The UK prudential regime for investment firms effective 1 January 2022: key considerations for investment firms | Proskauer Rose LLP

  1. What is IFPR?

The new UK prudential regime for investment firms (“IFPR”) will come into force on 1 January 2022 and will apply to UK investment firms authorized under the Markets in Financial Instruments Directive (“MiFID”) as applied in the UK post-Brexit, which will include current “BIPRU” businesses and “Exempt CAD” businesses, as well as alternative investment fund managers (“AIFM”) which have additional MiFID authorizations (called investment companies in collective portfolio management (“CPMI“).

The IFPR will introduce new regulatory capital requirements for companies within its scope and, among other things, new remuneration, reporting and disclosure requirements. Below we have outlined some of the key considerations for businesses that will be subject to the IFPR.

  1. What is the difference between SNI and non-SNI companies?

The IFPR regime distinguishes between “small investment firms and non-interconnected investment firms” (“NIS» businesses) and non-SNI businesses. The level of compliance with certain rules that will apply to a firm within the scope of the IFRS will be determined by whether the firm is an SNI or a non-SNI.

SNI companies are defined in chapter 1 of the prudential compendium of MiFID companies, (“MIFIDPRU 1”), prescribing a series of authorization-based and quantitative thresholds for companies to determine whether they are an NIS, as shown in the table below.

Measure* Threshold

Assets under management (AuM), which are defined for these purposes as:

  • discretionary portfolio management; and
  • non-discretionary arrangements constituting investment advice of an ongoing nature.
Client orders processed – spot trades
Client orders processed – derivatives transactions
Assets protected and administered Zero
Customer money held Zero
Total balance sheet and off balance sheet
Total annual gross receipts from services and investment activities

*These thresholds, with the exception of balance sheet and off-balance sheet total, only concern MiFID activities undertaken by the company. Basically, the calculation should aggregate the amounts resulting from the MIFID activities of all FCA approved companies in the same group.

While the FCA expects around 70% of companies to be SNIs, companies that exceed the relevant thresholds will be said to be non-SNIs. Notwithstanding this, companies that have authorization to deal as principal will still be considered non-SNI.

Certain companies (of which the FCA expects there will be around 100 in total) will also be considered “large non-NIS” if: (i) the value of their on- and off-balance sheet assets during the reporting period previous four years is a moving average of more than £300 million; or (ii) the value of its on-balance sheet and off-balance sheet assets over the preceding four-year period is a moving average of more than £100 million (but less than £300 million), and it has a trading portfolio of over £150 million and/or a derivatives business of over £100 million.

  1. What regulatory capital requirements will companies need to comply with?

Core capital and liquidity

SNI companies will be required to maintain “equity” which is the higher of a permanent minimum capital requirement (“people with reduced mobility”) (which will typically be £75,000) and a fixed overhead requirement (“FOR”) (an amount equal to one quarter of its corresponding expenditure for the previous year). Non-SNI companies will be required to maintain an amount of “equity” corresponding to the greater of their PMR, FOR or “K-factor” requirement, which involves a specific methodology and calculation relevant to the ‘business.

All SNI and non-SNI companies will also be required to hold core liquid assets – typically this will need to equal one-third of their FOR.

A number of companies will be particularly affected by the new regulatory capital requirements, such as CAD-exempt companies, which are likely to see their capital requirements increase significantly. Some firms may benefit from temporary transitional provisions allowing them to gradually adapt to the additional requirements of the IFPR. For example, Exempt CAD companies will be able to gradually increase their capital over a period of five years from January 1, 2022.

Regulatory consolidation

Under the IFPR, all companies will have to determine whether consolidated supervision will apply. Broadly, this will be the case where there is a UK parent entity of an “investment firm group”, containing at least one FCA investment firm. If so, the prudential consolidation requirements will apply directly to and at the level of the UK parent entity, which will be classified as an SNI or non-SNI business in its own right and will be required to comply with various prudential requirements under of the IFPR.

There is an exemption available, called the “group capital test”, which can be relied upon where the FCA allows it. In these circumstances, the UK parent entity will be exempt from the application of the IFRS on a consolidated basis and will instead be required to hold sufficient capital to cover the following:

  1. the sum of the full carrying amount of its equity investments, subordinated debt and certain other specified instruments in relevant entities of the investment firm group; and
  2. the total amount of its contingent liabilities in favor of the relevant entities of the investment firm group.
  1. What are the pay conditions?

All Companies falling within the scope of the IFPR will need to comply with the requirements of the MIFIDPRU remuneration code which will vary depending on the type of company. CPMI companies, as mentioned above, will also be required to comply with the MIFIDPRU Remuneration Code with respect to their MiFID activities. The MiFIDPRU Remuneration Code applies to remuneration, including deferred interest, paid to staff of a company (which has a broad meaning under FCA rules).

In particular, SNI companies will have to comply with basic remuneration requirements, requiring them to establish and implement remuneration policies, while applying proportionality.

All non-SNI companies, in addition to the requirements to which SNI companies will be subject, must:

  • identify “material risk takers” (orMRT”) (i.e. a member of staff whose professional activities have a material impact on the risk profile of the company or the assets that the company manages);
  • set ratios between fixed and variable remuneration for each MRT in their policies;
  • ensure that they have malus and/or clawback agreements in place with respect to MRTs.

Larger SNI companies will be subject to enhanced compensation rules, which will include establishing risk and compensation committees, complying with payment process rules, and providing certain additional compensation disclosures.

  1. What are the new risk management and ICARA requirements?

All companies (including SNI companies) will be required to undertake an internal capital and risk adequacy assessment (“ICARA”) process by which companies will have to comply with an overall financial adequacy rule (“O FAR”). As part of the ICARA process, companies will determine the level of capital and liquid assets they may need in addition to the basic capital and liquid asset requirements described in section 3 above.

  1. What disclosures apply under the IFRS?

Under the proposed publication rules (which have not yet been finalized), all companies (both SNI and non-SNI) will be required, at least once a year, to make certain specific publications on their websites on the same date. when they publish their annual financial statements. statements (although material changes may require more frequent disclosure).

Disclosures will include, among other things, information about compensation policies and practices, including qualitative and quantitative information. All companies will be required, for example, to disclose the total amount of compensation awarded to all staff, split between fixed and variable compensation.

Although the disclosure requirements are relatively extensive, the FCA has confirmed that at this stage there are no proposals for disclosure relating to environmental, social and governance matters, on which the FCA will consult separately.

  1. How often will companies be required to make regulatory filings?

IFPR will introduce a single suite of reporting forms for all covered companies, to enable the FCA to collect the appropriate data to monitor companies against IFPR’s prudential requirements. The reporting requirements, set out in MIFIDPRU 9, will take a proportionate and risk-based approach. However, companies will need to be able to provide, on request, additional details on how they have calculated the relevant information they have provided.

All companies (including SNI companies) will be required to report quarterly to the FCA, with the relevant reporting reference dates being the last working day of March, June, September and December. All companies will also be required to complete an ICARA questionnaire at least once a year, which the company’s governing body must review and approve.

  1. What are the next steps for the targeted companies?

If not already done, companies covered by the new IFPR regime should assess and determine:

  • what their IFPR classification will be (either SNI or non-SNI);
  • whether or not they are part of a consolidated group for the purposes of the IFRS;
  • what their new regulatory capital requirement will be; and
  • what steps are needed to comply with the new remuneration code and risk management requirements (in particular ICARA).

A final policy statement on the implementation of the IFRS rules on disclosure is expected to be issued in the fourth quarter of this year – companies should continue to monitor developments in this regard.

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