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News – 10.04.24
Form PF: Are you up to speed with the latest developments?
Through this insight we will bring to your attention the main changes in a bitesize manner so that you can stay abreast of the requirements as they may apply to your firm. … Read more
Insight – 16.04.24
US and UK tax on carried interest
Learn more about the opportunities to minimise double taxation for dual US/UK taxpayers … Read more
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Governance code updates and advice for Further Education colleges from Buzzacott and the ESFA
Join Buzzacott and the ESFA for a governance update for further education colleges … Read more
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Bookmark our IFPR hub page and let us guide you through our key points for effective and efficient compliance.
The IFPR affects all FCA solo-regulated investment firms that are currently authorised under MiFID. This includes firms that are currently subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) including:
If the IFPR does apply to your firm, you will need to determine which category you fall into. Under the new regime, investment firms will be subject to tailored regulatory requirements based upon the size and complexity of your firm.
The FCA proposes that all firms will fall into either one of two categories, Small and Non-Interconnected (SNI) or Non-SNI Firms. The low diagram below outlines the thresholds that determine which category applies to your Firm.
SNI or Non-SNI Firm?
1 These metrics are assessed on a combined/group basis.
2 Small and non-interconnected FCA investment firm.
Under the IFPR, all MiFID investment firms will be required to meet a new own funds requirement, which will be calculated as the higher of:
*Only applicable to Non-SNI Firms
Investment firms will need to hold a minimum level of own funds (PMR) at all times, and this dependent on a firm’s activities, size and its regulatory permissions. The new levels will be denominated in GBP instead of Euros and will increase to £75,000, £150,000 and £750,000.
CPMI firms are dually regulated under both MiFID and AIFMD and will continue to be subject to a €125,000 base requirement should this supersede the PMR.
The fixed overhead requirement (FOR) will apply to all investment firms regulated under IFPR. The FOR will be an amount equal to one quarter of its relevant expenditure in the previous financial year. Please refer to ‘Fixed Overhead Requirement - What is relevant fixed expenditure?’ for more information.
The K-factor requirement is an activity-based requirement that applies to all Non-SNI investment firms. The K- factors that apply to an investment firm will depend on the MiFID activities it carries out. Please refer to point 3 - ‘Which K-factors are applicable to my business?’ for more information.
Transitional rules will apply for a period of five years from the date of implementation of the IFPR. Please refer to point 6 - ‘Are there any transitional provisions available?’ for more information.
The K-factor capital requirement is a new activity based capital requirement that is applicable to all Non-Small and Non-interconnected Investment (Non-SNI) Firms. There are nine K-factors in total, and the ones that apply to an individual investment firm will depend on the MiFID investment services and activities it undertakes.
K-AUM (Assets under management) will be calculated in connection with any MiFID business that meets the following definitions:
K-CMH (Client money held) will be applicable to investment firms that have the permission to hold and safeguard client monies. The requirement is calculated by applying a coefficient to the average balance of segregated and non-segregated client monies.
K-ASA (Assets safeguarded and administered) applies to investment firms who safeguard client assets under CASS 6. The calculation of the requirement follows the methodology for K-CMH as explained above.
K-COH (Client orders handled) will apply to investment firms that carry out execution of orders on behalf of a client and for the activity of reception and transmission of client orders.
K-NPR (Net position risk) captures market risk on a firm’s trading book positions and it also applies to balance sheet positions outside of the trading book which give rise to foreign exchange or commodity risk.
K-CMG (Clearing margin given) is an alternative to K-NPR, in order for investment firms to calculate the market risk requirement for specified portfolios. Investment firms will be required to request for permission to use this approach.
K-DTF (Daily trading flow) is the K-factor for investment firms that carry out trading in its own name, including on behalf of clients under a matched principal basis. K-DTF is split into cash trades and derivative trades, investment firms are required to apply a coefficient to the daily average amount of each.
K-TCD (Trading counterparty default) captures the risk of an investment firms exposure to the default of its trading counterparties. K-TCD effectively replaces counterparty credit risk under the old regime.
K-CON (Concentration risk) is a requirement for investment firms that trade in their own name, K-CON is a requirement for firms to hold additional regulatory capital when they have an exposure to a counterparty or a group of connected counterparties that exceed a limit based on the own funds held.
The introduction of K-factors is going to require investment firms to have processes in place to capture the relevant data points applicable to their firm. The majority of K-factors use historic data, sometimes ranging as far back as 15 months, therefore it is crucial that investment firms begin to assess the K-factor impact before the IFPR implementation on 01 January 2022.
