Schedule 3: Prudential regulation of credit institutions etc. Part 1: New Part 9D of the Financial Services and Markets Act 2000
Part 1 of Schedule 3 inserts a new Part 9D into FSMA.
	Section 144A defines "CRR rules" as rules made under the new power for holding companies in section 192XA, as well as general rules by the PRA about a matter that is the subject of a) a provision of the CRR that has been or may be revoked under subsection (1) in section 3, or b) a CRR Basel standard, as defined in section 4. This is intended to include all rules made by the PRA to implement outstanding elements of the Basel III standards, and any other rules which are made as a result of revocations made under section 3 (which captures where more of the CRR has been revoked e.g. for coherence reasons).
	Subsection (5) of section 144A sets out that CRR rules includes matters adapted from the CRR Basel standards. This is intended to account for the fact that the BCBS sets standards for internationally active banks but, in the UK, prudential requirements stemming from the Basel Framework are applied to all credit institutions, including e.g. smaller banks and building societies that focus on domestic lending. CRR rules also includes rules on the subject matter contained in EU tertiary legislation made under the CRR.
	Section 144B contains definitions used in Part 9D.
	Sections 144C and 144D introduce new accountability requirements for the PRA (taken together, these two sections will be referred to as ‘the accountability framework’). The accountability framework reflects the increased responsibility given to the PRA for setting prudential requirements which is granted to it through this Act. It ensures the PRA considers additional policy priorities HM Treasury has identified as relevant to the implementation of the Basel standards, and which are not currently captured within the PRA’s statutory obligations. It also aims to increases transparency of how these policy priorities impact rulemaking of the PRA through the reporting requirement.
	Section 144C requires the PRA to have regard to a new list of matters, specified in this section, when making CRR rules. When having regard to the likely effect of the PRA’s CRR rules on these matters, the PRA should consider both their positive and negative effects. Subsections (3) and (4) include a further matter for the PRA to consider when making CRR rules – the effect of these rules on equivalence decisions specified as relevant by HM Treasury, including decisions made by, and for, the UK by any international jurisdiction. The Government retains responsibility for international relations, which includes equivalence arrangements between the UK and other international jurisdictions. Therefore, the matter of equivalence is treated differently to the others, with a requirement for the PRA to consult HM Treasury in this area. The Government has been clear that financial services equivalence will be judged on outcomes and therefore the consultation between the PRA and HM Treasury will reflect this.
	Section 144D imposes a new obligation on the PRA when it a) publishes consultations on draft CRR rules and b) makes final CRR rules. In both these scenarios, the PRA will be required to publish an explanation of the way in which having regard to the new matters listed in section 144C(1) has affected their draft or final rules. When the PRA makes final CRR rules, it must also publish a summary of their purpose. This is intended to increase transparency about PRA rulemaking when it implements the remaining Basel III changes and any further material updates to these regimes.
	Section 144E sets out exemptions from when the accountability framework applies.
	Subsection (1) specifies that the accountability framework does not apply where the PRA makes CRR rules following a direction or recommendation given by the Financial Policy Committee (FPC) of the Bank of England. This is because the FPC has an existing secondary objective to support the economic policy of the Government, and so they are already required to consider public policy priorities set by the Government.
	Taken together, subsections (2) and (3) mean that the accountability framework does not apply where the PRA makes CRR rules which do not differ materially from the CRR. This is because some sections of the CRR may be revoked by HM Treasury for coherence reasons. For example, where a substantial number of articles within a chapter need to change to implement Basel, the whole chapter may be revoked to avoid the regime being split between the CRR and PRA rules in a way that is very difficult to understand as a whole. In this case, the PRA rules which replace the revoked chapter of CRR will include some new rules and some rules that are restated without material modification. The accountability framework (as well as current FSMA consultation and reporting requirements) do not apply to these restated rules if they are copied over from the CRR without material modification. However, the PRA will be required to continue to consult the FCA.
	Subsection (4) is self-explanatory.
	The accountability framework is intended to apply on an ongoing basis, including to material rule changes where the PRA updates CRR rules in the future. Subsections (5), (6) and (7) exempt immaterial modifications to these rules from the accountability framework.
	Section 144F provides HM Treasury with a power to amend legislation as a consequence of the PRA making CRR rules. This includes the power to amend retained direct EU legislation as well as legislation made by the devolved legislatures. The CRR, as well as other legislation that references it, may need to be amended as a result of the PRA making CRR rules to ensure the regime as a whole is workable. For instance, cross-references in the CRR may need to be amended to refer to CRR rules made by the PRA.
	Section 144G gives the PRA the power to permit firms not to apply a certain CRR rule or to apply it with modifications. This is intended to ensure the PRA can provide permissions to enable firms to use different approaches within CRR rules, for example IRB approaches to credit risk (as explained in paragraph 314) rather than the SACR (as explained in paragraph 312.
	Subsection (1) of section 144H allows the PRA to make rules by reference to the CRR, instruments made under the CRR and to the retained EU law version of the CRD, as defined in subsection (3).
	Subsection (2) of section 144H allows for CRR rules to modify (but not amend or revoke) the provisions contained in CRR or associated EU tertiary legislation. This is necessary to make sure that the PRA can make new CRR rules in areas that are currently occupied by the CRR.