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A new UK prudential regime for MiFID investment firms – one year to prepare.

The FCA has now published its highly anticipated Discussion Paper (DP20/2) which sets out the details of the adoption of the EU’s new prudential regime for investment firms.

A new prudential regime has been commissioned in the UK through a Bill approved by HM Treasury this week, thereby eliminating some uncertainty caused by the UK leaving the EU. The FCA proposes to introduce a similar regime to the IFR/IFD that meets its own objectives and one that considers the specifics of the UK market. 

While the IFR/IFD represents a significant change to how MiFID investment firms will be prudentially regulated, the Discussion Paper focuses on introducing UK-specific rules intended to achieve the FCA’s broad objectives of improving stability, introducing proportionality and reducing the potential harm that an investment firm may cause to its clients or markets. 

We are delighted to publish the first in a series of articles on the implementation of the new UK Prudential Regime (the ‘Regime’). Over the coming months, our programme will focus on various aspects of the Regime to provide guidance to investment firms so that they are geared up when the new framework comes into force on 26 June 2021 as expected.

About the authors

Priya Mehta

+44 (0)20 7556 1372
mehtap@buzzacott.co.uk
LinkedIn

Jonathan Aseervatham

+44 (0)20 7556 1260
aseervathamj@buzzacott.co.uk
LinkedIn

A new prudential regime has been commissioned in the UK through a Bill approved by HM Treasury this week, thereby eliminating some uncertainty caused by the UK leaving the EU. The FCA proposes to introduce a similar regime to the IFR/IFD that meets its own objectives and one that considers the specifics of the UK market. 

While the IFR/IFD represents a significant change to how MiFID investment firms will be prudentially regulated, the Discussion Paper focuses on introducing UK-specific rules intended to achieve the FCA’s broad objectives of improving stability, introducing proportionality and reducing the potential harm that an investment firm may cause to its clients or markets. 

We are delighted to publish the first in a series of articles on the implementation of the new UK Prudential Regime (the ‘Regime’). Over the coming months, our programme will focus on various aspects of the Regime to provide guidance to investment firms so that they are geared up when the new framework comes into force on 26 June 2021 as expected.

A quick overview of the FCA’s Discussion Paper

A quick overview of the FCA’s Discussion Paper

The coverage of the Regime is wide-ranging and will affect all types of investment firms, whether small or large. There are significant changes proposed to the following aspects of compliance with the FCA’s current regulatory framework:  

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In addition there are specific annotations for ‘Collective portfolio management investment firms’ applicable to the  majority of the asset managers registered under the Alternative Investment Fund Managers’ Directive’ (AIFMD). The Regime also proposes certain changes to the existing Capital Requirement Regulations (CRR). 

Background to the IFR and IFD

Background to the IFR and IFD

Earlier this month, the European Banking Authority (EBA) published the following documents in relation to IFR/IFD:

  1. EBA’s Roadmap on investment firms 
  2. Draft Regulatory Technical Standards related to implementation of a new prudential regime for investment firms
  3. Draft Implementing Technical Standards on reporting requirements for investment firms
  4. Draft Regulatory Technical Standards on classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration
  5. Draft Regulatory Technical Standards on criteria to identify categories of staff whose professional activities have a material impact on an investment firm's risk profile or assets it manages

As indicated in the following extract from the European Banking Authority’s (EBA) Roadmap for IFR/IFD implementation, the EBA has highlighted six thematic areas covered by the EBA mandates. These will apply in stages over the next 2 years, as reflected in the FCA’s Discussion Paper through the ‘IFR transitional provisions’. 

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Specific topics expected to be finalised by December 2020

Specific topics expected to be finalised by December 2020

The first set of Regulatory Technical Standards (RTSs) which are summarised in Table 1 below are scheduled to be published in December 2020. This covers three draft RTS on the reclassification of certain investment firms, five draft RTS on capital requirements for investment firms at solo level, and one draft RTS on the scope and methods of prudential consolidation for investment firms at group level.

Table 1 – Final legislation expected to be published in December 2020 (12 months from EIF*)

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*EIF: entry into force is 26 December 2019

Further legislation with a slightly longer time horizon

Further legislation with a slightly longer time horizon 

Looking beyond December 2020, the next set of RTSs which are listed in Table 2 below, will cover draft Implementing Technical Standards on liquidity requirements, additional policy and own funds disclosures, a new remuneration code and supervisory information including the new SREP. The implementation of most of these are on a 18-month time horizon (from the proposed directive and regulation issued in December 2019) and accordingly, we can expect the final text of the standards to be published by June 2021.

Table 2 – Final legislation expected to be published by June 2021 (18 months from EIF*)

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*EIF: entry into force is 26 December 2019

Beyond this there are additional requirements that are due to be implemented between 2022 and 2025 under the Supervisory Convergence and SREP and ESG factors and risk mandates.

What should you do next?

The clock has started ticking and firms should consider carrying out a detailed impact assessment on how these regulations will affect their business. 

The consultation on all of the above is open until 4 September 2020 including a public hearing scheduled by the EBA on 30 June 2020. The FCA’s Discussion Paper is open for comment until 25 September 2020, soon after which we can expect the FCA to issue its final consultation paper.  

As we look forward to actively participating in these consultations and discussions. Our second article on this subject will concentrate on the new classification of firms, new capital requirements including K-factors, the new reporting requirements that will apply, and the overall impact that the new regime will have upon UK investment firms.

 

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