On 15 July 2025, HM Treasury (HMT) published a 2025 Policy Update to the September 2024 Policy Paper ‘Applying the FSMA 2000 model of regulation to the Capital Requirements Regulation’.

Background

In September 2024, HMT published a Policy Paper which set out its intention to apply the regulatory approach under the Financial Services and Markets Act 2000 (FSMA 2000) to implement the Basel 3.1 standards, as well as its plans to revoke the remaining parts of the UK Capital Requirements Regulation (UK CRR). This approach is often referred to as the FSMA model.

Update

The document now published provides an update on HMT’s plans to commence the revocation of certain provisions of the UK CRR, as well as making the necessary restatements of the UK CRR in UK legislation where required by the FSMA model. It also explains how the Prudential Regulation Authority (PRA) will replace UK CRR provisions with regulator rules, supervisory statements, and statements of policy.

The document covers HMT’s approach in three areas:

  • Basel 3.1 (chapter 2). The PRA has published a consultation on its proposed implementation of Basel 3.1 and HMT’s proposals and draft legislation should be read alongside the PRA’s consultation paper. HMT intends to facilitate the PRA’s proposals by legislating for a transitional approach to firms’ calculation of capital requirements for market risk under the internal model approach. The draft transitional regulations (The Capital Requirements Regulation (Amendment) Regulations 2025) propose to insert a new Article 465A into the UK CRR, that delay the new market risk capital requirements under the internal model approach until 31 December 2027. The PRA’s consultation sets out the detailed firm facing requirements it is proposing in its rules. HMT also intends to update its draft commencement legislation to ensure that relevant permissions are saved to facilitate the implementation of the PRA’s proposals.
  • Overseas Recognition Regimes (chapter 3). HMT will take a standardised approach to the development of Overseas Recognition Regimes, with the key features consistently structured across different regimes. The full approach is outlined in HMT’s guidance document. The UK CRR currently includes equivalence regimes which specify the approach that UK banks may adopt for certain activities or exposures in jurisdictions which have been deemed equivalent. HMT intends to restate existing equivalence decisions made under these equivalence regimes so that jurisdictions currently deemed equivalent are treated as designated under the Overseas Prudential Requirements Regimes and the effect of the current decisions is preserved, except regarding exchanges. HMT is considering adapting the current treatment of exposures to exchanges and investment firms under the Overseas Prudential Requirements Regimes and considering whether covered bonds should be designated under the new Overseas Prudential Requirements Regimes.
  • Definitions in the UK CRR which will be retained in legislation (chapter 4). Articles 4, 4a, 4b, and 5 of the UK CRR set out the definitions for key terms used in the UK CRR relating to the requirements which apply to credit institutions and designated investment firms. In accordance with the FSMA model, HMT plans to revoke all definitions contained in the UK CRR. The PRA will replace appropriate definitions with definitions in PRA rules, and HMT will restate in legislation those definitions that are necessary. HMT has published draft regulations that would give effect to key restatements by amending FSMA 2000 and other relevant legislation next steps.

TLAC

HMT is also making legislation to bring into force the revocation of parts of the UK CRR relating to definition of capital and total loss-absorbing capacity (TLAC) with effect from 1 January 2026.

Next steps

HMT:

  • Welcomes views relating to Overseas Recognition Regimes and key CRR definitions, as outlined in Chapters 3 and 4, by 23:45 on 5 September 2025.
  • Would also welcome comments on whether the provisions in the draft legislation published alongside the document will operate as intended by 23:45 on 5 September 2025.
  • Will publish a draft of the UK’s Overseas Prudential Requirements Regimes later in the year.
  • Intends to lay the transitional regulations and make the appropriate revocations of the UK CRR in sufficient time for the PRA to ensure implementation of Basel 3.1 on 1 January 2027.
  • Intends to lay the legislation necessary for the PRA to complete the restatement of the remaining assimilated law by 1 January 2027, facilitating the PRA’s implementation of the UK’s Strong and Simple framework and Securitisation framework.
  • Will make any consequential amendments to the statute book that may be required once the UK CRR has been revoked. HMT will make these amendments through a further statutory instrument and will provide updates on that legislation as appropriate.