stated aim of improving clarity without changing substantive effect. These include “investment firm” (now “Part 4A investment firm”), “financial institution”, “financial holding company”, “mixed financial holding company”, “participation”, “common management relationship”, and group parent definitions. The instrument also updates cross‑cutting terms such as “own funds” in the Banking Act and introduces a Schedule restating Annex I activities. Commencement is planned for 1 January 2027.

In parallel, HMT’s commencement regulations revoke CRR own funds provisions so that the quality of capital framework sits in PRA rules. Savings provisions preserve the effect of existing permissions as notifications or permissions under the new Rulebook constructs.

Key dates and next steps

• OPRR draft regulations and PRA consequential rules: consultation closes 2 April 2026; intended effect from 1 January 2027.
• Market risk transitional: CRR amendment comes into force 30 December 2026; transitional runs 1 January 2027 to 31 December 2027, with power to extend.
• Definitions restatement: in force from 1 January 2027.
• Definition of capital/TLAC revocations and savings: commenced ahead of 2027 to support SDDT and framework migration.

The principal operational lift for firms lies in governance around OPRR designations, updating policy and procedure references to CRR as CRR provisions move into the PRA Rulebook, and careful sequencing of market risk implementation plans through the 2027 transitional period.