On 14 December 2020, the FCA published Consultation Paper 20/24: A new UK prudential regime for MiFID investment firms (CP20/24).
CP20/24 follows Discussion Paper 20/2: Prudential Requirements for MIFID Investment Firms which the FCA issued in June 2020. In CP20/24 the FCA is seeking views on the first tranche of it proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR), a new prudential regime for UK firms authorised under the Markets in Financial Instruments Directive II (MiFID II). This is the first in a programme of Consultation Papers and Policy Statements that the FCA will issue to introduce the regime, subject to progress and amendments to the Financial Services Bill, on 1 January 2022.
In para 1.12 of CP20/24 the FCA sets out a consultation map summarising its proposed approach to stagger the IFPR topics on which it will consult. The FCA is consulting earlier on those topics that it thinks investment firms require the most time to prepare for. In CP20/24 the FCA is consulting on the following:
- Categorisation of investment firms: The FCA is proposing that all the current definitions of FCA investment firms, such as BIPRU, IFPRU, exempt-CAD, will cease to exist. There will instead be two broad categories of FCA investment firm. Firms will either be a ‘small and non-interconnected’ (SNI) investment firm, or they will not.
- Prudential consolidation. 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.
- Own funds. 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.
- Own funds requirements. The FCA is proposing to introduce 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 – ‘K-factors’. This is a capital calculation based on the activities that an FCA investment firm undertakes. In CP20/24, the FCA is providing more information on the K-factors that will only apply to FCA investment firms with permission to deal in investments as principal. The FCA is setting out draft rules for these K-factors first as they are generally the more complex to calculate. The FCA also sets out transitional provisions it is proposing to put in place to allow FCA investment firms time to move towards their new own funds requirements.
- Concentration risk monitoring and related own funds requirements. The 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 the FCA is introducing K-CON. This is an additional K-factor for assessing concentration risk that could lead to an increased own funds requirement.
- 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. The FCA will need different information from FCA investment firms to support this, and it is proposing an appropriate and proportionate data collection to capture this information. The FCA is also intending to remove reporting requirements that are no longer necessary or appropriate. The reporting on remuneration requirements will be included in the FCA’s second consultation, along with its proposals for the new remuneration regime.
- Respondents to DP20/2 asked the FCA to provide clarity on the functional currency of various requirements now covered by CP20/24. For all the changes proposed above which have fixed amounts, the FCA will use the absolute amounts used in the IFR but in Sterling.
The deadline for comments on CP20/24 is 5 February 2021.