On 23 June 2020, the FCA published Discussion Paper 20/2: Prudential requirements for MiFID investment firms (DP20/2).

The UK Government supported the overall goals of the EU prudential regime for investment firms (Investment Firm Directive / Investment Firm Regulation) (IFR/IFD) and in the Chancellor’s statement in the budget the Government confirmed its intention to legislate for a UK regime. The FCA proposes in DP20/2 to introduce a UK regime that will achieve similar intended outcomes as the IFR/IFD whilst taking into consideration the specifics of the UK market. DP20/2 is intended to help that analysis.

The FCA states that investment firms should be aware of the scale of the change the IFD/IFR represents. In addition to various less material changes compared to the existing prudential regime for investment firms, major changes described in DP20/2 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.
  • Applying liquidity requirements to all investment firms.
  • A new approach for investment firm’s internal risk and prudential assessments, and the supervision of those requirements.
  • New requirements on remuneration policies.
  • Changes to reporting and disclosure requirements.

However, the FCA notes that considerable amounts of detail remain outstanding including the necessary UK legislation being in place to ensure that investment firms will be regulated under a new domestic regime similar to the IFR/IFD rather than the on-shored Capital Requirements Directive IV / Capital Requirements Regulation.

The IFR/IFD contain mandates for regulatory/implementing technical standards and guidelines. The FCA states that in due course it might refer to the content of such measures in its rules depending on the Government’s approach to the UK regime.

The deadline for comments on DP20/2 is 25 September 2020.