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As we wait for the next consultation paper on the FCA’s new prudential regime, it’s not the time to be twiddling thumbs. The regulator consciously released guidance on the areas which take longest to prepare for first, and will expect your project to be underway.
Guidance on the IFPR – the UK Investment Firm Prudential Regime – will be outlined in three consultation papers. The first was released in January (CP 20/24), and we expect the second to follow this spring. Of course, there are some areas where you will need more detail to progress, or would be wise to wait, but there are some clear actions you can take now to understand the implications of the new prudential regime and make sure you’re prepared.
What you can start preparing for now
1. Establish project management, resources and training needs
Appoint someone in your firm to manage the IFPR project from the outset.
Think about what training your staff need – including board members. Documents that your board or senior management currently review could look different. How are they best placed to provide challenge if they don’t understand the changes?
You should also bear in mind what help you might need to implement IFPR. You may need to use a third party to work through the issues with you and help train staff.
2. Assess what sections of IFPR will impact your firm
A sensible place to start is thinking about whether your firm will be a “small and non-interconnected firm” or not. This is important as fewer parts of IFPR apply to SNI firms.
3. Calculate what K-factors will apply to you
Consider whether you have the data available to calculate these as most K-factors are calculated on a rolling annual average basis. Once you set out the parameters you will need a lot of data for K-factor calculations.
4. Calculate the impact of K-factors on own funds
Once you have done your K-factor calculations, do you have adequate capital? If not, can you use transitional relief as this is available for five years?
You need to calculate regulatory capital using rules set out in CRR. This may result in you having less regulatory capital than you have now.
5. Will you be part of a consolidation group under IFPR?
If you currently have a consolidation group for prudential purposes, will this look the same or will more firms or fewer firms need to be included in the group?
If you are not applying prudential consolidation rules at the moment, is the group caught by the new consolidation rules? This is particularly relevant for Exempt CAD firms who do not have to look at consolidation groups under current rules. The rules on what gives firms a consolidation group are notoriously complicated. Think about whether you have the expertise to navigate these or need outside help.
Once you have established your group, you will need to calculate your consolidated capital resource and consolidated capital requirement under IFPR.
6. If you have a consolidation group, is the group simple enough to apply for Group Capital test?
The GCT should result in a more beneficial capital position for most groups but you will need to apply to the FCA to be able to take advantage of this treatment. The FCA has said firms can use GCT while they are waiting for confirmation for up to two years. You should aim to submit the application by late 2021 so you can apply GCT as soon as IFPR comes into effect. It may take you a while to pull data for the application together so you can start to look at this now.
7. Does IFPR impact how you can pay staff?
Exempt CAD firms have not been subject to remuneration codes so this will be new for these firms. Have you identified material risk takers and do you need to amend employment contracts?
8. Think about updating your ICAAP
Your three year financial forecasts should be modelling what your capital requirement will look like under IFPR and we recommend that you update your ICAAP with a section on the impact of IFPR on your firm.
What you should wait for
The FCA’s next consultation paper should provide more detail on the ICARA so we recommend that firms wait to see what information this contains before they start to move their ICAAP document to an ICARA format.
The FCA will provide more guidance on some reports such as the calculation of the fixed overhead requirement in forthcoming CPs so whilst it is useful to review the templates, bear in mind the calculations could change.
Changing prudential policies and compliance monitoring programme
If your compliance monitoring plan covers your prudential requirements (which it should do) you will need to update this for the new requirements under IFPR. This could be the first time that you will need to hold a specific amount of liquid assets for example so think about what policies and procedures will need to be amended.
How we can help
Our specialist prudential team are working with a variety of investment firms to help them get ready for IFPR. Get in touch to see where we can help.