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    FCA Consults on Rules and Reporting Forms for Investment Firms Regime

    April 19, 2021

    FCA is consulting, via CP21/7, on the second phase of proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR). The UK IFPR rules aim to streamline and simplify prudential requirements for solo-regulated UK firms, authorized under the Markets in Financial Instruments Directive (MiFID). In this consultation, FCA is seeking views on the remaining aspects on own funds requirements (such as the Fixed Overheads Requirement), the basic liquid assets requirement, the remuneration requirements, the Internal Capital and Risk Assessment, or ICARA, process, and the draft reporting and notification templates. The comment period for this consultation closes on May 28, 2021.

    The following are the key highlights of the proposals in CP21/7:

    • Remaining aspects on own funds requirements. FCA proposed to introduce a fixed overheads requirement that will apply to all FCA investment firms. This will be another of the "floors" below which the own funds of an FCA investment firm must not fall. FCA also sets out proposals for the remaining activity-based capital requirements known as K-factors (those in addition to the K-factors proposed in CP20/24). The K-factors proposed in this consultation are those that may apply to any type of FCA investment firm.
    • Basic liquid assets requirement. The proposal states all FCA investment firms now have a basic liquid asset requirement. This would be based on holding an amount of core liquid assets equivalent to at least one third of the amount of their fixed overheads requirement. 
    • Remuneration requirements. It is proposed that all FCA investment firms must have a clearly documented remuneration policy and must comply with at least a small number of basic remuneration rules in respect of all the staff members. Non-small and non-interconnected firms must comply with further requirements, which include identifying material risk-takers and setting an appropriate ratio between variable and fixed remuneration. Under this proposal, only the largest non-small and non-interconnected firms would need to meet the full requirements by applying the rules on deferral and payout of variable remuneration in instruments. 
    • The Internal Capital and Risk Assessment process. FCA proposed to introduce the Internal Capital and Risk Assessment process for all FCA investment firms. Through this, firms will be expected to meet an Overall Financial Adequacy Rule. To support this, FCA will introduce an Internal Capital and Risk Assessment reporting template to support this. FCA also proposed guidance on intervention points and actions expected by FCA from firms in certain situations.
    • Reporting Requirements. FCA published the proposed templates for the new reporting to support the IFPR and the guidance for completing these templates. FCA also published the proposed forms for applications and notifications. FCA proposed to significantly reduce the amount of information that FCA investment firms need to report about their remuneration arrangements. FCA intends to simplify the additional reporting form for CPMI firms. FCA amended the MIF002 form for reporting liquid assets that accompanied CP20/24 to take account of the liquidity proposals in CP21/7. FCA also proposed to introduce an Internal Capital and Risk Assessment reporting form for FCA investment firms. This will replace the existing FSA019 (pillar 2) return for the relevant firms.

    The proposed rules apply to any MiFID investment firm authorized and regulated by FCA that is subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR). The draft rules will also apply to any regulated and unregulated holding companies of groups that contain an investment firm authorized and regulated by the FCA and that is currently authorized under MiFID and/or a Collective Portfolio Management Investment Firm. This is the second of the three planned consultations and it should be read in conjunction with the first consultation (CP20/24), which was published in December 2020. The first consultation introduced the UK IFPR and focused on the categorization of investment firms, prudential consolidation, own funds and own funds requirements, and new reporting requirements.

    FCA has received constructive feedback to the first consultation from across the industry and will publish the Policy Statement and the near-final rules on the first consultation in the second quarter of 2021. Following this second consultation, FCA will issue a third consultation in the third quarter of 2021. Policy Statements and rules for the second and third consultations will be also published over the course of this year. FCA is consulting earlier on more complex issues, where possible, to allow firms to prepare for the regime, which will be introduced in January 2022. FCA will publish the final rules once the Financial Services Bill has passed through the UK Parliament and all the consultations are complete. 


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    Comment Due Date: May 28, 2021

    Keywords: Europe, UK, Securities, Investment Firms, IFPR, K-Factor Regime, CRR, Liquidity Risk, Remuneration, ICARA, Reporting, FCA

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