Credit Institutions and Investment Firms (Miscellaneous Definitions) (Amendment) Regulations 2026

Baroness Kramer Excerpts

Wednesday 15th April 2026 Grand Committee

[The Financial Secretary to the Treasury (Lord Livermore) (Lab)]

My Lords, I ask that the Committee considers two statutory instruments made under the Financial Services and Markets Act 2023: first, the Credit Institutions and Investment Firms (Miscellaneous Definitions) (Amendment) Regulations 2026; and, secondly, the Capital Requirements Regulation (Market Risk Transitional Provision) Regulations 2026. The purpose of this legislation is to ensure that the UK’s capital framework remains agile and responsive for banks and investment firms. I will first set out the context in which this legislation is being delivered.

The Financial Services and Markets Act 2023 revoked assimilated law in the UK related to financial services, to bring it in line with the UK’s domestic model of regulation. The UK’s domestic model—the Financial Services and Markets Act model—was first established through the Financial Services and Markets Act 2000. That model prioritises the setting of regulatory standards by expert, independent regulators, working within an overall policy framework set by the Government and Parliament. This approach maximises the use of expertise in the policy-making process by allowing regulators with day-to-day experience of supervising financial services firms to bring their real-world experience into the design of regulatory standards. It also allows regulators to flex and update those standards to ensure that regulation responds to emerging developments.

One area of financial services regulation where the Financial Services and Markets Act model will apply is capital requirements regulation. Capital requirements regulation is an existing body of assimilated law that covers the detailed and technical capital rules that apply to credit institutions, such as banks and building societies, and larger investment firms. Applying the Financial Services and Markets Act model in this area means replacing the existing capital requirements regulation in three ways.

First, some of it is being replaced by rules set by the Prudential Regulation Authority. This includes rules in relation to Basel 3.1, the final set of post-crisis reforms designed to strengthen the resilience of the UK banking system. Secondly, provisions relating to prudential equivalence, also contained in the capital requirements regulation, are being replaced by a new overseas prudential requirements regime in legislation. Thirdly, important definitions in the capital requirements regulation are being restated in new legislation because they are essential for ensuring that the system of prudential regulation continues to operate as intended.

The statutory instruments that we are debating relate to the first and third of these areas: the replacement of rules by the Prudential Regulation Authority, specifically in respect of Basel 3.1, and the restatement of key definitions in the existing capital requirements regulation. They do not relate to the new overseas prudential requirements regime, which will be legislated for separately.

The first statutory instrument that I will address is the Credit Institutions and Investment Firms (Miscellaneous Definitions) (Amendment) Regulations 2026. The sole purpose of this instrument is to restate important definitions from the existing capital requirements regulation in law. For example, the definition of what constitutes an investment firm is being restated so that it remains in legislation, rather than being defined by the Prudential Regulation Authority rulebook. This is necessary to ensure that the Government and Parliament remain in control of what activities should be regulated.

This instrument does not introduce new regulatory requirements, neither does it make any substantive change to the scope or effect of the definitions being restated. Its purpose is simply to maintain legal continuity and ensure that the prudential framework continues to operate as intended, as we complete the move to the Financial Services and Markets Act model.

I turn to the second statutory instrument, the Capital Requirements Regulation (Market Risk Transitional Provision) Regulations 2026. This instrument relates to the first part of the capital requirements regulation reform process—namely, the replacement of certain capital requirements regulations with rules set by the Prudential Regulation Authority, specifically in respect of Basel 3.1. Most of the work to deliver Basel 3.1 has already been completed and, following extensive consultation, the Prudential Regulation Authority has published the new rules that will apply to credit institutions and larger investment firms. These rules will ensure that the UK banking system is well capitalised, while protecting the ability of firms within scope to support economic growth, including the ability to provide finance to small businesses and infrastructure projects.

