IFPR – What MiFID firms need to know following the release of the second consultation paper

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:

• Own funds requirements 
• Liquid asset requirement 
• Internal Capital Adequacy and Risk Assessment (ICARA) 
• Remuneration requirements 
• Regulatory reporting 

Own funds requirements

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:

• Other K-factors that apply to any investment firm (K-AUM, K-CMG, K-ASA, K-COH)
• The adjustment methodology for calculating the coefficients for the daily trading flow K-factor (K-DTF) in periods of extreme market stress and volatility
• The rules related to Fixed Overhead Requirements (FOR)
• Specific proposals for investment firms that provide clearing services as clearing members and indirect clearing firms

Liquid asset requirement

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.

Internal Capital Adequacy and Risk Assessment (ICARA) 

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

Remuneration requirements will be based on firms’ size and complexity. There are three-tiered requirements:

1. Basic requirements - All investment firms must have a clearly documented remuneration policy and comply with basic remuneration rules in respect of all their staff
2. Standard requirements - Firms that are not small and non-interconnected (non-SNI) must comply with further requirements, which include identifying material risk takers and setting an appropriate ratio between variable and fixed remuneration for them
3. Extended requirements - Only the largest non-SNI firms will also need to apply rules on deferral and pay-out of variable remuneration in instruments

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.

Regulatory reporting

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.

What happens next?

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.

What firms need to do now - Seven months left to achieve compliance

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:

• Confirmation of their classification under IFPR
• Clarification of prudential consolidation scope
• Calculation of own funds requirements and determination of their composition
• Design of processes for monitoring concentration risk going forward
• Implementing some operational aspects of reporting requirements

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. 

How Mazars can help?

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:

• Confirm their classification under IFPR
• Clarify their prudential consolidation scope
• Determine own funds composition and calculate own funds requirements, including K-factors
• Design processes for monitoring concentration risk going forward
• Become operationally ready to tackle their reporting requirements

Get in touch

_References

• _{FCA Consultation paper CP21/7}
• _{FCA Consultation paper CP20/24}
• _{FCA Discussion paper DP20/2}