CP3/26 – PRA rule changes to accommodate HM Treasury’s Overseas Prudential Requirements Regime

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Responses are requested by Thursday 2 April 2026.

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In the policy statement for this consultation, the PRA will publish an account, in general terms, of the representations made as part of this consultation and its response to them. In the policy statement, the PRA is also required to publish a list of respondents to its consultations, where respondents have consented to such publication.

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Responses can be sent by email to: CP3_26@bankofengland.co.uk.

Alternatively, please address any comments or enquiries to:

Prudential Regulation Authority
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EC2R 6DA

1: Overview

1.1 This consultation paper (CP) sets out the Prudential Regulation Authority’s (PRA) proposed amendments to its rules to reflect the implementation of HM Treasury’s intended Overseas Prudential Requirements Regime (OPRR). The OPRR has been designed to restate, with modifications, a number of existing CRR equivalence provisions in legislation. HM Treasury consulted on the creation of the OPRR in July 2025 and published its response to this consultation, alongside the draft Overseas Prudential Requirements Regime (Credit Institutions and Investment Firms) Regulations 2026 (‘the draft OPRR SI’) on 19 February 2026.

1.2 The PRA’s proposals are intended to ensure that the PRA’s Rulebook would remain aligned with HM Treasury’s reforms to the UK’s approach to recognising other jurisdictions’ regulatory frameworks. The expected impact on firms from these proposals is minimal, and no material costs are anticipated.

1.3 The proposals in this CP would result in changes to the following Parts of the PRA Rulebook:

• Glossary;
• Credit Risk: General Provisions (CRR);
• Credit Risk: Standardised Approach (CRR);
• Credit Risk: Internal Ratings Based Approach (CRR);
• Credit Risk Mitigation (CRR);
• Securitisation (CRR);
• Counterparty Credit Risk (CRR);
• Large Exposures (CRR);
• Market Risk: Advanced Standardised Approach (CRR);
• Market Risk: Simplified Standardised Approach (CRR);
• Settlement Risk (CRR); and
• Reporting (Pillar 2).

1.4 The proposals in this CP would also result in a minor change to statement of policy (SoP) 5/15 – The PRA’s methodologies for setting Pillar 2 capital.

1.5 The PRA’s detailed proposals are set out in Chapter 2 of this CP, the draft rules subject to consultation are in Appendix 1, and the draft changes to SoP5/15 are in Appendix 2. These proposals are intended to largely maintain both the requirements on firms and the PRA’s approach to how these articles currently operate. The PRA does, however, propose targeted improvements to enhance the clarity and operationalisation of its rules.

1.6 The PRA notes that some reporting and disclosure templates and instructions contain cross-references to the CRR and PRA rules that would be amended under the proposals and which may therefore need to be updated. The PRA intends to consider its approach to updating these references alongside any broader changes that may need to be made to reflect the restatement of CRR provisions in the PRA Rulebook in due course. It has not yet determined the timetable for this work.

1.7 This CP is relevant to PRA-authorised UK banks, building societies, PRA-designated UK investment firms, and their qualifying parent undertakings, which for this purpose comprise financial holding companies and mixed financial holding companies (collectively ‘firms’). It is not relevant to credit unions or third-country branches. Given that the changes are intended to maintain consistency and clarity across the PRA Rulebook, the proposals would generally apply to all firms within scope of the affected rules.

Implementation

1.8 The PRA proposes that changes resulting from this CP would become effective alongside the Basel 3.1 package on Friday 1 January 2027.

Responses and next steps

1.9 This consultation closes on Thursday 2 April 2026. The PRA invites feedback on the proposals set out in this consultation. Please address any comments or enquiries to CP3_26@bankofengland.co.uk.

1.10 In particular, the PRA would welcome responses to the following questions:

• Q1: Do you agree with the PRA’s proposed approach?
• Q2: Are there any other consequential changes the PRA should make?

1.11 When providing your response, please tell us whether or not you consent to the PRA publishing your name, and/or the name of your organisation, as a respondent to this CP.

