HM Treasury confirms the FSMA-based transition for UK bank capital rules and consults on a draft Overseas Prudential Requirements Regime

HM Treasury has published its response to the 2025 policy update on applying the Financial Services and Markets Act 2000 (FSMA) model to the UK Capital Requirements Regulation (UK CRR), confirming the legislative approach for transferring detailed prudential requirements from assimilated law into Prudential Regulation Authority (PRA) rules. The response finalises the government’s approach across three areas: facilitating the UK’s Basel 3.1 implementation, establishing new Overseas Recognition Regimes, and restating a limited set of key UK CRR definitions in legislation. The response confirms plans to legislate for a transitional approach to the market risk internal models elements of Basel 3.1, alongside PRA requirements. It also sets out the framework for the Overseas Prudential Requirements Regime (OPRR), intended to replace the existing UK CRR equivalence mechanisms with a UK-tailored designation regime. The accompanying draft OPRR regulations would allow HM Treasury to designate overseas jurisdictions for specified prudential treatments, including exposures to overseas credit institutions, investment firms and exchanges, overseas eligible covered bonds, certain sovereign and public sector exposures, and capital issued by overseas intermediate financial holding companies. The draft also “deems” a list of jurisdictions as designated for several exposure types, and includes specific provisions for Gibraltar. Within this package, HM Treasury intends to proceed with the revised approach to exchanges, and to introduce a designation power for overseas covered bonds for capital purposes while maintaining the existing PRA-led approach for liquidity treatment. For investment firms, the final approach streamlines the definition of “overseas investment firm” by removing a limb included in the original proposal. On key UK CRR definitions, HM Treasury does not plan to amend the draft definitions regulations published in July 2025, although it will provide further clarification in supporting materials and has made a consistency update to the definition of “securitisation” in the Securitisation Regulations 2024. HM Treasury is inviting technical comments on the draft OPRR regulations by 2 April 2026. The draft instrument is framed to come into force on 1 January 2027, aligning with the wider timetable for revoking relevant UK CRR provisions to support the PRA’s implementation of Basel 3.1 from 1 January 2027, with market risk internal models requirements applying from 1 January 2028.