Prudential regulation of credit institutions and investment firms Implementation of the Basel standards in the UK
Most Basel standards in effect in the UK at the time of introduction of this Act were implemented through Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (the EU Capital Requirements Regulation or EU CRR) and Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (the Fourth Capital Requirements Directive or EU CRD IV).
	Some of the Basel III standards finalised between 2010 and 2017 are implemented in the EU through Regulation (EU) 2019/876 of the European Parliament and of the Council of 20 May 2019 amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements (the Second Capital Requirements Regulation or EU CRR II) and Directive (EU) 2019/878 of the European Parliament and of the Council of 20 May 2019 amending Directive 2013/36/EU as regards exempted entities, financial holding companies, mixed financial holding companies, remuneration, supervisory measures and powers and capital conservation measures (the Fifth Capital Requirements Directive or EU CRD V). EU CRD V has been transposed into UK law through the Financial Holding Companies (Approval etc.) and Capital Requirements (Capital Buffers and Macro-prudential Measures) (Amendment) (EU Exit) Regulations 2020 (S.I. 2020/1406) and UK regulator rules, and therefore applies in the UK. Some parts of EU CRR II already applied in the UK and formed part of retained EU law at the end of the Transition Period with the necessary changes made under the EUWA to ensure that it continues to operate effectively.
	Some remaining EU CRR II provisions will apply in the EU from 28 June 2021. As this is after the end of the Transition Period, these parts of EU CRR II will not apply directly in the UK and do not form part of retained EU law.
	Most of the Basel 3.1 revisions agreed between 2017 and 2019 are not included in EU CRR II or EU CRD V, nor were they the subject of an EU legislative proposal at the time of introduction of this Act.
	The Government and the PRA remain committed to the UK’s implementation of the Basel standards. This Act will enable the implementation of the outstanding Basel III and 3.1 standards by giving HM Treasury the power to repeal the elements of CRR that need to be updated to reflect the latest Basel standards.
	Following repeal, many of the updates will be implemented through rules made by the PRA. This will primarily involve technical changes to the UK prudential framework as it relates to credit risk, market risk, counterparty credit risk, operational risk, large exposures, collective investment units, liquidity standards, reporting and disclosures, as well as other areas specified in the Basel standards.
	As for the IFPR, the Act also establishes an accountability framework to apply when the PRA makes rules to implement the Basel standards. The new requirements set under the accountability framework for Basel implementation are largely the same as for IFPR (see paragraphs 11 - 12), except the PRA must also consider the likely effect of their rules on the ability of firms to provide finance to UK businesses and consumers on a sustainable basis in the medium and long-term. This is to reflect the key role and importance of credit institutions who, unlike investment firms, hold and onward lend business and consumer deposits as the core of their business activities.
	As with the implementation of the IFPR by the FCA, the provision of rule-making responsibilities to the PRA – subject to an enhanced accountability framework – makes the UK’s prudential regulation regime more flexible, by enabling the PRA to update rules to reflect the nature of UK firms and the structure of UK markets.
	The Act provides the legal power needed to revoke some provisions of CRR. This ensures that the PRA can subsequently make the relevant rules, to ensure continuity, and minimise disruption for firms as elements of the regime transition from CRR to PRA rules.
	The Act provides powers for the PRA to make rules which apply to approved holding companies for the purposes of CRR and CRD, including sub-consolidated and consolidated prudential requirements and rules regarding matters such as governance and group-risk. This power is designed to ensure the approved holding companies’ provisions, which have been introduced through the transposition of EU CRD V, can be maintained effectively over time, including for the purpose of the implementation of Basel standards and ensures the application of the accountability framework contained in this Act wherever this power is exercised.
	The Act also provides for the Financial Policy Committee (FPC) to make directions or recommendations that apply to approved holding companies, ensuring a coherent regime now that approved holding companies are responsible for consolidated and sub-consolidated requirements.