1.12 Please also indicate in your response if you believe any of the proposals in this consultation paper are likely to impact persons who share protected characteristics under the Equality Act 2010, and if so, please explain which groups and what the impact on such groups might be.

1.13 Unless otherwise stated, any remaining references to EU or assimilated legislation refer to the version of that legislation which forms part of assimilated EU law.

2: The PRA’s proposals

Introduction

2.1 This section sets out the PRA’s proposals to make amendments to the PRA Rulebook to reflect the restatement of various CRR equivalence provisions in the OPRR.

2.2 In addition to the OPRR provisions discussed in this CP, the draft OPRR SI restates existing equivalence provisions relating to the calculation of own funds.^{footnote [1]} The PRA does not consider that changes to its rules are required in relation to these restatements.

2.3 There are a number of provisions in PRA rules that reference other jurisdictions’ regulatory frameworks, but which are not explicitly contingent on HMT making a designation. These provisions are outside the scope of this CP as they are unaffected by the introduction of the OPRR.

Credit risk designation regimes

2.4 This section sets out the PRA’s proposals to make amendments to the PRA Rulebook to reflect the implementation of OPRR in relation to credit risk.

Exposures to institutions

2.5 In PRA rules,^{footnote [2]} ‘institution’ means a credit institution or a designated investment firm. In the absence of the existing CRR equivalence provisions, the term ‘exposures to institutions’ would refer to exposures to these entities. Credit institutions may be located in any jurisdiction and are not necessarily regulated by the PRA. Designated investment firms are limited to investment firms that are designated and therefore regulated by the PRA, which are typically UK firms.

2.6 CRR Article 107(3) provides that exposures to an overseas investment firm, credit institution or exchange shall be treated as exposures to an institution only if the third country applies prudential and supervisory requirements to that entity that are determined by HMT to be at least equivalent to those applied in the UK (hereafter referred to as equivalent countries). The PRA considers that CRR Article 107(3) has the effect of:

• narrowing the types of credit institutions that may be treated as ‘exposures to institutions’ to UK credit institutions and overseas credit institutions in equivalent countries;^{footnote [3]} and
• expanding the concept of ‘exposures to institutions’ to also include exposures to overseas investment firms and overseas exchanges in equivalent countries.

2.7 HMT intends to revoke CRR Article 107(3) and replace it with an OPRR designation provision relating to ‘exposures to institutions’. The replacement designation provision presumes that PRA rules only directly apply the ‘exposures to institutions’ treatment under the standardised approach (SA) to exposures to UK entities, and that the OPRR expands the set of entities that are eligible for this treatment to entities in jurisdictions designated for this purpose. It does not prescribe how exposures to entities from non-designated jurisdictions should be treated. As a result, the treatment of exposures to entities in non-designated jurisdictions will need to be set out in PRA rules.

2.8 In light of this, the PRA proposes to amend its rules so that, subject to the effects of the OPRR, exposures to credit institutions are only treated as ‘exposures to institutions’ under the SA where the credit institution or designated investment firm is a UK entity. As a result, exposures to credit institutions would be treated as ‘exposures to institutions’ where the credit institution or designated investment firm is either located in the UK or in an overseas jurisdiction designated by HMT for this purpose. Exposures to such entities in non-designated jurisdictions would typically continue to be treated as exposures to corporates under the SA. The PRA considers that these amendments are necessary for the regulatory framework to be coherent and for the OPRR to have its intended effect.

2.9 In relation to the treatment of entities in designated jurisdictions, HMT has decided to generally preserve the effect of the current equivalence decisions on the application of the SA for credit risk. However, the PRA notes that the effect of the replacement OPRR provision set out in Regulation 4 of the draft OPRR SI differs from the effect of CRR Article 107(3) in the following respects:

• OPRR designation would only enable exposures to overseas exchanges to be treated as ‘exposures to institutions’ if the regulator of credit institutions in the jurisdiction in question treats such exposures to exchanges as exposures to credit institutions; and
• OPRR designation would only directly impact the RW treatment under the SA and would not automatically have a wider effect.

