UK FCA outlines details of prudential regime for investment firms

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

The policy statement also describes how the FCA proposes to calculate companies’ “K-factors”, namely an assessment of market risk, customer risk and firm risk, which are used to determine capital requirements, as well as fixed overhead costs. requirements.

The IFPR will apply to all companies carrying out activities related to the Markets in Financial Instruments Directive (MiFID) which are currently subject to part of the Capital Requirements Directive and the Capital Requirements Regulation. own funds, including collective portfolio management investment firms.

A number of prudential categories that currently exist will effectively cease to exist, with the introduction of a new single prudential framework called MiFIDPRU replacing them. These include BIPRUs (companies subject to the prudential compendium for banks, construction companies and investment firms), IFPRU (companies subject to the prudential compendium for investment firms) and companies CAD exempt”.

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

To qualify as an NIS, the company must not engage in activities most likely to cause harm to customers or the markets in which it operates, and must not engage in activities of such magnitude that would cause significant harm. customers or markets in which it operates.

In addition to the new liquidity requirements, the FCA will introduce new initial capital requirements and ongoing minimum capital requirements (PMR). For businesses conducting a limited set of MiFID services and activities, the PMR will increase from €50,000 to £75,000. Firms operating an organized trading facility with limitations will have a PMR of £150,000, while firms licensed to engage in investment business will have a PMR of £750,000.

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

The policy statement is the first set of confirmed rules for the new IFPR and confirms to a large extent the proposals initially set out in a December 2020 consultation document. A second consultation on the second phase of the proposed rules, took place between April and May 2021. Further consultations are expected in the third quarter of 2021 with further policy statements expected in the third and fourth quarters of the year which will cover among others risk management; internal capital adequacy and risk assessment (ICARA) and compensation.

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 assess the changes they will need to make to their capital and other prudential obligations in order to meet this short timeframe.

The FCA said the IFPR aims to create a prudential regime that is more fit for purpose than making investment firms comply with rules designed for banks, as is currently the case. He said the regime should reduce barriers to entry and allow for better competition among investment firms.