It said the changes to the draft policy were “appropriate to reflect risks in a more proportionate manner, reduce operational burden on firms, enhance the relative standing of the UK and improve the clarity of rules in a manner that aligns with the PRA’s statutory objectives”. 

The policy does not apply to banks and building societies that qualify as small domestic deposit takers, meaning their average assets do not exceed £20bn. Separate rules have been published for this kind of lender. 

 

Mortgage lending proposals

The PRA originally proposed introducing a definition for residential real estate, which would have excluded care homes, purpose-built student accommodation, and property that was predominantly used for holiday lets. 

Based on feedback mainly relating to holiday lets and suggestions that they should be considered residential property, this rule has been removed. 

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It also proposed introducing criteria for a loan to be determined as ‘regulatory real estate exposure’, with the requirement that it is a finished property. Where this requirement was not met, the PRA suggested classifying it as ‘other real estate’ with a higher risk weight. 

After receiving feedback that this could impact self-build mortgages as they would not meet the finished property clause, the PRA decided this would not be proportionate to the risk associated and will exempt self-build mortgages from this rule. 

It also amended a proposed rule to bring in criteria to determine whether the repayment of a loan was “materially dependent on the cash flows generated by the property”. 

The PRA suggested a policy to automatically apply this to houses in multiple occupation (HMOs). 

This was changed to exclude HMOs from the requirement and assess them in the same way as other residential real estate. 

It retained its proposal to apply a loan splitting approach to second charge mortgages where there are charges on the property not held by the lender, to reflect other charges on the property and the risk of the second charge lender’s exposures. 

The regulator said second charge mortgages were “generally riskier” than first charge mortgages as “even if recoveries are maximised, the second charge holder does not receive any recoveries until the first charge holder is fully paid”. 

It has also announced a simpler, more risk-sensitive approach to residential property valuations and lower capital requirements for small and medium enterprise (SME) exposures, which it said would make it easier for firms to lend to SMEs.

Regarding residential and commercial property valuations, the PRA proposed the value of the property should be the value at origination and when a lender issues a new mortgage for purchase or a new mortgage for an existing or new borrower for the property securing the loan. 

It said the valuation of a property should be “appraised using prudently conservative valuation criteria”. In a speech today, the Bank of England’s director of prudential policy, Phil Evans, said this would prevent the disadvantaging of long-term products such as lifetime mortgages.

This requirement has been maintained but amended to introduce a revaluation ‘backstop’ that would require lenders to obtain an updated valuation every five years. 

However, where the loan amount is more than £2.6m or 5% of the lender’s funds, it must get an updated valuation every three years, which the PRA said reflected the greater risk of loss in the event of a default where the property was inaccurately valued. 

Additionally, if the most recent valuation has been obtained because of a market-wide fall in property prices, a lender must either get an updated one either three or five years after this valuation or update this either three or five years after the most recent origination before the last valuation. 

The Basel 3.1 standards will be effective from 1 January 2026. 

 

PRA supporting growth

Simon Hills, director of prudential policy at UK Finance, said: “We welcome the announcement from the Prudential Regulation Authority (PRA) on its plans to implement Basel 3.1 in the UK. The PRA has made a number of important changes to its initial proposals, which will help support lending and growth in the economy, most notably around the overall capital impact and the approach to SME and infrastructure lending. Delaying the implementation date to 1 January 2026 gives firms more time to get ready. 

“We also welcome the new set of rules for smaller banks as they simplify the approach to capital for these firms and will help support competition in the UK banking sector. 

“We look forward to working with our members and the regulator as we prepare for the new rules coming into force.”