2.10 The PRA proposes to make several further amendments to Article 119 of the Credit Risk: Standardised Approach (CRR) Part to ensure it interfaces appropriately with the draft OPRR SI. When considered alongside the draft OPRR SI and the proposed changes outlined above, the overall effect on the SA treatment would be that exposures to the following entities would continue to be treated as ‘exposures to institutions’ for the purpose of applying Articles 119 to 121:

• Exposures to UK credit institutions and UK designated investment firms.
• Investment firms subject to Part 9C rules as defined in section 143F of the Financial Services and Markets Act 2000 (FSMA). The PRA proposes to delete Article 119(5) of the Credit Risk: Standardised Approach (CRR) Part, which currently has the same effect.
• Overseas credit institutions in countries for which HMT has made a designation in relation to such entities in accordance with the OPRR SI.
• Overseas investment firms in countries for which HMT has made a designation in relation to such entities in accordance with the OPRR SI.
• Overseas exchanges in countries for which HMT has made a designation in relation to such entities, and where the competent authority responsible for the regulation of credit institutions in that jurisdiction also treats exposures to the exchange as an exposure to a credit institution in accordance with the OPRR SI.

2.11 The PRA proposes to make a number of amendments to broader parts of the PRA Rulebook to generally preserve the cumulative effect of current equivalence decisions and PRA rules following the implementation of the OPRR. The PRA also proposes to make amendments to clarify the interaction of Article 119 and the OPRR with broader references in the PRA Rulebook to ‘exposures to institutions’ and ‘institution’ where it considers these to currently be unclear. As part of this, the PRA proposes to define the term ‘exposures to institutions’ in the Glossary of the PRA Rulebook to refer to exposures that may be treated as exposures to institutions under the SA.

2.12 The effect of these proposed changes would be that:

• Where the italicised term ‘exposures to institutions’ is used in the Rulebook, it would refer to exposures to the entities listed in paragraph 2.10. It would not include exposures to overseas credit institutions where HMT has not made a relevant designation under the OPRR.
• Where the term ‘exposures to institutions’ is not italicised, or the term ‘institution’ is used without being preceded by ‘exposures to’, ‘institutions’ would refer to credit institutions and designated investment firms (ie including all UK and overseas credit institutions and all UK and any overseas designated investment firms, but excluding all exchanges and all investment firms that are not designated investment firms).

2.13 The PRA proposes the following changes to the IRB approach and credit risk mitigation treatments:

• Exposure class allocation under the IRB approach: The PRA proposes to preserve the current effect of CRR Article 107(3) by amending its rules such that the exposure class allocation under the IRB Approach would use the SA concept of ‘exposures to institutions’.
• Reference to ‘exposures to institutions’ in IRB approach economic downturn criteria: The PRA proposes to remove a redundant reference to ‘exposures to institutions’ in the criteria for determining an economic downturn while modelling loss given default (LGD) and conversion factors (CFs) or exposures at default (EAD), as modelling these parameters is not permitted for exposures to institutions under the PRA’s Basel 3.1 rules.
• Use of debt securities issued by institutions as collateral: The PRA proposes to amend references to debt securities issued by institutions in the Credit Risk Mitigation (CRR) Part to clarify that this includes debt securities issued by credit institutions and investment firms, where a direct exposure to the relevant credit institution or investment firm may be treated as an ‘exposure to an institution’ under the SA. The PRA considers that this would generally preserve the current treatment and is appropriately risk sensitive. The PRA does not propose to include debt securities issued by exchanges. The PRA considers that this would be a substantive change to the current treatment of such debt securities and does not consider debt securities issued by exchanges to be of equivalent risk to debt securities issued by UK and designated-overseas credit institutions.
• Unfunded credit protection: Similarly, for the purpose of determining eligibility of protection providers under the risk-weight substitution method and the parameter substitution method, the PRA proposes to amend the reference to ‘institution’ in Article 201 of the Credit Risk Mitigation (CRR) Part to clarify that this includes credit institutions and investment firms, exposures to which are ‘exposures to institutions’ under the SA.

