On 28 November 2023, the FCA published its latest IFPR newsletter.
At the start of the newsletter the FCA refers to its earlier publication of its observations from the multi-firm review into firms’ progress in implementing the internal capital adequacy and risk assessment (ICARA) process and reporting requirements under the Investment Firms Prudential Regime (IFPR).
It then covers:
- Investment firm groups. Among other things the FCA states that it has noticed that some firms may not have been including all relevant financial undertakings within the scope of their investment firm group. The FCA reminds all firms and UK parent entities subject to MIFIDPRU of the relevant rules in MIFIDPRU 2.4 which set out how to determine the existence and content of an investment firm group. Also, the FCA reports that it has noticed attempts by some controllers of MIFIDPRU firms to either avoid the existence of an investment firm group, or to reduce the scope of application of prudential consolidation under MIFIDPRU 2.5 to their group. In such cases the FCA reminds firms of section 143J of the Financial Services and Markets Act, which deals with a requirement to have a UK parent undertaking. Furthermore, the FCA warns that where it sees multiple MIFIDPRU firms owned by third country parent entities, it is prepared to exercise its power if necessary.
- Compliance with requirements for issuing CET1 capital instruments. The FCA touches on instances where a firm is seeking to include a new issuance of a capital instrument as part of its common equity tier 1 capital (CET1), where a firm is reliant upon other reserves (e.g., capital contribution reserves) to qualify as CET1 and where a firm has gained deemed permission for capital instruments that were in issuance pre-IFPR to qualify as CET1 by utilising the transitional provision in MIFIDPRU TP 7 and submitting a TP 4.4R notification (prior to the deadline of 29 June 2022). In relation to the latter the FCA reports that it has noticed in some instances that where firms made these notifications, the capital instruments referred to within them may not actually satisfy all the conditions under the relevant provisions of the UK Capital Requirements Regulation (CRR) (as applied by MIFIDPRU 3.3) to count as CET1. These are the conditions in article 28 of the UK CRR (in the form in which it stood as at 1 January 2022). The FCA reminds firms that it is therefore important that they ensure that where they have relied upon MIFIDPRU TP 7, the capital instruments which have been ‘deemed to be approved’ meet those conditions of the UK CRR. If a firm discovers that it has been misreporting to the FCA the true value of its eligible regulatory capital, it should consider if it has a need to notify the regulator of this under Principle 11 of the Principles for Business.
- Deductions from own funds. Firms are reminded that when assessing the adequacy of their financial resources (including under the ICARA process in MIFIDPRU 7 and Finalised Guidance FG20/1 FCA framework: assessing adequate financial resources) to consider the nature of the relevant asset and whether it is prudent to hold sufficient capital to absorb a full deduction. This issue is equally relevant in the context of the consolidated situation of investment firm groups under MIFIDPRU 2.5.
- Matched principal restrictions for firms with permission to deal on own account. The FCA states that it has seen examples of firms with the matched principal broker (MPB) limitation potentially acting outside of their permissions due to a failure to comply with the criteria for what constitutes an MPB. The ‘matched principal exemption conditions’ are defined in the FCA’s Handbook Glossary Terms by reference to previous prudential sourcebook rules as they applied on 31 December 2021. The FCA reminds firms that they must meet all the conditions to be compliant with the MPB limitation. It also states that firms that carry this limitation may wish to conduct a holistic assessment to ascertain if their business model/activities meet the relevant conditions.
- IFPR reporting. The FCA covers firms with permission to deal on own account – reporting of K-factors on Form MIF001, items to be entered into cell 6A in RegData on Form MIF002 and general reporting guidance for Form MIF006.