On January 1, 2022, the FCA will implement its new UK Investment Firms Prudential Regime (IFPR), a significant regulatory change that requires investment managers, advisors and brokers to act quickly to ensure compliance.
To add to the challenge of getting all your ducks in a row on time, investment firms should bear in mind that there is quite a lot of complexity to the new framework which aims to provide a more proportionate and risk-focused regime than those in force at the moment.
As a starting point, all UK firms providing MiFID services will be required to have in place remuneration policies and practices, including both qualitative and quantitative information, but to what extent will vary from firm to firm, depending on their size and classification under one of the two new prudential categories.
The new IFPR creates a distinction between small and non-interconnected (SNI) investment firms and non-SNI firms (replacing all other prudential categories) and imposes a suite of more onerous rules on larger firms.
It is worth noting that the UK IFPR is similar to the new prudential framework imposed by the EU in June, comprised of the Investment Firms Regulation and the Investment Firms Directive. This may be unsurprising given the UK played a pivotal role in the design of the new capital requirements rules during the pre-Brexit period.
The move by the FCA though, marks an important step change to the existing prudential regimes in the UK, the Capital Requirements Directive (CRD) and Capital Requirements Regulations (CRR).
The new regime also brings in new own funds requirements and liquid assets requirements. The own funds requirement is linked to the permanent capital requirement (PMR) and fixed overhead requirement (FOR), with the additional consideration of the new ‘K-factor’ for non-SNI entities. The K-factor quantifying the risk of harm to clients, the market and the firm. Liquid asset requirements are based on a proportion of an investment firm’s fixed overhead requirement and any guarantees it provides to clients.
The IFPR has also created new governance and risks controls, including the introduction of an Internal Capital Adequacy and Risk Assessment (ICARA) process, subject to an annual review, or more frequently based on any material change. The ICARA is the centre piece of firms’ risk management processes, covering various monitoring and mitigation functions.
All investment firms must make disclosures relating to remuneration, but non-SNI firms must also disclose information about risk management, own funds, own funds requirements and investment policy.
It is a complicated classification process. Our new eBook, The impact of a new UK prudential regime on MiFID firms, provides a summary of the new framework. It aims to help firms to determine whether the IFPR classifies them as SNI or non-SNI, and whether they are considered part of a consolidated group. Firms can then work out their new regulatory capital requirements and the steps needed to comply with the new remuneration code and risk management requirements.
These are significant changes and firms need to start preparing immediately to meet the January implementation date.
Download our eBook here, or if you would like to find out more about how the new UK prudential regime will affect your business, and how Apex Group can help ensure you are compliant, please contact our team here.