2.14 The PRA has not proposed to amend its rules that prohibit the use of credit assessments which incorporate assumptions of implicit government support when assigning risk weights to institutions under the SA. The effect of this would be that such credit assessments may not be used for the purpose of assigning a risk weight to exposures to credit institutions (regardless of their jurisdiction) and designated investment firms. The PRA considers that this most appropriately reflects the intent of the Basel 3.1 standards.

Exposures in the form of eligible covered bonds

Treatment of eligible covered bonds under credit risk rules

2.15 Under Article 129 of the Credit Risk: Standardised Approach (CRR) Part, firms using the SA apply a preferential risk-weight treatment to certain exposures in the form of covered bonds known as ‘eligible covered bonds’. Covered bonds are only eligible covered bonds where they are ‘CRR covered bonds’ and meet certain further conditions. A covered bond can only be a ‘CRR covered bond’ if it is issued by a credit institution that has its registered office in the UK.

2.16 In addition to the preferential risk-weight treatment under the SA, eligible covered bonds benefit from two further preferential prudential treatments:

• under Article 161(1) of the Credit Risk: Internal Ratings Based (CRR) Part, firms using the foundation IRB (FIRB) approach may apply a preferential LGD of 11.25% to eligible covered bonds; and
• under Article 207(2) of the Credit Risk Mitigation (CRR) Part, firms using various credit risk mitigation methodologies may use an obligor’s own issues of eligible covered bonds as eligible collateral, provided there is not a material positive correlation between the credit quality of the obligor and the value of the collateral.

2.17 HMT has decided to introduce a power to designate jurisdictions through the OPRR in relation to covered bonds, with the effect that covered bonds headquartered in designated jurisdictions that meet the non-jurisdictional Article 129 criteria would be treated as eligible covered bonds for the purpose of applying the preferential SA treatment.

2.18 While HMT has not taken any decisions as to whether it will use the power to designate jurisdictions in relation to covered bonds in the future, the PRA considers that it would be appropriate to make a number of changes to its rules to ensure they operate coherently and effectively in the event of a future designation.

2.19 The PRA proposes a number of minor changes to Article 129 of the Credit Risk: Standardised Approach (CRR) Part. The PRA considers that these changes are necessary for its rules to interface effectively with the draft OPRR SI.

2.20 The PRA has considered how a future designation of jurisdictions in relation to covered bonds should impact its rules relating to the FIRB approach and credit risk mitigation. The PRA considers that, where it has been judged appropriate for overseas covered bonds to be eligible for a preferential treatment under the SA on the same basis as UK covered bonds, it would be consistent for them to also receive the preferential treatments under the FIRB approach and the credit risk mitigation framework on the same basis as UK covered bonds. The PRA is therefore proposing to amend the Glossary Part definition of ‘eligible covered bonds’ to achieve this outcome. The PRA’s proposals would also align the treatment of covered bonds in its market risk rules, where appropriate.

Treatment of eligible covered bonds under liquidity rules

2.21 The PRA notes that the draft OPRR SI does not affect the meaning of ‘CRR covered bond’ where it continues to be used in the PRA Rulebook given the effect of a designation under the draft OPRR SI is solely for the purpose of applying the SA.

2.22 This consultation does not address changes necessary to the Liquidity Parts of the PRA Rulebook as a consequence of the OPRR. The PRA recognises there are references in the liquidity rules to Article 129 of the Credit Risk: Standardised Approach (CRR) Part that will require amendments to reflect that the OPRR is intended to only apply for the purpose of determining capital requirements for exposures to covered bonds. The PRA will consult on this in due course. The PRA anticipates that any changes to the Liquidity Parts would be implemented alongside the OPRR in January 2027. 

2.23 The PRA statement on 15 July 2025 clarified that the PRA does not expect firms to alter their existing approach to the inclusion of non-UK covered bonds in Level 2A HQLA under the Liquidity Coverage Ratio (CRR) Part of the PRA Rulebook. That statement remains applicable. Since then, the PRA has completed a review of the current liquidity treatment of non-UK covered bonds and intends to consult on PRA rules to confirm firms’ role in assessing the equivalence of non-UK covered bonds included in HQLA Level 2A.

