The Bank of England's Prudential Regulation Authority (PRA) is proposing a new framework to automatically update regulatory thresholds every five years to prevent 'prudential drag.' This issue occurs when fixed nominal thresholds tighten unintentionally over time due to economic growth and inflation, leading to more conservative requirements than originally intended. The PRA suggests the first update under this new framework would take place on 1 July 2031, shifting from an ad hoc approach to a systematic, predictable methodology.
The proposed framework aims to improve proportionality and support competition by aligning thresholds with nominal GDP growth. This would reduce barriers to growth for financial sector firms and enhance service provision to the UK economy. While firms may incur initial costs to adapt to the framework, predictable updates should simplify business planning and lower ongoing costs. The PRA is consulting on which thresholds should be included in this automatic indexation process.
Not all regulatory thresholds are deemed suitable for automatic indexation, and the PRA is seeking feedback on additional thresholds through a separate discussion paper. Firms are encouraged to provide evidence on the costs and benefits of including these thresholds in the framework. The proposal is part of the PRA's broader effort to modernize its policy framework and ensure future-proofing of regulatory requirements.
The consultation is relevant to various PRA-regulated firms, including banks, insurers, and credit unions, as well as those subject to PRA requirements on a consolidated basis. The PRA believes the benefits of this proposal will outweigh the costs, as it aims to maintain the intended calibration and proportionality of regulatory requirements over time.