On 6 August 2021, the FCA published Consultation Paper 21/26: A new UK prudential regime for MiFID investment firms (CP21/26).
CP21/26 is the third Consultation Paper setting out the FCA’s proposals for the UK Investment Firm Prudential Regime (IFPR). It should be read in conjunction with two earlier FCA Policy Statements (PS21/6 and PS21/9).
In CP21/26 the FCA sets out proposals relating to the following:
- Disclosure and environmental, social and governance (ESG) The FCA proposes that FCA investment firms that are not small and non-interconnected (non-SNIs) should disclose information about their risk management and governance arrangements, and about their own funds requirements and investment policy. The FCA also proposes that any small and non-interconnected (SNI) firm that has issued additional tier 1 (AT1) instruments should also disclose information about their risk management arrangements. Another FCA proposal is that all FCA investment firms must make some disclosure on their remuneration policies and practices. This will be qualitative and quantitative and proportionate to the size and type of firm. In CP21/26 the FCA is not proposing that FCA investment firms should make disclosures on ESG issues, apart from the governance arrangements already mentioned. The FCA will consult specifically on ESG disclosures in a subsequent Consultation Paper.
- Own funds – excess drawings by partners and members. The FCA proposes a rule to address the situation where excess drawings can be made by partners in a partnership or members in a limited liability partnership without being recorded as a loss and is, instead, treated as a loan to partners or members.
- Technical standards. The FCA considers the binding technical standards (BTS) adopted under the onshored versions of the Capital Requirements Regulation and the Financial Conglomerates Directive to be relevant for the IFPR. In most cases the FCA is proposing to apply the onshored technical standards with modifications that are set out in new Prudential sourcebook for MiFID Investment Firms (MIFIDPRU). However, there are 2 BTS where there are too many amendments and the FCA has therefore incorporated these into a MIFIDPRU annex.
- The FCA is proposing to amend the requirements that depositaries must meet so that they no longer have to have permission to deal on own account. The FCA also proposes to allow other FCA investment firms to act as a depositary where they also provide the MiFID ancillary service of safe-keeping and administration of financial instruments. A further proposal from the FCA amends the minimum own funds requirement and moves the relevant requirement from FUND and COLL into MIFIDPRU.
- UK resolution regime. The FCA sets out proposed changes to the Handbook reflecting the position that FCA investment firms would be moved out of the scope of the UK’s resolution regime.
- Consequential changes. The FCA sets out proposals to make certain amendments to ensure that the interactions between MIFIDPRU and other parts of the Handbook work. The proposals include amendments to chapter 3 in GENPRU covering cross-sector groups.
- The FCA sets out how it will use its new powers under the Financial Services Act 2021 to impose obligations directly on non-authorised parent undertakings of FCA investment firms.
- Applications and notifications. The FCA is proposing a generic application form and a generic notification form that will cater for any specific requirements that arise from the various technical standards that it proposes to incorporate into MIFIDPRU.
The deadline for comments on CP21/26 is 17 September 2021.
Following the consultation on CP21/26, the FCA will publish a Policy Statement and final rules for the whole UK IFPR regime in autumn 2021.
The UK IFPR will take effect on 1 January 2022. This will have a significant impact on UK MiFID II investment firms and CPMIs, who should start considering the likely impact of the new prudential regime and the adjustments that will be required to their internal systems and controls.
With the deadline fast approaching, we have launched an IFPR: Impact product, which we have developed to help clients manage each step of their internal implementation project. It provides a high level summary of the draft MIFIDPRU, as well as any consequential amendments to other FCA sourcebooks.
Further information on IFPR: Impact can be found here.