Implementation of Investment Firms Prudential Regime

Last week, the regulator teased us with more of their ‘near final’ rules for the Implementation of Investment Firms Prudential Regime (PS21/9). The final, final rules are expected to be published in Q4 of 2021, but we imagine there will not be any drastic movement from where we are now.

Before going further, the Investment Firms Prudential Regime (IFPR) is not applicable to the majority of Apricity firms. It is applicable for firms under the following categorisations;

  • Investment firms that are currently subject to BIPRU and GENPRU.
  • Full scope, limited activity and limited licence investment firms currently subject to IFPRU and CRR.
  • Local investment firms.
  • Exempt CAD-firms.
  • Investment firms that would be exempt from MiFID under Article 3 but have ‘opted-in’ to MiFID.

There are a handful of further categories included in this regulation. For the full list please click here

So, what’s all the fuss about? For those where this is applicable, this is actually quite a sizable piece of regulation coming in from the FCA so sit tight. The objective of this piece of regulation is to ‘streamline and simplify the prudential requirements’ for investment firms in the UK. Currently, 11 regimes exist for all firms that fall under the current regime, and the near-final rules for IFPR look to turn this into one overarching regime applicable to all firms but slightly varying based on the risks the firms possess.

How did we get here?

Like any piece of regulation, this has gone through several rounds of consultation and policy statements. We have currently had 2 consultation papers (CP20/24 and CP21/7), and 2 corresponding policy statements (PS21/6 and PS21/9)  highlighting the near-final rules. Q3 2021 spoils us with one final consultation paper CP21/26 released 06/08/2021, with the policy statement confirming the finalised new rules in Q4 of this year. 

The regulator has already confirmed implementation for the majority of the rules is to be 1st January 2022.

What is it?

There are 10 main categories of changes under IFPR:

  • MIFIDPRU1: Application
  • MIFIDPRU2: Prudential consolidation and the group capital test
  • MIFIDPRU3: Own funds resources
  • MIFIDPRU4: Own funds requirements
  • MIFIDPRU5: Concentration risk
  • MIFIDPRU6: Liquidity
  • MIFIDPRU7: Risk management, governance, ICARA and SREP
  • MIFIDPRU8: Disclosure
  • MIFIDPRU9: Regulatory Reporting
  • MIFIDPRU10: Clearing members and indirect clearing firms

We will summarise below some of the key changes in IFPR that are likely to be applicable to our firms. Please note that we have not gone into every section of this regulation in detail.

Earlier we stated that the move to IFPR is to align all firms under one principle, but this will have slightly different applications depending on the type of firm you are. The type of firm is split into ‘SNI’ or ‘Non-SNI’, which is small and non-interconnected. This is all about assessing the systemic risks you possess to market integrity. 

In order to classify as a small and non-interconnected firm you must meet all of the following quantitative criteria;

Measure Threshold
Assets under management <£1.2bn
Client orders handled – cash trades <£100m per day
Clients orders handles – derivatives trades <£1bn per day
Assets safeguarded and administered zero
Client money held zero
Average daily trading flow – cash trades zero
Average daily trading flow – derivative trades zero
On- and off-balance sheet totals <£100m
Total annual gross revenue from investment services and activities <£30m

Own Funds Requirement 

The own fund’s requirement is broadly split into 3 different elements, and the application of these is dependent on the type of firm.

Some firms may already be used to the concept of the Fixed Overheads Requirement (FOR), but following the inception of IFPR, all firms affected by this regulation will need to meet their own fund requirements and use the FOR to calculate this. The FOR is the equivalent of 25% of expenditure in the previously completed financial year of the firm. There is a list of deductions from this available from the FCA website. 

Firms will also have a new permanent minimum capital requirement (PMR) which is moving from £50,000 to £75,000 for the majority of firms. Any firms that were previously exempt-CAD will have a six-year implementation period to get to this number. The PMR is now also equal to the initial capital requirement (ICR) which should be considered by any firms looking to apply for permissions that would have them fall under IFPR. 

One final addition under the own fund’s requirement, the FCA have implemented a new quantitative indicator to assess the risks the firm possesses, and require any additional capital resources. This requirement is known as the K-Factor formula which broadly assesses the risk to the client, and additionally the risk to the firm. 

For a non-SNI firm, the own fund’s requirement is the highest of;

  • PMR
  • FOR
  • K-factor requirement

For an SNI firm, the own fund’s requirement is the highest of;

  • PMR
  • FOR

Liquidity 

From January, all investment firms are required to hold at least ⅓ of the FOR in liquid assets, plus 1.6% of the total amount of any guarantees provided to clients. The regulator has defined what it deems to be core liquid assets as;

  • Coins and banknotes.
  • Short-term deposits at a UK bank.
  • Assets representing claims on or guaranteed by the UK government or the Bank of England.
  • Units or shares in short-term regulated money market fund, or in a comparable third-country fund. 

Risk management, governance, ICARA and SREP

ICAAP is being replaced by ICARA which is the Internal Capital and Risk Assessment. This dictates the process firms need to follow to assess the adequacy of their own funds and liquidity requirements. The regulator sees this as being the “centrepiece for investment firms’ risk management, incorporating business model assessment, forecasting and stress-testing, recovery planning and wind-down planning”. The FCA link this back to SM&CR, ensuring that the firm has correct oversight and management for the implementation and continual review of the ICARA. 

Whilst there is a lot more to this regulation, these are the main points that will need addressing by firms of Apricity. It is likely that for any firms where IFPR is relevant, they will be categorised as SNI firms, and therefore have slightly lesser implications. We recommend all firms address the changes, sooner rather than later and we will ensure to update firms when the final rules are confirmed in Q4 of this year. We do not expect there to be any systemic changes off the back of this, as what has been published so far has been classified as ‘near-final’. 

Maddie Delboy – Compliance Consultant