Consultation on changes to UK investment firm regulation

The Financial Conduct Authority (FCA) has published its first consultation on a new prudential regime for UK investment firms, which includes significantly enhanced capital requirements

The UK Investment Firm Prudential Regime (IFPR) will come into being in January 2022 and is intended to streamline and simplify the prudential requirements for solo-regulated investment firms in the UK. At present, there are many different regimes which apply depending on size of firm and type of investment business.

There are approximately 3,200 FCA investment firms in the UK. Many people have products with investment firms, ranging from workplace or personal pensions and investment ISAs to those who use a platform to trade stocks themselves.

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. This includes the amount of capital and liquid assets the FCA investment firm should hold so that if it does have to wind down, it can do so in an orderly manner.

The regulator said that introducing the IFPR means that there will be a single prudential regime for all FCA investment firms. It should reduce barriers to entry and allow for better competition between investment firms.

This is the first of three consultations that the FCA will issue, and the regulator says it is keen to receive feedback in order to develop final rules that achieve the regime’s objectives and are also workable for FCA investment firms.

The issues under consideration include the categorisation of investment firms. The current definitions of FCA investment firms will be replaced by two broad categories, so firms either be a ‘small and non-interconnected’ (SNI) investment firm, or they will not.

The FCA is proposing that prudential consolidation will apply to investment firm groups, except if the FCA has granted permission to a group to use the alternative of the group capital test. How requirements should be calculated on a consolidated basis will differ from the current regime.

The 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.

The 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. The FCA believes that using this higher quality of capital for all FCA investment firms will lead to them being more resilient and having an increased capacity to absorb losses.

There will be a new permanent minimum requirement as one of the floors below which an FCA investment firm’s own funds must not fall. This will be based on the activities that an FCA investment firm undertakes.

The FCA is also proposing to increase the initial capital that is required for a firm to become authorised as an FCA investment firm. This will be to the same level and quality of capital as for its ongoing permanent minimum requirement once authorised.

Furthermore, the FCA is proposing to introduce a new approach to calculating capital requirements, known as ‘K-factors’, and based on the activities that an FCA investment firm undertakes.

The FCA is proposing new monitoring requirements for general concentration risk that will apply to all FCA investment firms.

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.

The reporting on remuneration requirements will be included in the FCA’s second consultation, along with its proposals for the new remuneration regime.

Final rules will be published over the course of next year. Where possible the FCA is consulting earlier on the more complex topics. This is to give investment firms as much time as possible to ready themselves for what will be a major change.

The consultation period closes on 5 February 2021.

Link to the consultation:

CP20/24: A new UK prudential regime for MiFID investment firms

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