Early insights: The PRA’s DP 1/25 and its implications for UK mortgage lenders

Reflections on proportionality, IRB aspirations, and how future paths could emerge to create an increasingly competitive mortgage market for consumers

The recent publication of DP1/25 by the PRA has prompted widespread reflection across the UK’s retail mortgage lending sector. On the surface, assuming discussion points emerge in similar form for consultation, and eventual future policy, institutions may be considering what this evolving regulatory landscape could mean for their lending plans and growth ambitions.

Lenders should already be well into their Basel 3.1 implementation and testing plans. For some IRB firms—both established and aspiring—this also includes long-running hybrid model suite journeys happening in parallel. Introducing stepping stones along the IRB path could help firms gradually build more advanced risk management capabilities in a proportionate manner and achieve incremental capital efficiencies over time. Senior management will still be expected to maintain strong governance across the three lines of defence and apply rigorous model risk management principles. However, this approach could help overcome some of the current barriers to IRB adoption including:

• rich (and long) data histories.
• lack of empirical downturn performance evidence.
• high quality books with limited experience of arrears, default, and loss.

In turn, this could increase consumer choice and allow more lenders to compete in non-niche mortgage markets, whilst still being able to secure attractive returns. Something very much aligned to policymakers’ objectives to facilitate effective competition and nurture the UK economy’s international competitiveness and its growth over the medium to long term.

In this article, we explore the key themes emerging and questions mortgage lenders may be considering, and offer balanced points to reflect on as we wait for the outcome of ongoing discussions and the consultation period that will follow.

Who does this impact?

We believe this has potential relevance across a broad range of ‘medium sized’ lenders in the UK mortgage market – importantly, a definition which has yet to be finalised; Tier Two IRB incumbents, mid-sized building societies who may currently feel constrained by Standardised, particularly in lower LTV ranges, and challenger banks with ambitious growth plans. Whilst established Tier Ones are unlikely to be impacted by ‘Foundation’ IRB considerations themselves, the outcome of some of the discussion around hybrid nuances / expectations such as the 30% cyclicality cap may influence future thinking around PD methodology enhancements.

Basel 3.1 implementation: Early days and uncertain timelines for further discussion

The PRA’s discussion process is still in its early stages, seeking feedback by the end of October to shape the nature of consultation to follow. Any subsequent consultation leading to formal changes in prudential policy are intuitively expected to align with – or perhaps even trail – Basel 3.1’s official ‘Day One’. As such, whilst open dialogue around these new options is to be welcomed, lenders currently executing their plans (Basel 3.1 implementation and corporate planning lending ‘mix’) on ‘known’ Basel 3.1 requirements are keenly watching for signals that could result in changes to their own timelines and longer-term strategic priorities.

Encouraging the IRB journey: Opportunity for growth and sophistication

A significant message arising from DP1/25 is that the discussion paper does not discourage firms already progressing towards, or aspiring to  , Internal Ratings-Based (IRB) approaches and this is something we are seeing with our existing clients, as firms continue to progress their pre-existing plans. On the contrary, depending on how ‘medium-sized firms’ are ultimately defined, some “Strong and Simple” (SDDT) organisations with an asset base of less than £20bn may find themselves newly encouraged to seek IRB accreditation, especially if a foundation-level approach provides an attainable, proportionate, stepping stone before more advanced data and modelling requirements become necessary.

This opens a possibility to firms previously outside the scope of IRB to reconsider their trajectory, particularly as regulatory clarity grows and proportionality becomes more explicit.

Challenges in credit risk modelling: Data, defaults, and downturns

Specific technical hurdles remain under Basel 3.1 near-final policy, especially concerning Loss Given Default (LGD). Use of reference rates in Probability of Possession Given Default estimates has proved commercially unattractive, creating tension between regulatory intent and business realities. The F-IRB discussion is a welcome one in this space, assuming LGD impositions provide a capital benefit over Standardised, but remain more conservative than Advanced IRB calculations, across the LTV spectrum.

As is, the ‘hybrid’ Probability of Default (PD) methodology presents further challenges. Its effectiveness depends heavily on data history, evolving risk appetites, and the ability to reflect cyclical changes through risk grading and PiT drivers. The less extensive a firm’s data, the harder it is to remain compliant within regulatory bounds.

We are planning additional technical papers providing more detail on the modelling challenges and possible resolutions to the current situation. But, for now, the focus remains on the key themes that firms may be considering….

Sector-wide engagement: A welcome invitation

Firms are being actively invited to respond to PRA’s consultation, with industry groups such as UK Finance and the Building Societies Association expected to coordinate collective feedback. The PRA’s openness is seen as a positive move, offering industry participants an opportunity to surface challenges and contribute to shaping proportionate, growth-oriented regulatory pathways. This is particularly important for smaller and mid-sized firms looking to elevate their risk management sophistication in line with growth ambitions.

Strong and simple: Asset thresholds and ambitions

The “Strong and Simple” framework specifically targets small domestic deposit takers (SDDTs), set at an asset threshold of £20bn. Yet, questions remain around the line dividing small and medium firms, especially where rapid asset growth is planned. There are firms currently well below the threshold—at least in mortgage assets—but whose broader balance sheets and ambitious lending plans could see them exceed it within their planning horizons.

A key consideration is whether these options might prompt firms to express a desire to ‘opt out’ of the SDDT regime if they have ambitious growth plans, seeking instead to pursue an incremental IRB accreditation and more sophisticated risk management structures commensurate with these. Since the publication of this Discussion Paper  , we have had several conversations with firms considering their longer-term options.

Conclusion

DP1/25 is catalysing a sector-wide conversation about proportionality, regulatory ambition, and the practical challenges of credit risk modelling. As the PRA seeks input, UK mortgage lenders face a pivotal opportunity to influence policy design, ensuring that new rules support both resilience and innovation – running alongside competition – across the sector. The way forward will depend on how consultation feedback, firm-level ambitions, and regulatory clarity combine to shape the next phase of mortgage risk management in the UK.

Get in touch

Send us an email if you are interested in learning how our experienced team of consultants can support your organisation navigate the changing regulatory landscape – info@4-most.co.uk.