Investment Firm Prudential Regime – How to prepare
On 1st January 2022, the UK adopted a more proportionate and fit-for-purpose prudential regime for investment firms known as the Investment Firms Prudential Regime (IFPR).
IFPR – What UK investment firms need to know
Over summer 2020, the UK Government and Regulators shared their views on the European Union’s new Investment Firm Prudential Regime for MiFID investment firms. More importantly, it gave indications of what could happen in the UK.
As the UK Regulators had a hand in developing the EU’s Investment Firm Directive and Regulation (“IFD” and “IFR”), the intention is to retain their key principles for the UK future regime but also to keep options open to reflect UK market specificities.
Although we are still in the middle of a discussion process initiated by the FCA in June 2020 and expecting subsequent consultation, it is believed that the UK Investment Firm Prudential Regulation – IFPR – will apply from Summer 2021*. This is consistent with the EU timeframe.
*The application date was postponed in Autumn 2020 to 1 January 2022. You can find more information here.
What do these changes mean for investment firms going forward
From 26 June 2021, EU MiFID investment firms will be subject to IFD/IFR and excluded from the scope of CRD and CRR framework. CRD/CRR will remain the EU prudential regime only for Credit Institutions and certain specific MiFID investment firms going forward.
UK MiFID investment firms will not have to comply with IFD/IFR as its applicability date is set after the end of the EU Exit transition period, rather with the IFPR, the new UK-specific prudential regime for investment firms.
In addition, according to the HM Treasury’s Financial Services Bill (June update), FCA-regulated investment firms will not be required to comply with:
- CRD V, upon its transposition in the UK on 28 December 2020,
- CRR II, applicable in most of the EU from 28 June 2021, and
- any subsequent updates to that regime.
The approach to exclude FCA-regulated investment firms from the scope of CRD V has been reaffirmed in the Consultation Paper CP20/14.The FCA also confirmed that the Remuneration Code in place for IFPRU and BIPRU firms will remain as is for the time being: changes brought in by the transposition of CRD V by the end of 2020 will not apply.
UK MiFID investment firms should continue to comply with the current regulation pending the introduction of the IFPR.
IFPR’s key areas of changes
In its June Discussion Paper DP20/2, the FCA stated that the IFPR will seek to achieve similar outcomes as those intended in the IFD/IFR whilst considering the UK market specifics. Deviations from the EU proposal will seek to reflect the number, size and nature of UK investment firms, the UK market structure and how it operates.
The major changes that IFPR could bring include:
- Update to the initial capital required for authorisation
- Update to the rules on defining capital
- New own funds requirements, introducing the K-factor approach
- New requirements for prudential consolidation, group risk and concentration risk
- Liquidity requirements applicable to all investment firms
- New process for assessing and supervising prudential risk
- Updated requirements on remuneration policies
- Amendments to reporting and disclosure
What happens next?
In practice, the FCA will examine both responses from the industry to its DP and European publications such as EBA’s Implementing Technical Standards and other guidelines to develop the IFPR.
UK MiFID investment firms have less than a year to be ready. They can start identifying the potential impacts of the new prudential regime on their business based on the EU documents already available.
An FCA consultation paper is expected to be published in Q4 2020* and should provide greater details on the UK proposed future regime so that firms refine their strategy to achieve compliance ahead of the IFPR application date.
* The FCA has moved to a tiered consultation approach and is expected to published three consultation papers in total. You can find our more recent articles here.
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 your transition to IFPR.
We can help firms:
- Determine their prudential category
- Identify and map all the applicable changing requirements
- Perform an impact assessment of the new requirements to their business models
- Design an action plan to conform with the new regime, setting out key actions, timelines, dependencies, and stakeholders.
References
IFPR – The first consultation paper
In December 2020, the FCA detailed some of their proposals for the Investment Firm Prudential Regime (IFPR), which will come into effect in January 2022.
IFPR – The second consultation paper from the FCA
The FCAs second consultation paper(CP21/7) on proposed rules to introduce the Investment Firm Prudential Regime (IFPR) was released on 19 April 2021.
National contact
Anindya Ghosh Chowdhury Director - Financial Services Consulting London
IFPR webinar
Investment Firm Prudential Regime virtual session
24 June 2021. In this virtual session we discussed the key changes introduced by IFPR, in particular the ICARA process.