On 19 April 2021, the FCA issued the second phase of proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR) by publishing Consultation Paper 21/7: A new UK prudential regime for MiFID investment firms (CP21/7). CP21/7 should be read in conjunction with the FCA’s first consultation paper on the IFPR which it published last December (CP20/24).
In CP21/7 the FCA sets out proposals in the following areas: own funds requirements, basic liquid asset requirement, risk management and governance, remuneration requirements, and regulatory reporting requirements.
Own funds requirements
In terms of own funds requirements the FCA’s proposals are set out in chapters 4 and 5 and in summary these cover:
- The introduction of a fixed overheads requirement that will apply to all FCA investment firms. This will be another of the ‘floors’ below which the own funds of an FCA investment firm must not fall.
- The remaining K-factors that apply to any type of FCA investment firm. These are in addition to the K-factors that were proposed in CP20/24.
- The method for adjusting the calculation of coefficients for the daily trading flow K-factor in periods of extreme market stress and volatility.
- Specific proposals on own funds requirements and firm categorisation for FCA investment firms when they provide clearing services as clearing members and indirect clearing firms.
Basic liquid asset requirement
In chapter 6 of CP21/7 the FCA proposes that all FCA investment firms should have a basic liquid asset requirement. This would be based on holding an amount of core liquid assets equivalent to at least one third of the amount of their fixed overheads requirement (FOR). The FCA explains the concept of core liquid assets and how this provides an appropriate set of assets that can be used to meet the basic liquid asset requirement.
In chapters 7 and 8 of CP21/7 the FCA covers its proposals regarding the introduction of an internal capital and risk assessment (ICARA) process for all FCA investment firms. Through this, firms will be expected to meet an Overall Financial Adequacy Rule (OFAR). This establishes the standard the FCA will apply to determine if an FCA investment firm has adequate financial resources. The FCA sets out how it proposes to expect FCA investment firms to determine through the ICARA process any necessary appropriate own funds and liquid assets requirements, in addition to the own funds and basic liquid assets requirements mentioned above. This includes that they consider harm to consumers and markets, including risks to their ability to engage in an orderly wind-down, as well as those from their ongoing activities. With the ICARA, the FCA is consolidating its requirements for business model analysis, stress-testing, recovery planning and actions, and wind-down planning. The FCA proposes new relevant expectations for senior managers and governance arrangements. The FCA also sets out new guidance on intervention points, actions it expects of firms in certain situations and what they can expect from the regulator. As part of this, the FCA intends to re-orientate its prudential supervisory approach for FCA investment firms towards being harm-led and in support of sector supervision. The FCA will introduce an ICARA questionnaire reporting template to support this.
The FCA’s proposals regarding remuneration requirements are described in chapters 9 to 12 of CP21/7. In summary, the FCA proposes that all FCA investment firms must have a clearly documented remuneration policy and comply with at least a small number of basic remuneration rules in respect of all their staff. Those FCA investment firms that are not small and non-interconnected (non-SNI firms) must comply with further requirements, which include identifying material risk takers and setting an appropriate ratio between variable and fixed remuneration. Under the FCA’s proposals, only the largest non-SNI firms would need to meet the full requirements by also applying rules on deferral and pay-out of variable remuneration in instruments.
Capital 13 of CP21/7 covers the FCA’s proposals regarding regulatory reporting requirements. The regulator proposes to significantly reduce the amount of information that FCA investment firms need to report to it about their remuneration arrangements. The FCA intends to simplify the additional reporting form for collective portfolio management investment firms. The FCA has also amended the MIF002 form for reporting liquid assets that accompanied CP20/24 to take account of its liquidity proposals in CP21/7 and is consulting on a new layout. The FCA proposes to introduce an ICARA reporting form for FCA investment firms. This will replace the existing FSA019 return for these firms.
Accompanying CP21/7 the FCA has published further proposed templates for the new reporting to support the IFPR and the guidance for completing these templates. The FCA is also publishing proposed forms for applications and notifications.
Deadline for comments
The deadline for comments on CP21/7 and the proposed templates and forms is 28 May 2021.