The Fixed Overhead Requirement (FOR) will apply to all investment firms. Under the current regime, a subset of investment firms has been required to calculate the FOR as part of their capital adequacy requirements although there are some key changes under IFPR that all firms should be aware of.
The basis of the calculation is similar under the new regime and is set as one quarter of the previous financial year’s audited fixed overheads less any 'variable' expenditure. However, there is a notable change in what is considered to be variable expenditure.
Firms who have previously calculated the FOR will need to review what they consider variable expenditure as the scope for expenditure deductions has narrowed under the IFPR. We advise firms that currently take a generous approach towards deduction of variable expenses to compare the current basis of calculating their fixed overheads with those proposed under IFPR.
Other points of note:
One of the biggest considerations that investment firms, particularly hedge funds, asset managers and private equity firms, need to assess is the K-AUM K-factor. The assets under management (AUM) of an investment firm could not only determine its firm classification, but also potentially its capital requirement.
If a firm is deemed to manage or advise on assets in excess of £1.2bn, it will classified as a Non-SNI firm and will then have to apply the K-factor (K-AUM) requirement in calculating its capital requirements. Firms will need to apply a 0.02% coefficient to its average AUM in calculating its K-AUM requirement.
AUM will be measured as the net total value of the relevant assets, and firms should use the market value of these assets. Firms may choose to offset any negative values or liabilities attributable to position within relevant portfolios. This will be welcomed by most firms as this represents a truer reflection of the risk undertaken by a firm in managing or advising on a portfolio of assets, as opposed to the use of other measurements such as the gross and exposure method.
The average AUM should be calculated as follows:
A firm may also need to calculate additional K-factors, K-COH and K-CON, to calculate it overall K-factor requirement.
It should be noted that for CPMI firms managing assets under AIFMD, these assets will not be brought into the scope of the £1.2bn classification threshold or the K-AUM requirement.
Under IFPR, the definition of AUM has been extended to not only include "Assets under management", but also "Assets under advisory".
To that extent, the FCA have further clarified that AUM will include the following:
For most investment managers, who actively carry out portfolio management, this should be relatively straightforward. However, many fund management structures include a UK “sub-advisor” which have typically been classified as Exempt-CAD firms, on the basis that they only provide advice and/or recommendations to the investment manager. Such firms will need to review their investment management/advisory agreements to clarify whether they have AUM (or AUA) to determine their firm classification and resulting capital requirements under IFPR.
The IFPR has imposed numerous changes and additional requirements for most investment firms. One of biggest impacts for firms is the potential increase in capital requirements, and at the outset, firms may not have sufficient capital to meet the new requirements.
Fortunately, the FCA have proposed some transitional provisions to allow firms to build up their capital over a five year period before feeling the full effect of the new requirements.
For all investment firms, there will be a change in the Permanent Minimum Requirement (PMR) which effectively replaces the base capital requirement under the current regime. Under IFPR, the PMR will be in GBP (as opposed to EUR) and the table below outlines how the FCA will help most firms transition to the new minimum requirements (please note that there are some exceptions to these as explained below):
| Exempt-CAD | BIPRU | IFPRU €50k | IFPRU €125k | IFPRU €730k | |
| Year one | £50,000 | £50,000 | £50,000 | £125,000 | £730,000 |
| Year two | £55,000 | £55,000 | £55,000 | £130,000 | £735,000 |
| Year three | £60,000 | £60,000 | £60,000 | £135,000 | £740,000 |
| Year four | £65,000 | £65,000 | £65,000 | £140,000 | £745,000 |
| Year five | £70,000 | £70,000 | £70,000 | £145,000 | £750,000 |
| End of transition | £75,000 | £75,000 | £75,000 | £150,000 | £750,000 |
While this represents somewhat of a manageable change for most firms, the more significant impact will be the calculation of the Fixed Overhead Requirement (“FOR”) and, if applicable, the K-factor requirement (“KFR”), particularly for Local firms and Exempt-CAD firms. The FCA have made provisions for this in the IFPR and below are some examples of the significant changes to capital requirements for certain types of firms and the potential transitional provisions available.
For firms currently classified as IFPRU or BIPRU firms, the transitional provisions will allow firms to effectively cap their capital requirement (based on either the FOR or KFR) to twice their current own funds requirement. However, firms will still have to calculate and monitor their full own funds requirement under the new regime.
