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Last updated: 20 Apr 2021
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The FCA releases its second IFPR consultation paper (CP21/7)

The FCA has now published its long awaited second consultation paper CP21/7 – A new UK prudential regime for MiFID investment firms.

The Investment Firm Prudential Regime (‘the IFPR’ or ‘the Regime’) introduces a single proportionate regime for MiFID investment firms regulated by the FCA taking into account their size and business. The ‘Risk Based Approach’ focuses on addressing potential harm to consumers, clients and the market. It also stipulates the amount of liquid assets and regulatory capital levels that a firm must hold.

About the authors

Priya Mehta

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

+44 (0)20 7556 1260
aseervathamj@buzzacott.co.uk
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The Investment Firm Prudential Regime (‘the IFPR’ or ‘the Regime’) introduces a single proportionate regime for MiFID investment firms regulated by the FCA taking into account their size and business. The ‘Risk Based Approach’ focuses on addressing potential harm to consumers, clients and the market. It also stipulates the amount of liquid assets and regulatory capital levels that a firm must hold.

Confirming that the Regime will be effective from 1 January 2022, the second CP covers the following key topics:

  • Introduction of ‘Fixed Overheads Requirement’ for all firms as another ‘floor’ below which the own funds of an FCA investment firm must not fall
  • Detailed rules relating to the K-Factors not covered within the first CP. Specifically this CP covers K-ASA, K-CMH, K-AUM and K-COH
  • Clarification on adjustment to calculating the coefficients for the K-DTF
  • Specific proposals on own funds requirements and firm categorisation for firms acting as clearing members and indirect clearing firms 
  • Explanation on the basic and core liquid assets requirements and the type of assets that can be used 
  • Introduction of the ‘Internal Capital and Risk Assessment (ICARA)’ process for all FCA investment firms and setting out the expectation to use this to meet the ‘Overall Financial Adequacy Rule (OFAR)’
  • Proposals relating to risk management, governance and Supervisory Review and Evaluation Process (SREP) process and how this would interact with the ICARA and SM&CR
  • Expectations around ‘recovery planning’, ‘wind down planning and triggers’, ‘assessing the adequacy of own funds and liquid assets’ and ‘thresholds monitoring’
  • Expectations relating to a clearly documented Remuneration Policy for all firms including rules relating to proportionality and requirement to have risk, remuneration and nomination committees for large non-SNI firms 
  • Additional Regulatory returns including a new template for ‘Collective Portfolio Management Investment firms (CPMIs) and ICARA reporting form
  • Information on proposed forms for applications and notifications to be made on various topics 

Each of the above subjects unfolds into more complex rules and assessing the impact for your firm is critical. Jointly with the first consultation paper, we now have clarification on all of the following:

  • Classification of firms and thresholds
  • Composition of capital/owns funds and own funds requirement including all nine K-factors as well as the fixed overheads requirement
  • Application of prudential consolidation or qualification for the ‘Group Capital Test’
  • Monitoring requirements relating to concentration risk, liquidity, capital adequacy and thresholds
  • Risk management, governance and review process including the ICARA
  • New regulatory reporting requirements including templates for the new returns and increased frequency of reporting for some firms
  • Remuneration code and proportionality rules applicable based on the size, structure and complexity of firms
  • Transitional rules to allow firms to implement these changes over a five-year time horizon

All of the above is being drafted within MIFIDPRU which will be a new sourcebook within the FCA’s Handbook covering all rules applicable to MiFID investment firms. Accordingly, the FCA intends to retire a significant part of GENPRU and all of BIPRU and IFPRU sourcebooks. 

With the clock ticking, it is imperative for all firms to start an in-depth assessment of the impact of IFPR as there could be some significant gaps between the current prudential rules and the new Regime that will need to be addressed through the rest of the year in order to be compliant by 1 January 2022. 

Although the aim of the IFPR is to create a simplified risk-responsive regulatory structure for investment firms that are not considered systemically dangerous, in the short run the Regime is likely to impose an additional operational and compliance burden and potentially additional capital requirements. 

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