On 26 November 2021, the FCA published Policy Statement 21/17 ‘A new UK prudential regime for MiFID investment firms’ (PS21/17).

PS21/17 is the third in a series of Policy Statements on the UK Investment Firm Prudential Regime (IFPR). In PS21/17 the FCA summarises the feedback it received to Consultation Paper 21/26 ‘A new UK prudential regime for MiFID investment firms and sets out its response and final rules.

The structure of PS21/17 is as follows:

  • Chapter 2: The FCA summarises the feedback it received on its proposals for disclosure by FCA investment firms, including both how and what firms should disclose. The FCA’s proposals covered disclosure on: risk management, governance arrangements, own funds, own funds requirements, remuneration and investment policy. The FCA reports that it has made some changes to the disclosure requirements it proposed, in particular to the level of application. It has also clarified when FCA investment firms must publish their first set of disclosures under the new regime. The FCA has also introduced some exemptions from the requirement to disclose quantitative remuneration data, when certain criteria are met.
  • Chapter 3: The FCA summarises the feedback received on its proposals for the treatment of drawings by partners or members of partnerships or limited liability partnerships that exceed the profits made. The FCA’s consultation proposal, which is now being implemented, was that such excess drawings should be deducted from the firm’s common equity tier 1 (CET1). This would not apply to the extent that the amount is already: (i) deducted from the firm’s own funds as a loss for the current financial year; (ii) offset by new capital contributions from other partners or members as allowed for  under our rules; or (iii) reflected in a reduction of the firm’s own funds that was permitted under articles 77 and 78 of the UK Capital Requirements Regulation (UK CRR) as applied by MIFIDPRU 3.6.1R.
  • Chapter 4: The FCA covers the feedback it received on its proposals to apply the onshored UK equivalents of EU derived binding technical standards (BTS) for which the FCA is listed as a responsible regulator and that it has identified as relevant under the IFPR. In most cases the FCA will be applying the onshored BTS with specific modifications. There are 2 cases where the FCA is departing from its general approach and these are with respect to the CRR Own Funds BTS and CRR BTS on prudent valuation. In these cases, the FCA has copied out the technical standard provisions, with modifications, directly into MIFIDPRU.
  • Chapter 5: The FCA sets out its comments on the feedback it received on its proposed capital requirements for FCA investment firms that also have a Part 4A permission to act as a depositary for various types of investment funds. The FCA explained that depositaries that are also FCA investment firms should consider the potential for harm arising from their depositary activities as part of their internal capital adequacy and risk assessment process under MIFIDPRU 7. The FCA has maintained its proposal that FCA investment firms that act as depositaries generally cannot be considered as small and non-interconnected firms. The FCA also confirms that IFPRU is being deleted in its entirety. However, the change that the FCA included in Consultation Paper 21/7 relevant to non-MiFID UCITS depositaries was to the reference to IFPRU in 5.4.8R in Chapter 5 of IPRU(INV). This requires that a firm which is the depositary of a UCITS scheme must continue to comply with the rules in IFPRU 2 as they applied on the day before IFPR is implemented. That is the FCA freezes in time the cross-reference to IFPRU to the version which will exist on 31 December 2021 (but not thereafter). Therefore, deleting IFPRU on1 January 2022 will not affect the application of the relevant IFPRU material by UCITS depositaries.
  • Chapter 6: The FCA summarises the feedback it received on its proposals to put into effect the removal of FCA investment firms from the scope of the UK resolution regime. The FCA proposed to delete IFPRU 11 and amend other parts of the Handbook so that the rules are consistent with that change. Respondents supported the FCA’s proposals, and the FCA has provided further clarification regarding the timeline for the changes. The FCA expects all the changes to take effect on 1 January 2022 at the same time as the IFPR commences. The government intends to deliver the legislation that de-scopes FCA investment firms from the UK resolution regime from 1 January 2022. The FCA confirms that FCA 730k investment firms will no longer be subject to the UK resolution regime including obligations such as contractual recognition of bail‑in once the changes have taken effect. However, as part of the IFPR, the rules in MIFIDPRU 7 include a requirement for all FCA investment firms to consider recovery planning as an integrated feature of their risk management, as part of the ICARA process.
  • Chapter 7: The FCA covers the feedback to its proposals to amend the non-prudential Handbook modules as needed due to the implementation of the IFPR. The FCA has proceeded with making the consequential amendments as proposed, but with some changes (for example it has made a minor correction to its proposal for an amended definition of ‘ancillary services undertaking’ in the Handbook Glossary). The FCA will not be mapping the existing rules to new rules.
  • Chapter 8: Covers the feedback the FCA received on its proposals to apply its existing approach to investigations and imposition of sanctions to any breaches of the IFPR and make minor amendments to the Decisions Procedure and Penalties Manual and the Enforcement Guide. The FCA has proceeded as consulted.
  • Chapter 9: Deals with the feedback the FCA received on its proposals for an investment firm group notification form, including financial conglomerates. The FCA has proceeded with its proposals for the investment firm groups’ notification and the use of the generic application and notification forms. The FCA is also taking the opportunity to make some further administrative updates to certain application and notification forms as part of finalising the overall IFPR framework.

IFPR will take effect on 1 January 2022.