The UK remains committed to the full and consistent adoption of the Basel reforms. The Prudential Regulation Authority intends to implement most of the new Basel 3.1 rules from 1 January 2027, which will give UK-focused firms the regulatory certainty that they need to plan for the future and invest in the real economy. The timing of implementation in other major jurisdictions, however, remains unclear, particularly for certain market-risk requirements affecting banks that use internal models. This is particularly relevant for internationally active firms with cross-border trading activity. Implementing those specific requirements in the UK ahead of clarity elsewhere risks causing unnecessary operational complexity for internationally active firms, including the need to run different systems and processes in parallel across jurisdictions.

That is why the Government, in conjunction with the Prudential Regulation Authority, have decided to build in flexibility to the UK’s approach. The Government announced last year that implementation of new international model market risk requirements—the element of Basel 3.1 that will most affect the ability of UK banks to compete in international markets—will be delayed until 1 January 2028.

This instrument gives effect to that approach by disapplying the updated international model market risk rules during the transitional period from 1 January 2027 to 31 December 2027. During that period, firms will continue to apply the existing requirements. This will apply only to a small number of internationally active firms. This limited delay will allow the UK to flex the new internal model requirements for market risk, should that prove necessary, to ensure that the UK remains competitive with other major jurisdictions.

The instrument also provides the Treasury with the ability to extend the transitional period by making further regulations if international developments warrant it. Any such extension would be time-limited, subject to parliamentary scrutiny and used only if necessary to respond to material international developments.

These statutory instruments are limited in scope and carefully targeted. They restate important provisions in the capital requirements regulation which need to remain on the statute book to ensure that the system of prudential regulation continues to operate as intended. They also enable a flexible and pragmatic approach to Basel 3.1 implementation, minimising disruption and protecting the competitiveness of UK firms while uncertainty over implementation remains in other jurisdictions.

Taken together, these limited changes will help to deliver an agile and responsive prudential regime for banks and investment firms. I beg to move.

[Baroness Kramer (LD)]

My Lords, the definition of a statutory instrument is very technical, and I frankly have nothing to add to it. The capital requirements SI, in that it provides the temporary flexibility to see how other jurisdictions will behave, seems understandable and we on these Benches oppose neither. However, I have some questions for the Minister on the changes that underlie these SIs.

The Minister will know that undue risk taken in their trading activities by internationally active institutions played a significant role in the depth and complexity of the 2007-08 crash and the economic stagnation that followed. I have always been concerned that the regulators will be persuaded by their competitiveness and growth objective to relax the risk requirements on this sector, and these SIs seem to confirm that that is indeed the direction of travel. Am I right?

The finance industry, which is keen to get profits from risk so long as the losses fall on taxpayers, has certainly been calling for scope to take more risk, always assuring us that its genius means that risk is not really risk. The Treasury is strongly encouraging risk-taking in the name of growth, but its view is very short-termist and again there is very little understanding of the way in which risk takes impact.

This SI refers constantly to competitiveness with other jurisdictions, particularly the US and the EU. What assurances can the Minister give me that we have not now entered the world of the lowest common denominator, which of course has been the greatest fear of many of us as we have seen regulation continuously softened?

Some I have talked to have said that the regulator is easing capital requirements, as this SI illustrates, to help the big conventional institutions counter the surge in private credit as the lesser of two evils. Is that correct? Some have said that the reduction in the risk requirement is to counter the pressures that will flow from the EU capital requirements directive 6, which could significantly restrict the ability of non-EU banks to provide core banking services to EU clients from outside the EU, thereby encouraging the further relocation of operations and staff from London to EU locations. Is it correct that this is an anticipative countermeasure to what the Treasury sees coming?

Others are saying that President Trump’s determination to significantly deregulate US banks and financial activities means that we have to enter and accept an era of high-risk banking and serious financial volatility. I am very cautious when the risk profile of British banking is set by President Trump’s definition of what is risk and what is not, but is it the view of the UK Government and regulators that we have to adjust to be competitive with President Trump’s perspective on what risk should be undertaken in the financial sector? I am most concerned that increases in risk across the piece in the financial sector are not being acknowledged and are consequently treated with complacency. The various protections that we have in place are partial, many of them are untested and even those that do exist are consistently being undermined. Does the Minister share my anxiety?