On 12 September 2024, HM Treasury (HMT) published a Policy Paper ‘Applying the FSMA 2000 model of regulation to the Capital Requirements Regulation’.

The Financial Services and Markets Act (FSMA) 2023 revoked assimilated law on financial services so that areas of regulation covered by assimilated law can be made consistent with the UK’s FSMA model approach. The revocation of parts of the UK Capital Requirements Regulations (CRR) has already taken effect and been replaced with PRA rules. The Policy Paper now published sets out HMT’s plans to commence the revocation of the remainder of the CRR and revocations and restatements with modifications of the Capital Requirements (Capital Buffers and Macro-prudential Measures) Regulations 2014 (CBR) in accordance with FSMA 2023. It also explains how the PRA and Bank of England will replace the CRR and CBR provisions with regulator rules and statements of policy.

Three stages

The Policy Statement explains that:

  • Applying the FSMA model to the CRR and CBR will take place in three stages.
  • The first stage will be to revoke articles of the CRR which the PRA needs to replace with rules in order to implement the Basel 3.1 package. The Basel 3.1 related UK CRR revocations are discussed in chapter 2 of the Policy Paper.
  • The second stage will be to revoke any CRR provisions left on the statute book following Basel 3.1 implementation. Chapter 3 of the Policy Paper explains how this stage will be delivered and summarises some of the reforms the PRA proposes to make to the capital framework using rules and policy statements that will replace revoked CRR and CBR provisions.
  • The third and final stage will include legislation needed for three purposes to:
    • restate the CRR equivalence regimes in legislation;
    • restate in legislation some of the key CRR definitions which are needed to ensure that the overall legislative framework continues to operate as intended once the UK CRR is fully revoked; and
    • make any consequential amendments to other parts of the statute book which will be needed once the CRR has been completely revoked.
  • The detail for the legislative approach for the third stage is not covered in the Policy Paper. The government will consult on proposals in due course.

Draft legislation

HMT has also published three pieces of draft legislation:

  • Commencement regulations that give effect to the Basel 3.1 revocations.
  • Regulations that will restate some of the CBR requirements in legislation.
  • Commencement regulations that will bring into force the revocation of parts of the UK CRR related to the definition of capital.

Next steps

HMT will commence the revocation of relevant parts of the CRR to facilitate the PRA’s implementation of its Basel 3.1 package. HMT will commence revocation, as set out in the draft commencement regulations to take effect in time for the PRA to meet its implementation timetable of 1 January 2026.

The government intends to complete the revocation of the CRR alongside the revocation and restatement with modification of the CBR. HMT states that completing the revocation of the CRR will include revoking provisions which relate to the definition of capital as set out in the draft commencement regulations on definition of capital.

HMT adds that whilst all non-Basel related CRR revocations will likely be covered in one set of commencement regulations, draft commencement regulations covering definition of capital provisions are being published now as they relate to the PRA’s proposed new rules for its strong and simple regime. In due course, HMT will make other commencement regulations to revoke certain other aspects of the CRR and to revoke the CBR. The government would welcome views from stakeholders on whether this next stage of work, and in particular whether the provisions included in draft legislation published alongside the Policy Paper, will work as intended to deliver the benefits associated with the FSMA model of regulation and provide a smooth transition for the UK’s prudential regime to that model.