Broader implications

2.24 The PRA notes that any future HMT designation of a jurisdiction for the purposes of covered bonds would impact the allocation of exposures to exposure classes in a way that could impact the calculation of the CCyB rate for individual firms, as well as individual firms’ eligibility for the SDDT regime. This is because an effect of the designation would be to bring these bonds into scope of the definition of ‘relevant credit exposures’. The PRA considers that, in aggregate, the effect would likely be small as eligible covered bonds from a designated jurisdiction would be only one of a number of types of relevant credit exposures for the purposes of the calculation. The PRA therefore does not propose to make rule changes relating to these effects.

Exposures to central governments or central banks, regional governments or local authorities, and public sector entities

2.25 The CRR sets out the following provisions relating to exposures to overseas central governments or central banks, regional governments or local authorities, and public sector entities:

• CRR Article 114(7) provides that, where an exposure to an overseas central government or central bank (sovereign) in an equivalent jurisdiction is denominated and funded in its domestic currency, it may be assigned the overseas regulator’s risk weight for the exposure where this is lower than the risk weight based on the Credit Quality Step (CQS);
• CRR Article 115(4) provides that firms may treat exposures to overseas regional governments or local authorities of equivalent jurisdictions in the same manner as an exposure to the central government of that jurisdiction where:
  • the overseas regulator treats the exposure to the regional government or local authority in the same manner as an exposure to the central government; and
  • there is no difference in risk between the exposure to the regional government or local authority and the exposure to the central government;^{footnote [4]}
• CRR Article 116(5) provides that firms may treat exposures to overseas public sector entities (PSE) in equivalent countries in accordance with the unrated PSE treatment set out in Article 116(1) of the Credit Risk: Standardised Approach (CRR) Part or the rated PSE treatment set out in Article 116(2) of that Part, where the overseas regulator treats exposures to PSEs in the same manner.

2.26 HMT has decided to generally preserve the effect of these current equivalence decisions in the OPRR. The PRA proposes to make minor amendments to the PRA Rulebook, including updating cross-references, to facilitate this and enable its rules to interface appropriately with the draft OPRR SI.

2.27 CRR Article 116(5) also states that exposures to overseas PSEs in non-equivalent countries are to be assigned a risk weight of 100%. The draft OPRR SI does not set out a risk-weight treatment for exposures to overseas PSEs in non-designated jurisdictions. The PRA proposes to restate the requirement to apply the existing 100% risk weight for these exposures in the PRA Rulebook. The PRA considers that the 100% risk-weight treatment remains appropriate and notes it is aligned with the risk-neutral treatment of unrated corporates and the risk weight assigned to unrated central governments.

2.28 The OPRR specifies the treatments for the purpose of direct exposures to these entities under the SA. The PRA proposes to make further amendments to its rules to ensure the current arrangements for reflecting equivalence decisions in other Parts of the PRA Rulebook is generally preserved following the implementation of the OPRR. As part of this, the PRA considers it appropriate to clarify how the funded and denominated criteria for sovereign exposures more generally apply under the Credit Risk Mitigation (CRR) Part and for other purposes in the Credit Risk: Standardised Approach (CRR) Part. The treatment in the OPRR of overseas sovereign exposures that are funded and denominated in own currency aligns with the treatment of UK sovereign exposures, and the PRA’s proposed clarifications would affect both UK and overseas sovereign-issued collateral.

2.29 In relation to funded credit protection, the following provisions of the Credit Risk Mitigation (CRR) Part depend on the SA risk-weight treatment for sovereign exposures:

• Article 222(3) provides that firms using the Financial Collateral Simple Method (FCSM) assign the risk weight that they would assign under the SA to the collateralised portion of the exposure; and
• Article 227(2)(a) provides that firms using the financial collateral comprehensive method (FCCM) may apply a 0% volatility adjustment where both the exposure and the collateral are cash or debt securities issued by sovereigns within the meaning of Article 197(1)(b) of the Credit Risk Mitigation (CRR) Part and are eligible for a 0% risk weight under the SA.

