FCA planning new prudential regime for UK investment firms

The FCA is proposing to introduce a new UK investment firm prudential regime (IFPR) for FCA solo-regulated MIFID authorised investment firms by January 2022. It will be based on the EU’s Investment Firm Regulation (IFR) and Investment Firms Directive (IFD) and aims to streamline the various regimes which currently apply to UK investment firms in order to reduce barriers to entry and allow better competition between investment firms. It is hoped that the new rules will help to reduce the potential for harm that investment firms pose to clients, consumers and the market.

Who will the rules apply to? 

The draft rules will apply to:

• any MIFID investment firm authorised and regulated by the FCA that is currently subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) including:

1. investment firms that are currently subject to BIPRU and GENPRU;
2. ‘full scope’, ‘limited activity’ and ‘limited licence’ investment firms currently subject to IFPRU and CRR;
3. ‘local’ investment firms;
4. matched principal dealers;
5. specialist commodities derivatives investment firms that benefit from the current exemptions on capital requirements and large exposures;
6. ‘exempt-CAD’ firms;
7. investment firms that would be exempt from MiFID under Article 3 but have ‘opted-in’ to MiFID;

• regulated and unregulated holding companies of groups that contain investment firm(s) authorised and regulated by the FCA and that are currently authorised under MiFID and/or that have a Collective Portfolio Management Investment (CPMI) permission.

What are the key points of the new regime? 

• Investment firm categorisation 

The FCA has proposed to replace the current complex investment firm categories (e.g. BIPRU, IFPRU, exempt-CAD) with the following two broad categories:

- small and non-interconnected (SNI) investment firm; and

- non-SNI investment firm.

• Prudential consolidation for investment firm groups 

Prudential consolidation will apply to investment firm groups. The FCA is proposing to introduce a group capital test for FCA investment firm groups that do not wish to be subject to prudential consolidation and meet certain specified conditions. This is to ensure that parent entities hold appropriate amounts of capital to support their investments in subsidiaries.

• Own funds requirements

A new permanent minimum requirement will be introduced for a firm’s own funds based on the activities the firm undertakes.

• General concentration risk 

New monitoring requirements are proposed for general concentration risk that will apply to all FCA investment firms. This includes the entities with which investment firms place their client assets and their own cash.

• Reporting requirements 

Investment firms will be required to assess and hold financial resources against the potential for harm that they present to markets and consumers. The FCA is also intending to remove current reporting requirements that are no longer necessary or appropriate.

Takeaways

The FCA is requesting feedback on the proposed rules set out in its first (of three) consultation paper CP 20/24 (https://www.fca.org.uk/publication/consultation/cp20-24.pdf) by 5 February 2021 and will publish the final rules once its consultation process is complete over the course of next year. It is likely that the IFPR will create major changes for FCA authorised investment firms so it is critical that they adequately prepare for the implementation of the new regime.

If you require further information about anything covered in this briefing, please contact our Financial Services Regulation and Funds Team.