Exempt-CAD firms currently have a capital requirement of €50,000. However, as all firms, in addition to having a new minimum requirement, must also calculate an FOR and potentially a K-factor requirement depending on whether they are an SNI or Non-SNI firm. For such firms the transitional provisions are outlined below:
Another significant change is the removal of the matched principal exemption, which effectively means that all firms that deal on a matched principal basis will be treated as if they were dealing on their own account and therefore be subject to a PMR of £750,000. Such firms, under the current regime, have a minimum capital requirement of €50,000 (€125,000 for firms with client money permissions), and the FCA have made specific transitional provisions to increase the PMR over 5 years.
Local firms potentially have biggest change in their capital requirements as a result of the proposed new rules under IFPR. These firms have historically had capital requirement of €50,000, but under the new regime, based on their classification and activities, will have a PMR of £750,000, as well as being likely to see a significant increase in their ongoing requirements based on the FOR and KFR.
Both matched principal trading firms and local firms will be able to limit their minimum own funds requirements in stages as follows:
| PMR transitional provisions | Matched-principal brokers | Local firms |
| Year one (from 1 January 2022) | Current base capital requirement (€50,000/€125,000) | £250,000 |
| Year two (from 1 January 2023) | £190,000 | £350,000 |
| Year three (from 1 January 2024) | £330,000 | £450,000 |
| Year four (from 1 January 2025) | £470,000 | £550,000 |
| Year five (from 1 January 2026) | £610,000 | £650,000 |
| End of transition (from 1 January 2027) | £750,000 | £750,000 |
For many investment firms that are part of a group, it will need to be assessed as to whether a consolidated situation exists and whether prudential consolidation rules need to be applied. Furthermore, if a consolidated situation does apply, firms should assess whether they can apply to use the Group Capital Test, rather than applying full prudential consolidation.
Prudential consolidation will apply where there is an investment firm group, and this will occur when at least one entity in a parent/subsidiary relationship is an FCA investment firm. Therefore, a UK investment holding company of a regulated entity could potentially trigger a consolidated situation.
Types of relationship which may result in bringing entities into scope and triggering a consolidated situation:
Prudential consolidation will have to be applied to the consolidated situation of the UK parent, and results in treating this entity and all other entities within the investment firm group as if it were a single FCA investment firm.
Relevant entities in an FCA investment firm group could include:
Investment firm groups will have to meet a consolidated own fund requirement which will be the higher of the following:
In order to meet this requirement, investment firm groups must hold own funds on a consolidated basis. Such own funds must meet the requirements as set out in the MIFIDPRU sourcebook to be eligible.
Certain FCA investment firm groups may have the option of using the group capital test (GCT) as an alternative to having to apply full prudential consolidation to the group. The main requirement of the test is to ensure that the parent entity of the investment firm group holds sufficient regulatory capital that can be allocated to each of its subsidiaries, so that they in turn can meet their own funds requirements.
In order to use the GCT, firms will need to demonstrate that the FCA investment firm group has a “sufficiently simple” structure, and there should be no significant risk of harm to others as a result of not being supervised on a consolidated basis. Firms will need to apply to the FCA for permission by 1 December 2021 outlining their rationale to meet these criteria, and the FCA have provided guidance of what they expect the application to include.
The FCA have proposed transitional arrangements for firms to use the group capital test before obtaining permission provided that they have made the application by 1 December 2021 and the management body of the investment firm group believe that it is reasonable to apply the GCT as opposed to full prudential consolidation on the group. This arrangement will apply for up to two years from 1 January 2022, or the date that the FCA decides that the GCT would not be appropriate, whichever is earlier.
For the first time, there will be a basic liquid assets requirement for all investment firms (including SNIs). The intention is that these requirements should improve investment firms’ financial resilience.
The IFPR proposes that firms should hold liquid assets equal to one-third of the fixed overheads requirement (FOR) but that this level should be considered a minimum. Firms could be required to hold liquid assets in excess of this minimum requirement as part of the ICARA process.
A variety of instruments can be included as liquid assets, however certain assets will be subject to a “hair-cut” as to their deemed value and can only be used towards a certain proportion of the requirement.
For example, a ‘haircut’ of 15% would mean that only 85% of the value of the relevant liquid asset may count towards meeting the investment firm’s liquidity requirement.
There will also be an obligation for all investment firms to monitor and control liquidity risk on an on-going monthly basis and report to the FCA on a quarterly basis.
The ICARA stands for ‘Internal Capital Adequacy and Risk Assessment’. It represents an on-going process that all firms will be required to have in place to:
While all of the above contribute to building an ICAAP, there are some significant changes to the way investment firms monitor the adequacy of own funds and liquidity on a continuous basis.
First and foremost is the introduction of the ‘Overall Financial Adequacy Rule’ (OFAR).