2.30 The PRA proposes to amend these articles to clarify that, for the purpose of these articles, a sovereign may only be considered to be eligible for a 0% risk weight under Article 114(4) of the Credit Risk: Standardised Approach (CRR) Part and regulation 6(2) of the draft OPRR SI where the collateral provided by the sovereign is denominated in its own currency and the exposure for which the sovereign debt is acting as collateral is funded in the domestic currency of that sovereign. The proposed approach would align with the PRA rules for the treatment of unfunded credit protection. The PRA considers that this approach would appropriately reflect the purpose of the ‘funded and denominated’ preferential treatments.

2.31 Article 227(2)(h) of the Credit Risk Mitigation (CRR) Part also requires that, for a firm to apply a 0% volatility adjustment under the FCCM, the counterparty must be a core market participant as set out in paragraph 3 of that Article. In accordance with Article 227(3)(a) of the Credit Risk Mitigation (CRR) Part, central governments and central banks are core market participants if they meet the conditions referred to in Article 197(1)(b) of that Part, and if exposures to such entities would be assigned a 0% risk weight under the Credit Risk: Standardised Approach (CRR) Part or under CRR Article 114(7) (which the PRA proposes to replace with a reference to regulation 6(1) of the draft OPRR SI). The PRA proposes to clarify that, for the purpose of determining whether the 0% risk-weight criterion is met, the risk-weight treatment applicable to an exposure in cases where it is denominated and funded in the entity’s domestic currency would apply.

2.32 Article 122B(5) of the Credit Risk: Standardised Approach (CRR) Part sets out criteria for a project finance exposure to be considered ‘high quality’ and receive a lower risk weight under the SA during the operational phase. One of these criteria is that the entity’s revenue depends on one main counterparty and, where that main counterparty is a central bank, central government, regional government, local authority, PSE, or corporate entity, a direct exposure to the counterparty would be assigned a risk weight of 80% or lower under the SA.

2.33 The PRA proposes to amend this article to clarify that, for the purpose of this provision, the main counterparty may only be considered to receive a 0% risk weight under Article 114(4) of the Credit Risk: Standardised Approach (CRR) Part and regulation 6(2) of the OPRR if the project finance exposure is denominated and funded in the domestic currency of the main counterparty in question. The PRA considers that the amended criteria would better reflect the impact of the main counterparty on the risk of the exposure.

Exposures to Gibraltarian entities

2.34 The Gibraltar (Miscellaneous Amendments) (EU Exit) Regulations 2019 introduced a ‘horizontal fix’ that preserved the CRR treatment of exposures to Gibraltarian entities as it stood at the end of the transition period following the UK’s withdrawal from the EU. At the point the CRR is revoked, HMT intends to specify the following treatments for exposures to Gibraltarian entities:

• exposures to Gibraltar credit institutions are treated as ‘exposures to institutions’ for the purpose of applying Articles 119 to 121;
• exposures to Gibraltar investment firms are treated as ‘exposures to institutions’ for the purpose of applying Articles 119 to 121 where the competent authority responsible for the regulation of credit institutions in Gibraltar treats exposures to the investment firm as exposures to credit institutions;
• exposures to PSEs established in Gibraltar are treated as exposures to UK PSEs; and
• exposures to the Government of Gibraltar are treated exposures to the UK Government.

2.35 The PRA proposes to make minor amendments to the PRA Rulebook to facilitate this and enable its rules to interface appropriately with the draft OPRR SI. The PRA notes that its proposals in relation to Gibraltarian entities are broadly consistent with its wider proposals set out in this CP to reflect the introduction of the OPRR.

Large exposures

2.36 Rule 1.3 of the Large Exposures (CRR) Part amends the definition of ‘institution’ for the purpose of that Part. The effect of rule 1.3 is that exposures to an overseas investment firm or credit institution are treated as exposures to an institution only where the overseas jurisdiction applies prudential and supervisory requirements to that entity that HMT has determined to be at least equivalent to those applied in the UK (hereafter referred to as equivalent countries).

