Summary – The Investment Firm Prudential Regime (IFPR) is a new streamlined and simplified regime for the prudential regulation of investment firms in the UK.
This second consultation paper (CP21/7) provides further clarity on six key aspects:
In the first consultation paper (CP20/24), aspects of own funds requirements were limited to the definition of the Permanent Minimum Capital Requirement (PMR) and the K-factors that will only apply to firms authorised to deal on own account. These are namely risk-to-market (K-NPR and K-CMG) and risk-to-firm (K-TCD, K-DTF and K-CON).
The second consultation paper CP21/7 covers:
Under IFPR, firms will be required to hold an amount of liquid assets equivalent to at least one third of their FOR and a percentage of guarantees provided to clients. This is the basic liquid asset requirement.
The eligible assets are defined as core liquid assets. They are not expected to attract any haircut under adverse circumstances, given their certainty of value. The FCA proposes a list that includes, inter alia, short-term deposits held at a UK bank, UK gilt and treasury bonds.
The ICARA process introduces a new approach for assessing risks posed and potential harm to the firms themselves, their customers and the markets. This process includes recovery planning and actions, and wind down planning.
Through ICARA, firms will be expected to assess and demonstrate whether they can meet the Overall Financial Adequacy Rule (OFAR), which establishes the adequate level of financial resources, i.e. capital and liquidity, firms must hold.
Remuneration requirements will be based on firms’ size and complexity. There are three-tiered requirements:
Inclusion of Collective Portfolio Management Investment firms (CPMI)
CP21/7 explicitly confirms that all CPMI firms will be subject to IFPR, meaning that the definition of an FCA investment firm now includes CPMI firms.
Clarifications are provided around the calculations of the FOR and other requirements such as remuneration rules. These requirements will only apply to their MiFID investment firms. The FCA has also defined a specific simpler and lighter reporting form for them.
The FCA proposes to significantly reduce the amount of information that investment firms need to report on remuneration arrangements.
The Regulator has published draft reporting templates in relation to liquid assets, remuneration and CPMI firms, associated guidance and forms for applications and notifications. This includes an ICARA questionnaire to report key information gathered as part of firm’s ICARA process.
The consultation for CP21/7 closes on 28 May 2021.
Comments can be sent to the FCA using the online response form or by email.
A third consultation paper is expected to be published in early Q3 and will cover any outstanding areas such as public disclosures and ESG.
The FCA is expected to publish the first set of near-final rules concerning the first CP20/24 in late Spring, in the form of a Policy Statement (PS). Two other PS will follow for the second and third consultation paper.
The final rules, e.g. the MiFIDPRU Handbook and the Remuneration Code, should be published once the Financial Services Bill has passed through Parliament. However, timings have not yet been confirmed.
UK investment firms have seven months until the deadline of 1 January 2022 to prepare for IFPR.
Firms should have already identified impacts and started to plan their implementation based on the consultation papers already available.
We recommend that firms start implementing the changes in the following areas:
Given that the FCA has reaffirmed that the UK regime will seek to achieve the same overall outcome as the EU’s and even if further clarifications are expected, on the remaining aspects, firms can also leverage on the European publications already available. This includes the Investment Firms Directive and Regulations (IFD/IFR) and associated EBA’s Regulatory Technical Standards.
Our regulatory compliance and risk management specialists will draw upon their detailed understanding of prudential changes, regulatory expectations and best practices to provide high-quality services tailored to support firms’ transition to IFPR.
We can support firms:
References
In January 2022, the UK adopted a more proportionate and fit-for-purpose prudential regime for investment firms known as the Investment Firms Prudential Regime (IFPR). The IFPR requires applicable firms to complete an internal capital adequacy and risk assessment (ICARA) process to assess their capital and liquidity requirements for mitigating harm.
Over summer 2020, the UK Government and Regulators shared their views on the European Union’s new Investment Firm Prudential Regime for MiFID investment firms. More importantly, it gave indications of what could happen in the UK.
In December 2020, the FCA detailed some of their proposals for the Investment Firm Prudential Regime (IFPR), which will come into effect in January 2022.
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