The PRA's Standard Cost Model
This technical note outlines the standard assumptions and inputs that underpin the Prudential Regulation Authority (PRA)’s Standard Cost Model (SCM). The SCM provides a proportionate method for estimating the direct operational compliance costs or savings that firms may incur when regulatory requirements change. It offers a structured approach for identifying, categorising, and quantifying incremental compliance activities and their associated costs. The model draws on established cost modelling practices, cost benefit analysis (CBA) guidance, internal expertise, firms’ consultation responses, advice from the PRA’s CBA Panel, targeted surveys, and information obtained through supervisory engagement.
The SCM forms part of the PRA’s approach to cost benefit analysis and complements other tools designed to support the PRA’s analysis of regulatory impacts.
The PRA welcomes feedback on the model to support its continuous improvement. In particular, the PRA welcomes evidence to inform the model assumptions and benchmarks.
All responses will be treated confidentially and will not be disclosed without prior consent of the respondent.
Feedback should be sent to PRA-costbenefitanalysis@bankofengland.co.uk.
The Bank of England’s use of the PRA’s SCM
The Bank of England (the Bank), in discharging its responsibilities for regulating financial market infrastructures (FMIs), makes use of the PRA's SCM, and its assumptions. The Bank uses the PRA’s SCM to estimate direct operational compliance costs or savings that central counterparties (CCPs) and central securities depositories (CSDs), known as FMIs, are expected to incur due to changes in regulatory requirements.
The SCM forms part of the Bank’s approach to cost benefit analysis and complements other tools designed to support the Bank’s analysis of regulatory impacts.
The obligation on the Bank to conduct a CBA when making rules for CCPs and CSDs is new, and there is relatively limited literature on CBA for FMI regulation. Given the difficulty in precisely estimating the benefits and costs of FMI regulation, the Bank judges that the SCM is a reasonable approach to calculate FMI costs or savings because it draws on established cost modelling practices used across a variety of settings and sectors. It is also consistent with the efficient and economic use of the Bank’s resources. To promote the accuracy of the estimates, the Bank also makes use of supervisory judgement and may carry out surveys of FMIs.
The Bank’s approach to firm categorisation differs from the PRA’s. The Bank recognises that total assets is not the most meaningful metric for categorisation of FMIs and have instead categorised them based on their systemic importance and operational complexity. Based on this, the Bank has chosen to be conservative in its assumptions and categorise all FMIs as 'large' when calculating costs. However, the Bank will revisit this assumption as appropriate, including if less systemically important and complex FMIs enter the market.
The Bank welcomes feedback on its use of the SCM for FMIs, particularly evidence to inform the model assumptions and benchmarks.
All responses will be treated confidentially and will not be disclosed without prior consent of the respondent.
Feedback should be sent to BankCostBenefitAnalysis@bankofengland.co.uk.