2.37 CRR Article 391 deals with the determination of equivalence for large exposures purposes. These equivalence determinations are currently aligned with decisions made under CRR Article 107. HMT is intending to revoke CRR Article 391 as set out in its draft OPRR SI, and therefore the PRA needs to determine how its rules that reference exposures to entities that currently receive a preferential treatment by virtue of CRR Article 391 and Rule 1.3 should operate going forwards.

2.38 The PRA considers that CRR Article 391 and rule 1.3 impact two provisions in the Large Exposures (CRR) Part:

• Article 390(6)(d), which excludes from the definition of exposures any intra-day exposures arising from the provision of money-transmission services, including the execution of payment services, clearing and settlement in any currency and correspondent banking, where such exposures are to institutions providing those services.
• Article 395(1), which requires firms to limit their exposures to a counterparty or a group of connected counterparties to 25% of their Tier 1 capital. Where the exposure is to an institution or an investment firm or where a group of connected counterparties includes one or more institutions or investment firms, the limit is the higher of 25% of the firm’s Tier 1 capital or GBP 130 million. Article 395(4) of the Large Exposures (CRR) Part allows firms to apply the higher large exposure limit set out in Article 395(1) to overseas investment firms.

2.39 The PRA considers that for credit institutions and investment firms, it is appropriate to align the entities in scope of these provisions with the entities that are treated as ‘exposures to institutions’ under the SA. Therefore, the PRA proposes to amend its rules accordingly. The PRA notes that the effects of these proposed amendments would be to:

• limit UK investment firms in scope of Article 395(1) of the Large Exposures (CRR) Part to UK designated investment firms and investment firms subject to rules made under Part 9C of FSMA;
• bring UK investment firms that are subject to rules made under Part 9C of FSMA in scope of Article 390(6)(d) of the Large Exposures (CRR) Part; and
• maintain the existing treatment of overseas credit institutions and investment firms.

2.40 In relation to exchanges, the PRA proposes that exposures to overseas exchanges would not fall within the scope of either of these provisions. The PRA considers that the purpose of the higher limit in Article 395(1) is to relax large exposure limits for small firms for lending to other credit institutions or investment firms, and that the provision of services referred to in Article 390(6)(d) is unlikely to involve exposures to exchanges.

2.41 The PRA proposes to align the treatment of Gibraltarian credit institutions and investment firms for large exposures purposes with the approach set out in paragraph 2.34.

3: PRA objectives analysis

3.1 The PRA considers that these proposals would advance its primary objective of promoting the safety and soundness of firms by providing clarity and certainty on the expected functioning of PRA rules in the context of HMT’s OPRR.

3.2 The PRA notes that its proposals are generally aligned with the Basel 3.1 standards. While the treatment of eligible covered bonds under the IRB approach and CRM framework does not align with the Basel 3.1 standards, the PRA considers that its proposals would advance its safety and soundness objective in a more proportionate manner. Its proposals would enable overseas covered bonds to receive these treatments on the same basis as UK covered bonds where HMT has assessed that the regulation of such overseas covered bonds is sufficiently robust for them to be treated in the same way as UK covered bonds under the SA.

3.3 The PRA has assessed whether the proposals in this CP would facilitate effective competition and, subject to alignment to international standards, whether the proposals would facilitate the international competitiveness of the UK and the growth of the UK economy in the medium to long term. The PRA considers that the proposals in this CP would facilitate effective competition, as providing clarity and certainty would lead to more consistent calculation of capital requirements across firms. The proposals would also support the international competitiveness of the economy by facilitating the intended effects of HMT’s OPRR designations, and by supporting UK-based firms’ ability to compete in lending to overseas markets by appropriately recognising the prudential benefits of overseas jurisdictions’ regulatory standards.

4: Cost benefit analysis (CBA)

4.1 Section 138J of the Financial Services and Markets Act 2000 (FSMA) requires the PRA to publish a cost benefit analysis (CBA) when consulting on proposed rules.

