Update: Final IFPR Rules Released
On 22 October 2021, the FCA published the long-awaited final rules for the UK IFPR, which will come into force on 1 January 2022.
The new regime will apply to the following types of firms:
(a) FCA authorised and regulated MiFID investment firms,
(b) Collective Portfolio Management Investment Firms (CPMIs), and
(c) Both regulated and unregulated holding companies of groups that contain either (a) or (b).
The final rules can be found in the following legal instruments FCA 2021/38 and FCA 2021/39.
In line with the FCA’s aim to streamline and simplify prudential requirements, the final rules introduce updated guidance relating to remuneration, the recording of material risk takers (MRTs) and performance adjustment requirements.
Under the MIFIDPRU Remuneration Code, MiFID investment firms need to ensure that their remuneration policies and practices are documented. The Remuneration Policy Statement template sets out the questions that will most likely be asked by the FCA during a review of a firm’s remuneration policy.
In addition to the final rules and the RPS template, the FCA provides an additional RPS Table form. The firm’s Material Risk Takers (MRTs) are to be recorded in the excel spreadsheet template provided here. The RPS Table contains two sections: a record-keeping part (column A through I) and a variable remuneration part (from column K through AB) to be completed only if requested by the FCA.
The general guidance on the application of ex-post risk adjustment to variable remuneration, FG21/5, outlines the FCA expectations on reducing current year awards, the application of malus, and clawback (recouping already vested awards)
All Investment Firms currently prudentially regulated under either the GENPRU/BIPRU or Exempt CAD regimes which from 1st January will be subject to MIFIDPRU will need to submit a notification form to the FCA to ensure their current capital resources are classified as Core Equity Tier 1 Capital for the purposes of the new regime. This notification requirement also applies to all UK Parent Entities within Investment Firm Groups (unless they are already subject to the IFPRU regime). The form will be in the Connect system by the middle of December, but you can view an example form here.
More information on this can be found in ‘A new UK prudential regime for MiFID investment firms: Consultation Paper 21/7.‘
FCA Announces IFPR Set-Up Questionaire
Alongside the release of the finalised rules, the FCA has also announced that it will be sending out a questionnaire to existing FCA investment firms in November to provide the regulator with the information they need to update their systems and reporting schedules in preparation for this new regulation. The questionnaire will ask for key information including:
- Expected SNI status;
- Investment firm group membership/composition; and,
- Expected ICARA reporting dates.
What is the IFPR?
On 1st January 2022, the new UK Investment Firm Prudential Regime (“IFPR”) will come into force for all UK MiFID Investment Firms.
At this stage, the main changes anticipated by IFPR include:
- A new structure for prudential risk supervision – an ‘Internal Capital and Risk Assessment (“ICARA”)’ rather than the current ‘Internal Capital Adequacy Assessment Process (“ICAAP”)’.
- Updates to firms’ liquidity requirements.
- Further obligations presented by remuneration policies.
- Changes as to what constitutes capital.
- New thresholds for the initial capital required for new firms as well as New Own Fund Requirements and Permanent Minimum Requirements.
The IFPR will see the introduction of the new ‘K’ Factor requirements which will be used to determine a firm’s capital requirements for Investment Firms that are not a Small Non-Interconnected firm (“SNIs”). These will examine 3 broad risk areas: Risk to Client, Risk to Market and Risk to Firm. Firms running their own ‘trading book’ will have an additional ‘k factor own funds requirement’ for concentration risk called ‘K-CON’.
There will also be additional requirements for prudential consolidation, group risk and a broader definition of concentration risk, including the location of client money, and source of income.
There are also additional capital requirements for ‘exposure values’ greater than 25% of own funds in a trading book. There will be a minimum liquid asset requirement for all firms which is 1/3 of the Fixed Overheads Requirement.
Definition of liquid assets is expanded compared with that in the European Banking Association’s ‘Capital Requirements Regulation (“CRR”)’, with no limit as to their composition.
The FCA is also developing new reporting forms as part of IFPR; however, they do not expect these to be as complicated as the COREP/FINREP reports. Non-SNI firms will have to report on their concentration risks (counterparties, trading book positions, location of client assets etc).
Only firms dealing as a principal or placing without a firm commitment basis will have to do additional reporting.
What does the IFPR mean for UK firms?
The FCA has stated that IFPR will, “create a single, proportionate regime that reflects firms’ size and business” and should, “provide for better competition between firms and simplify requirements for new market entrants.” Most MiFID investment firms will have the single prudential category of ‘Investment Firm’. These firms are subject to all IFR prudential rules. Smaller firms will have less onerous requirements if they meet the criteria of a small and non-interconnected investment firm (SNI).
When the IFD/IFR is implemented, most of these firms will no longer be under the scope of the Central Registration Depository (“CRD”) and CRR framework. It replaces all the current prudential categories for MiFID investment firms such as Exempt CAD, BIPRU, and different IFPRU categories. It also affects the Collective Portfolio Management Investment Firm (“CPMI”) firms which are currently in the BIPRU or IFPRU prudential category for their MiFID activities.
UK MiFID investment firms will not have to comply with IFD/IFR or CRD V and CRR II; however, the existing regimes will continue to apply until the introduction of IFPR.
Who is the IFPR going to affect?
All FCA regulated investment firms which are currently in the scope of CRD and CRR will be affected by IFPR. This includes the following:
- BIPRU and GENPRU firms;
- ‘full scope’, ‘limited activity and ‘limited licence’ investment firms currently subject to IFPRU and CRR;
- ‘local’ investment firms;
- matched principal dealers.
- specialist commodities derivatives investment firms that benefit from the current exemptions on capital requirements and large exposures including:
- Oil Market Participants (“OMPs”)
- Energy Market Participants (“EMPs”)
- ‘exempt-CAD’ firms;
- investment firms that would be exempt from MiFID under Article 3 but have ‘opted-in’ to MiFID
- regulated and unregulated holding companies of groups that contain an investment firm authorised and regulated by the FCA and that is currently authorised under MiFID and/or a Collective Portfolio Management Investment (“CPMI”).
What do firms need to do ahead of the IFPR implementation?
Firms now have less than 6 months to prepare ahead of the introduction of IFPR. Ahead of this deadline, firms will need to be certain of how their prudential category will change under the regime and how this will affect their business. This will require a careful analysis of the as yet unfinalised regulatory changes.
Once the relevant category is known, the firm should calculate its new estimated capital requirements. Groups should check their new consolidated requirements.
Firms will then need to check which of the new rule requirements that are to be introduced will apply to them for remuneration, risk management, liquidity, concentration, public disclosure, and reporting.
Laven has been reviewing the impact of the new regime on all UK MiFID Investment firms and we have developed a programme that may assist your firm.
Our programme provides a review of your business model, performing an impact assessment that identifies ways either to avoid the burden of the above issues or assist you to adapt to them.
If you’d like to explore this opportunity further, please get in touch via the link below:
