PRA and BoE detail cost model for regulation

The Prudential Regulation Authority (PRA) and the Bank of England (BoE) have outlined the Standard Cost Model (SCM), a framework for estimating firms' operational compliance costs from regulatory changes. Both regulators are seeking feedback on the model's assumptions and benchmarks.

Estimating compliance burdens

The Prudential Regulation Authority (PRA) has published a technical note detailing its Standard Cost Model (SCM), a method designed to estimate direct operational compliance costs or savings for firms facing regulatory changes.

The SCM provides a structured approach to identify, categorise, and quantify incremental compliance activities and their associated costs.

It integrates established cost modelling practices, cost-benefit analysis (CBA) guidance, and insights from firms' consultations and supervisory engagement.

The PRA emphasizes that the SCM is a key component of its broader approach to cost-benefit analysis, complementing other analytical tools.

The regulator is actively seeking feedback on the model, particularly evidence to refine its underlying assumptions and benchmarks, with all responses treated confidentially.

BoE's FMI application

The Bank of England (the Bank) also employs the PRA's SCM to assess compliance costs for financial market infrastructures (FMIs), including central counterparties (CCPs) and central securities depositories (CSDs).

The Bank's obligation to conduct cost-benefit analyses for FMI regulation is new, with limited existing literature.

The Bank considers the SCM a reasonable approach, drawing on established modelling practices.

Notably, the Bank's firm categorization differs from the PRA's, focusing on systemic importance and operational complexity.

It conservatively categorizes all FMIs as 'large' for cost calculations, an assumption subject to future review, especially if less complex FMIs emerge.

Conservative, but open to evidence

The SCM, while structured, risks overestimating FMI compliance costs due to the Bank of England's 'conservative' categorization.

The open call for evidence on model assumptions highlights a critical need for refinement to ensure accurate regulatory impact assessments.

Its practical utility ultimately hinges on integrating more granular, real-world data.