Matthew Hazell, Managing Director of Newgate Compliance, an Ocorian company, explains that the Financial Conduct Authority’s new UK Investment Firms Prudential Regime (IFPR) will mean significant changes from 1 January 2022
There is no doubt that the introduction of the IFPR will present a more streamlined and simplified prudential regulation regime for investment firms in the UK. Held in a single MIFIDPRU rulebook, the IFPR will have an impact on any firm able to conduct MiFID business from 1 January 2022.
The extent to which it will impact you, however, will depend on whether you fall in the category of a small and non-interconnected firm (SNI) or not (non-SNI) – which depends on your activities and the scale of those activities.
Generally, IFPR will apply in relation to the MiFID business that firms conduct. For example, if you are an alternative investment fund manager (AIFM) operating as a collective portfolio management investment (CPMI) firm that has permission to conduct MiFID activities, the IFPR will still apply.
A CPMI firm would still be subject to Chapter 11 of the IPRU-INV (Interim Prudential Sourcebook for Investment Businesses) as well as relevant parts of the MIFIDPRU rules.
One of the key changes to the regime is that base requirements will rise to £75,000, £150,000 and £750,000 depending on firm type, with variable requirements being either a quarter of fixed annual costs or a sum of the K-factors.
K-factors are a mix of activity and exposure-based requirements that non-SNI firms need to calculate that capture potential harm in a firm’s business activities. They will apply to firms that hold client money and/or assets, deal on their own account or enter into a transaction in their own name as agent for the client.
For investment firms in a group structure with a UK parent or subsidiary, the parent company – regulated or not – will need to meet certain consolidated regulatory requirements in relation to capital, capital requirements, concentration risk, liquidity, disclosure and reporting.
Regulated firms will also need to meet capital requirements on an ongoing basis.
An important point to note is that investment firms will no longer be able to use tier 3 capital, and will only be able to use tier 2 capital up to a maximum of 25% of a firm’s capital requirement.
Furthermore, the IFPR also introduces new ‘basic liquid asset requirements’, which require firms to maintain a minimum of one-third of their fixed overhead requirement in core liquid assets.
If their liquid assets fall below this, the FCA will expect the firm to wind down the business.
Through the Internal Capital and Risk Assessment (ICARA) process, firms will also need to determine their liquid asset threshold requirement, which informs the FCA of the additional liquid assets they need to fund their ongoing business and ensure they can wind down in an orderly manner.
Monitoring harms
Notably, ICARA replaces the Internal Capital Adequacy Assessment Process (ICAAP) and is seen by the FCA to be the centrepiece of a firm’s risk management process.
It will be a continuous process through which firms should: identify and monitor harms; outline how harm is mitigated; perform business model assessment, planning and forecasting; outline recovery plans and triggers; and outline wind-down planning.
The result of the ICARA should be the determination of a firm’s liquid asset threshold and own funds threshold requirements – to ensure that the firm can remain viable and address harm from its activities, as well as enabling an orderly wind-down.
The IFPR will also bring about a change in reporting obligations. A single suite of reporting forms will be introduced and all firms will have a quarterly reporting obligation in relation to own funds, liquid assets, SNI threshold monitoring, balance sheet and income statements.
Annual returns will be required on remuneration and ICARA. Firms that deal on own account will need to report quarterly on concentration risk. Certain FSA0xx returns and common reporting (COREP) returns will be retired.
CPMI firms will also still be bound by the AIFMD remuneration code for its material risk takers. IFPR will introduce basic remuneration requirements for all staff involved in MiFID activities.
Non-SNI firms will be subject to standard remuneration requirements, with the largest population being subject to enhanced remuneration requirements.
There is a lot to digest, and notable changes to get to grips with, but as 1 January 2022 edges ever closer, the time to act is now.
As that implementation date approaches, it is important to carry out an assessment that undertakes a gap analysis of a firm’s systems and controls against the new requirements, identifying any remediation actions to be undertaken. Failure to do so may have a hard-hitting impact when January comes around.
• This article appeared in the Funds Edition of Businesslife, published in August 2021