FCA Issues its Discussion Paper on the New Prudential Regime

Prudential Regime For UK Investment Firms | Compliance Consulting

This week, the Financial Conduct Authority (FCA) published a discussion paper (DP) entitled “A new UK prudential regime for MIFID investment firms”. This marks the FCA’s first step in introducing a set of prudential rules for investment firms to better reflect their business models and the risk of harm they pose to consumers and markets.

The DP notes that although the UK has left the EU, the FCA is proposing to introduce a similar regime to the EU’s Investment Firms Regulation (IFR)/Investment Firms Directive (IFD).

The DP seeks feedback from stakeholders on the appropriate regime for the UK, while summarising the IFR/IFD.

The FCA notes that investment firms should be aware of the scale of the change the IFR/IFD represents. Major changes reflected in the DP include: 

  • An update to the initial capital required for authorisation
  • Changes to the rules on the definition of capital
  • New own funds requirements, including the introduction of the K-factor approach
  • New rules on prudential consolidation, group risk and concentration risk
  • Application of liquidity requirements to all investment firms

The FCA advocates a streamlined and simplified prudential regime in the UK, whereby the FCA would no longer apply the range of existing prudential categories such as “limited license IFPRU” or “BIPRU”. All firms would simply be “investment firms” with the smaller ones known as small and non-interconnected investment firms (SNI).

The FCA discusses the K-factor approach to determine the minimum own funds requirements of an investment firm that is not an SNI. The K-factor approach is to provide a tailored and more appropriate method for setting a risk-based minimum own funds requirement. The FCA expects investment firms to adopt the K-factor approach generally in their risk assessment process. Even where the K-factor approach does not apply, due to the fixed overhead requirement or the permanent minimum capital requirement being higher for that SNI, the FCA would still expect non-SNI firms to calculate it.

The FCA notes that the IFR introduces minimum quantitative liquidity requirements for all investment firms, including SNIs. The FCA supports a similar approach of extending new liquidity rules to all UK investment firms.

The IFR/IFD adopts a more proportionate regulatory reporting regime for investment firms, compared to the requirements of the Capital Requirements Regulation (CRR). The FCA supports this approach of limiting reporting requirements to data points relevant to the business model of the investment firm.

The FCA also believes that the IFR introduces a public disclosure regime that better reflects the business model and potential risk of harm posed by investment firms than the CRR.

The FCA’s view is that Collective Portfolio Management Investment Firms should be subject to the same prudential requirements for their additional MiFID business as a MiFID investment firm would be for its MiFID business.

The DP poses 35 questions over 20 chapters. Responses are due by 25 September 2020. A link to the DP is available here.

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