The OFAR states that a firm must, at all times, hold own funds and liquid assets which are adequate, both as to their amount and their quality, to ensure that:
(a) the firm is able to remain financially viable throughout the economic cycle, with the ability to address any potential harm that may result from its ongoing activities; and
(b) the firm’s business can be wound down in an orderly manner, minimising harm to consumers or to other market participants.
The OFAR will be used as the absolute minimum standard that the FCA will use to determine if an FCA investment firm has adequate financial resources.
Further, the rules introduce an ‘own funds threshold requirement’ and a ‘liquid assets threshold requirement’.
Both of these will typically flow from the detailed assessment of harms that a firm would carry out as part of the ICARA process wherein it would qualify and quantify risks through measures such as implementing appropriate systems and controls, strengthening governance and oversight processes.
The own funds threshold requirement should represent the additional capital that is needed to cover any residual risks, and the liquid assets threshold requirement represents additional liquid assets required to cover the residual risks.
Lastly, IFPR introduces a new concept called ‘Early warning indicator’. An ‘Early warning indicator’ is defined as an amount of own funds equal to:
So effectively, at any point in time you will need to maintain a 10% buffer on capital adequacy and the moment you dip into that buffer you will be required to notify to the FCA about it and also take remedial actions immediately.
As part of the ICARA process, you must assess and articulate the necessary steps and resources that would be required to plan an orderly wind-down and the termination of your regulated business over a realistic timescale and assess the own funds and liquid assets required to enable the process.
The supporting guidance for wind down planning is within the WDPG section of the FCA Handbook.
A wind down plan must address the following as a minimum:
The key change is that all investment firms will be required to prepare and maintain a wind-down plan. The amounts identified to support the wind-down process cannot be lower than your own funds threshold requirement and the liquid assets threshold requirement.
Further, the rules introduce a new concept, the ‘Early warning indicator’. An ‘Early warning indicator’ is defined as an amount of own funds equal to:
Accordingly, at any point in time you will need to maintain 10% of own funds threshold requirement as a buffer and if your own funds fall below the indicator then you will be required to notify to the FCA about it along with the remedial actions that the firm will be expected to take immediately.
As it stands, regulatory reporting requirements can be very different for different types of investment firms. However, under the IFPR, the FCA is going to introduce a single suite of reporting forms for all FCA investment firms. The other significant change is that all investment firms will be required to carry out regulatory reporting on a quarterly basis, with the reporting reference dates being the last business day in March, June, September and December.
The implementation of the IFPR will mean a number of regulatory returns will be discontinued, including FSA001, FSA002, FSA003 and COREP returns. Please see below a list of the new regulatory returns to be reported by investment firms under the IFPR.
The majority of the returns (with the exception of MIF007 and MIF008) are to be reported on a quarterly basis, with a reporting due date of 20 business days following the reporting reference date and 30 business days when reporting on a consolidated basis.
Under the IFPR all investment firms will also be expected to monitor and control several key areas on an on-going monthly basis. These are:
There will be an obligation for all investment firms to monitor and control concentration risk on an ongoing basis. This will take account of any concentration of assets on and off the balance sheet to a single counterparty and group of connected counterparties. It has been mostly derived from the large exposures regime in CRR.
Although concentration risk includes exposure values for those firms with a trading book, it is not limited to this.
All firms will also be expected to monitor concentration risk arising from a variety of items such as client money/assets, a firm’s own cash deposits, receivable balances such as trade debtors and accrued income.
Non-SNI firms without a trading book will be required to monitor on a monthly basis and report concentration risks to the FCA on a quarterly basis.
MIFIDPRU Remuneration Code is a single remuneration code for all FCA investment firms created within SYSC 19G.
MIFIDPRU Remuneration Code has been broken down into three tiers:
Basic remuneration code mainly stipulates the following:
Further to the basic remuneration requirements, non-SNI firms below the thresholds have to comply with further requirements called ‘standard remuneration requirements’ as follows:
There should be appropriate restrictions on non performance related variable remuneration such as guaranteed variable remuneration, retention awards, buy-out awards, severance pay payable to MRTs.
Other requirements on firms include:
The ‘extended rules’ relating to large non-SNI firms have not been discussed here. Please contact us if they apply to you.
Further, if you are a Collective Portfolio Management Investment firm (CPMI), you will need to comply with the AIFMD Remuneration Code (SYSC 19B) or the UCITS Remuneration Code (SYSC 19E) as applicable in entirety or jointly depending on how your business is split between MiFID and AIFMD/UCITS activities.
Contact us for the latest on the regime and how it could impact your firm.
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