UK’s new prudential regime unveiled.jpg

The FCA’s discussion paper makes it clear that although the UK is no longer in the EU, it supports the goals of the EU prudential regime for investment firms – known as IFR/IFD. However, the UK regulator intends to have targeted deviations from the EU regime where they are necessary to reflect the number, size and nature of investment firms in the UK and the structure of the UK market. This IFR/IFD with UK characteristics is called the Investment Firms Prudential Regime, or IFPR.

The discussion paper: Prudential requirements for MiFID investment firms was published on 23rd June with the consultation closing on 25th September. HM Treasury have also made it clear that they intend to legislate for such a regime with application by next summer. It’s interesting to note that the discussion paper does not appear to have taken into account the consultation papers issued by the EBA on various aspects of IFR/IFD in early June 2020.

What does the FCA’s prudential discussion paper mean in practice?

In overall terms, the FCA appears to be aiming for a quite high degree of convergence. Here, we highlight some of the areas where the UK approach may differ from the EU or where additional clarity has been provided.

Application

  • Matched principal firms – they will no longer have specific rules separate from other firms which deal on own account
  • Large firms which deal on own account with > €5b assets – the FCA will be able to decide whether these firms should remain on CRR
  • Thresholds for small and non-interconnected firms (SNIs) – those relating to AUM, client orders handled (COH), balance sheet assets and gross revenues will be applied on a consolidated basis

Capital and Own Funds

  • Non corporates – the FCA intends to recognise eligible LLP members’ capital and others as being CET1 capital

Own funds requirements

  • Matched principal brokers / OTFs with permission to deal on own account – they will have to hold permanent minimum capital of €750k
  • Fixed Overhead Requirement (FOR) – the FCA wants to know what level of detail firms want on how to calculate it

K-factors

  • K-AUM – the AUM should be measured at market value and also appointed reps’ AUM will have to be included in calculations
  • K-COH – the client orders handled from appointed reps will have to be included. OTF and MTF buying and selling is excluded
  • K–CMH (client money held) – this should be measured in line with how it is measured under MiFID
  • K-ASA (assets safeguarded and administered) – these should be measured at market value or best efforts estimates
  • K-DTF (daily trading flows) – these should be based on total value paid or received
  • K-NPR (net position risk) – firms wanting to use internal models will have to seek FCA approval

Consolidated prudential requirements

  • Group service companies – these may be caught as being ancillary service undertakings
  • Consolidated PMC – this should be the sum of the individual firms which are consolidated
  • Double counting – the FCA has made it clear that it wants to remove any potential for this
  • Consolidated financial statements unavailable – the FCA may ask for a firm’s own consolidation workings to be independently verified
  • Group Capital Test (GCT) – this is an alternative to consolidation and the FCA has indicated many UK groups will be able to take advantage of it

Liquidity requirement

  • SNIs – the FCA will apply it to them
  • The minimum level of 1/3 of FOR should be recognised as just being a baseline
  • Liquidity assessments – these will be carried out alongside the Internal Capital Adequacy and Risk Assessment (ICARA) process for non SNIs (see below)

ICAAP replacement

  • The new assessment will be the ICARA. This will cover the risk the firm faces as well as the risks that the firm poses to others
  • Groups – the ICARA will take place on an individual basis
  • ICG (individual capital guidance) – replaced by Pillar 2 Guidance (P2G)
  • Wind down planning – to include capital and liquidity will be mandatory
  • Stress and scenario testing / Reverse stress test – also mandatory

Remuneration

  • Consolidation groups – the new rules will apply on a solo and consolidated basis
  • Threshold for dis-applying provisions on pay-out, deferral and pensions holding/retention periods, and risk or remuneration committee – firms with balance sheet assets <€300m will be able to dis-apply these

What happens next?

The consultation period ends on 25 September 2020 and we would encourage firms to provide feedback, either to the FCA direct, or by contributing to Bovill’s response.

The Government have indicated that they will endeavour to implement IFPR by summer 2021, which is broadly consistent with the EU’s applicability date for IFR/IFD.

Come to our webinar on the new prudential regime to find out more.