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With many firms focusing on their MIFID II requirements, the EBA proposals for a new capital regime for investment firms have crept in a little under the radar. Their final recommendations were published in October and have gone to the European Commission for approval. Whilst the go live date is not yet known, proposals could come into force as early as 2018.
Under the proposed new rules, any firm holding client money or safeguarding client assets could see a large increase in their Pillar 1 capital requirement as these could attract a sizable capital charge. This is brand new requirement and could take many firms by surprise.
By way of example, if currently a firm has client assets of £1bn, this will result in a new capital requirement of £4.5 million. As most firms in this category typically have the fixed overhead requirement as their capital driver, this is likely to represent a large increase in capital requirement and another cost of doing custody business.
Firms holding client money are already drowning under regulation with CASS requirements coming under increasing scrutiny from the FCA and new CASS audit requirements in place this year. The concern is that the new regulation could force many firms out of the client money space. Would this be good for clients?
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