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    FCA Launches First Consultation on Investment Firm Prudential Regime

    December 14, 2020

    FCA proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR) for prudentially regulated investment firms. This is the first of the three consultations that FCA will issue to introduce the regime in January 2022. The final rules will be published during next year. FCA highlights that there are approximately 3,200 FCA investment firms in UK and the new regime is expected to streamline and simplify the prudential requirements for the solo-regulated investment firms. At present, many different regimes apply depending on the size of a firm and the type of investment business. FCA has published a draft reporting template, along with the associated completion guidance, to support the Investment Firms Prudential Regime. The consultation period closes on February 05, 2021.

    The new rules will extend the framework for prudential requirements to consider the potential harm FCA investment firms pose to clients, consumers, and the market. The IFPR considers the harm an FCA investment firm can cause to others based on the activities that a firm conducts. It also considers the amount of capital and liquid assets that an FCA investment firm should hold so that if it does have to wind down, it can do so in an orderly manner. IFPR is a new prudential regime for UK firms authorized under the Markets in Financial Instruments Directive (MiFID). The key highlights of the proposed prudential regime for FCA investment firms include the following:

    • Categorization of investment firms—FCA is proposing that all the current definitions of FCA investment firms will cease to exist. There will instead be two broad categories of FCA investment firms. Firms will either be a small and non-interconnected (SNI) investment firm, or they will not. The prudential requirements in the IFPR are designed to scale with the size and complexity of the firm.
    • Prudential consolidation—FCA is proposing that prudential consolidation will apply to investment firm groups, except if FCA has granted permission to a group to use the alternative of the group capital test. FCA is also proposing to introduce a group capital test for FCA investment firm groups that do not wish to be subject to prudential consolidation and meet certain specified conditions. This is to ensure that parent entities hold appropriate amounts of capital to support their investments in subsidiaries.
    • Own funds—FCA is proposing that the own funds of FCA investment firms should be made up solely of common equity tier 1 capital, additional tier 1 capital, and tier 2 capital, as the higher quality of capital for all FCA investment firms is expected to result in these firms being more resilient and having an increased capacity to absorb losses.
    • Own funds requirements—FCA is proposing to introduce a new permanent minimum requirement as one of the floors, below which its own funds must not fall. This will be based on the activities that an FCA investment firm undertakes. FCA is also proposing to increase the initial capital that is required for a firm to become authorized as an FCA investment firm. This will be to the same level and quality of capital as for its ongoing permanent minimum requirement once authorized. FCA is also proposing to introduce a new approach to calculating capital requirements—"K-factors." 
    • Concentration risk monitoring and related own funds requirements—FCA is proposing new monitoring requirements for general concentration risk that will apply to all FCA investment firms. This includes the entities with which FCA investment firms place their client assets and their own cash. Non-SNI firms will also be required to report on this general concentration risk. For FCA investment firms that trade in their own name, FCA is introducing K-CON. This is an additional K-factor for assessing concentration risk that could lead to an increased own funds requirement. FCA has set out rules on maximum levels of concentration risk permitted for trading book exposures.
    • Reporting requirements—Through the IFPR, FCA investment firms will be required to assess and hold financial resources against the potential for harm that they present to markets and consumers. FCA will need different information from FCA investment firms to support this and FCA is proposing an appropriate and proportionate data collection to capture this information. FCA also intends to remove reporting requirements that are no longer necessary or appropriate. The reporting on remuneration requirements will be included in the second consultation, along with proposals for the new remuneration regime.

    The draft rules will apply to any investment firm under MiFID that are currently 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 that is authorized under MiFID and or a Collective Portfolio Management Investment.


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    Comment Due Date: February 05, 2021

    Keywords: Europe, UK, Banking, Securities, Investment Firms, K-Factor Regime, Regulatory Capital, MIFID, FCA

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