Out-Law News 2 min. read

UK FCA outlines details of prudential regime for investment firms

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The UK Financial Conduct Authority (FCA) has outlined the details of the new prudential regime that will apply to all investment firms.

In a policy statement introducing the UK Investment Firms Prudential Regime (IFPR), the FCA said key changes for firms would include a new requirement to hold liquidity equivalent to a third of capital.

The policy statement also outlines how the FCA proposes to calculate firms’ ‘K-factors’, being an assessment of risk to market, risk to client and risk to firm, which are used to determine capital requirements, as well as fixed overhead requirements.

The IFPR will apply to all firms carrying on Markets in Financial Instruments Directive (MiFID) business that are currently subject to any part of the Capital Requirements Directive and the Capital Requirements Regulation, including collective portfolio management investment firms.

A number of the prudential categories which currently exist will effectively cease to exist, with the introduction of a new single prudential sourcebook known as MiFIDPRU replacing them. These include BIPRU (firms subject to the prudential sourcebook for banks, building societies and investment firms), IFPRU (firms subject to the prudential sourcebook for investment firms), and ‘exempt CAD’ firms.

The IFPR will divide firms into ‘small and non-interconnected’ (SNI) investment firms, and those that are not. The division will provide proportionality for SNIs including the calculation of prudential requirements and disclosure and remuneration.

To qualify as an SNI, the firm must not carry out activities that have the greatest potential to cause harm to customers or to the markets in which it operates, and must not carry out any activities on such a scale that would cause significant harm to customers or to the markets in which it operates.

In addition to the new liquidity requirements, the FCA will introduce new initial capital requirements and permanent minimum capital requirements (PMR). For firms conducting a limited set of MiFID services and activities, the PMR will rise from €50,000 to £75,000. Firms operating an organised trading facility with limitations will have a PMR of £150,000, while firms with permission to carry on any investment activities will have a PMR of £750,000.

The FCA said PMRs would be set in sterling rather than euros to avoid exchange rate fluctuations.

The policy statement is the first set of confirmed rules for the new IFPR, and confirms to a large extent proposals initially set out in a December 2020 consultation paper. A second consulutation, on the second phase of the proposed rules, ran between April and May 2021. Further consultation is expected in the third quarter of 2021 with further policy statements due in the third and fourth quarters of the year which will cover amongst other things risk management; internal capital adequacy and risk assessment (ICARA) and remuneration.

The IFPR will be implemented from the beginning of January 2022, but in some areas there will be a five-year transition period. All investment firms should be assessing any changes that they will need to make to their capital and other prudential obligations in order to meet this short timetable.

The FCA said the IFPR is intended to create a prudential regime which is more fit for purpose than having investment firms complying with rules designed for banks as is currently the case. It said the regime should reduce barriers to entry and allow for better competition between investment firms.

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