Initial assessment of the impact of IFPR
If you haven’t already done so, the first step is establishing the classification of your firm between ‘Small and non-interconnected firm’ and ‘Non-small and non-interconnected firm’, depending on the quantitative assessment of the activities carried out by you.
Then, you must determine if your existing capital instruments qualify as ‘common equity tier 1 capital’, ‘additional tier 1 capital’ or ‘tier 2 capital’, as the FCA intends to tighten the definition of regulatory capital.
Depending on whether you’re currently an exempt-CAD firm, BIPRU or an IFPRU firm, you may have to deal with some significant changes to your capital requirement, with the introduction of ‘fixed overheads requirement’ as the base floor, plus further complications through the K-factor requirement.
So what’re K-factors and which do you need to consider? K-factors are the capital requirement metric that take into account a firm’s risk profile, size of the balance sheet, client assets and volume of trading and investment activities; representing the range of risks the firm can present. There are nine K-factors in total, broadly split into:
- Those which apply to firms that don’t have the permission to deal on their own account (K-AUM, K-CMH, K-ASA, K-COH).
- And those that have a trading book (K-DTF, K-NPR, K-CMG, K-TCD, K-CON).
Not to forget the increase in the base capital requirement itself, which under IFPR is £75,000, £150,000 or £750,000. As opposed to the corresponding current levels of €50,000, €125,000 or €730,000 for different types of firms.
Something positive for you to note is that the transitional rules are quite generous, allowing firms to build the required capital over a time horizon of five years. However, this does require careful tracking of the rules at each of the base capital, fixed overheads requirement, and K-factor requirement levels.
Lastly, surrounding all of the above is the consideration of your group structure itself, to determine whether you need to comply with all of the above rules at a solo as well as consolidated level. A simple structure may make you eligible for ‘Group Capital Test’ which is subject to the FCA’s granting permission, but worth avoiding the ‘prudential consolidation rules’ if you can.