4.2 FSMA requires regulators to provide an estimate of the costs and benefits of the proposals unless, in the opinion of the regulators, the costs and benefits cannot reasonably be estimated or it is not reasonably possible to do so. Where estimates cannot be ascribed a monetary value, other estimates of outcomes are provided. On this basis, the PRA has not undertaken a quantitative CBA for the proposals in this CP.

4.3 The PRA has not consulted the CBA panel on the preparation of this CBA. The PRA considers it would be disproportionate to do so having considered SoP14/24 – The Prudential Regulation Authority’s approach to cost benefit analysis.

Costs of the proposals

4.4 The proposals are not expected to introduce additional reporting or disclosure obligations or require changes to business models. While firms may incur some limited one-off compliance costs (for example, updating or reviewing internal documentation, policies, systems and processes), these are expected to be minor, firm-specific, and absorbed within business-as-usual compliance processes. As such, the PRA considers these costs to be negligible and not suitable for meaningful quantification.

4.5 The PRA estimates that there are no material costs that would be incurred by the PRA from implementing these proposals.

Benefits of the proposals

4.6 The PRA considers that the proposals in this CP are necessary to facilitate the effective implementation of HMT’s OPRR in a way that ensures consistency between the PRA Rulebook and the updated legislative framework. If the PRA did not act, there could be a higher burden on firms to interpret PRA rules or understand the interaction between PRA rules and the OPRR. The clarity provided by the proposals would also make it easier for firms to benefit from the preferential treatments granted by HMT’s designations under the OPRR.

4.7 The proposed rule changes would provide ongoing clarity and transparency to firms. Increasing transparency would reduce firms’ costs and improve firms’ certainty over the PRA’s requirements. This may help to provide confidence to smaller, newer and foreign entities that they would be able to comply effectively while also facilitating competition and improving market outcomes. Increased certainty would also support capital planning.

4.8 The proposals that support the safety and soundness of firms may support confidence in PRA-regulated firms, which would improve market outcomes and financial stability. Improved market outcomes and financial stability should, in turn, support a higher level of economic output in the medium term. As the impact of the proposals on transparency and costs is limited, these indirect impacts are anticipated to be correspondingly small.

5: ‘Have regards’ analysis

5.1 In developing these proposals, the PRA has had regard to the FSMA regulatory principles and the aspects of the Government’s economic policy as set out in the HMT recommendation letter from November 2024. The following factors, to which the PRA is required to have regard, were significant in the PRA’s analysis of the proposal:

• Transparent exercise of the PRA’s functions: The PRA considers that its proposals would benefit the transparent exercise of its functions, as the proposals are designed to clarify the impact of HMT’s designation decisions for other jurisdictions on PRA rules.
• Proportionality principle: The PRA considers that its proposals would be a proportionate response to the introduction of the OPRR by HMT and has assessed that the impact on firms as a result of the proposals would be proportionate.
• Efficient use of the PRA’s resources: The PRA considers that its proposals would be an efficient use of its resources as clearer rules would result in fewer clarificatory queries for the PRA to use its resources to address.

5.2 The PRA has had regard to other factors as required. Where analysis has not been provided against a ‘have regard’ for these proposals, it is because the PRA considers that ‘have regard’ to not be a significant factor.

6: Other legal requirements

Statutory duty to consult

6.1 The PRA has a statutory duty to consult when changing rules (FSMA s138J) or standards instruments (FSMA s138S). When not making rules, the PRA has a public law duty to consult widely where it would be fair to do so. 

6.2 Due to the nature and low materiality of the proposals, the statutory practitioner panels were not consulted by the PRA when developing this CP.

Impact on mutuals

6.3 The PRA considers that the impact of the proposed rule changes on mutuals is expected to be no different from the impact on other firms.

Equality and diversity

6.4 In developing its proposals, the PRA has had due regard to the equality objectives under s.149 of the Equality Act 2010. The PRA considers that the proposals do not give rise to equality and diversity implications.