The FCA is consolidating all capital definitions within MIFIDPRU 3, with the objective of creating a single, self-contained source of rules on own funds which will remove the need for firms to cross-reference the UK Capital Requirements Regulation (UK CRR) and related technical standards. 

At a high-level, the main changes:

• clarify what qualifies as own funds and streamline existing drafting to remove provisions designed for banks;
• shift certain approvals (e.g., for the treatment of verified interim profits as Common Equity Tier 1 (CET1)) to notifications only;
• distinguish more clearly between CET1, Additional Tier 1 capital (AT1) and Tier 2 capital;
• provide technical clarification on certain common group treasury scenarios; and
• introduce enhanced disclosure requirements for a small number of firms with non-standard capital structures.

Broadly, the changes apply to:

• MIFIDPRU investment firms;
• UK parent entities subject to MIFIDPRU 3 on a consolidated basis; and
• parent undertakings applying the Group Capital Test.

Where groups contain both FCA investment firms and PRA-regulated entities, the new rules apply to the FCA firm on a solo basis only, such that the group-level prudential approach remains unchanged.

The FCA’s primary goal is to reduce unnecessary complexity in the rules and remove certain provisions which are bank-specific and have limited relevance for investment firms. This, along with other minor modifications to the existing provisions of MIFIDPRU 3 as explored in more detail at questions 4-9 below, is designed to make the rules clearer, simpler and more proportionate to the business models of FCA-regulated investment firms. 

As mentioned above, the changes also support the UK government’s broader regulatory reform agenda, which focuses on streamlining regulation in order to promote growth.

Under the current rules, FCA investment firms are required to obtain FCA permission before interim profits can be recognized as CET1 capital.¹

From 1 April 2026, the new rules provide that firms will be able to notify the FCA “as soon as reasonably practicable” after including those profits as CET1. The FCA has, however, confirmed that the verification standards for such profits remain unchanged (such that profits must be verified by persons independent of the firm)² and that appropriate deductions must still be made for foreseeable charges and dividends. Where interim profits are included, the FCA has emphasized that the notification should be made “promptly”.

This change is expected to simplify and accelerate the process for firms looking to treat interim profits as CET1, reducing administrative burden.

The FCA has rowed back on certain changes to the CET1 requirements proposed in CP25/10. 

While clarifying, harmonising and simplifying certain definitions and terminology, the new rules under PS25/14 are not expected to change the overall levels of CET1 that must be held, or require firms to make material changes to their broader capital structures. 

The FCA has also clarified and streamlined the rules around AT1 instruments, but has maintained the essential characteristics of AT1 capital (i.e., subordination, perpetual nature, loss absorption capability and full discretion over distributions) while removing unnecessary complexity from the UK CRR provisions designed for banks.

The FCA has also: 

• reiterated that AT1 instruments must absorb losses when CET1 ratios fall below trigger levels; and
• emphasised that AT1 instruments must be fully paid up – undertakings to pay (even if permitted under company law) will not be acceptable. 

For partnerships (including UK limited liability partnerships and UK limited partnerships), the FCA has reiterated that retained profits qualify as CET1 capital only if a firm that is a partnership can unconditionally and indefinitely retain them. The FCA will assess this based on substance over form – meaning that if in practice partners can access profits on demand (even if an agreement frames division as ‘discretionary’), such retained profits cannot count as CET1. 

This means that:

• profits can be treated as regulatory capital if the partnership has complete discretion over distributions, and partners have no enforceable right to demand payment; and
• once profits are “divided” and become withdrawable by the partners, they are liabilities (even if not yet paid). 

Going forward, the FCA has recommended that investment firms review their partnership agreements carefully, to confirm how profit rights are currently structured.

The FCA has clarified two common group treasury scenarios – specifically where:

a. a parent subscribes for shares in a subsidiary which subsequently makes a loan back to the parent; and

b. subscription payments and other mutual obligations between parent and subsidiary are settled on a net basis.

On (a), once shares are validly issued and paid for, the FCA has confirmed their fully paid-up status is not affected by subsequent arm’s-length transactions within the group, and that standard group treasury operations (including intercompany loans) do not undermine the capital’s validity. 

On (b), the FCA has confirmed that net settlement of mutual obligations is acceptable where full economic value is received - so that at the point of settlement, the firm is not left with any residual credit risk.

The FCA also emphasised that firms should consider any intercompany lending arrangements when assessing group risk under MIFIDPRU 7.9.

Firms with non-CET1 instruments that rank equally with CET1 for loss absorption purposes will be required to make additional disclosures in MIFIDPRU 8 Annex 1R. 

MIFIDPRU 8 already requires firms to provide a reconciliation between regulatory capital and balance sheet equity, and so the enhanced disclosures are expected to complement this existing requirement, whereby:

• the reconciliation shows how regulatory capital relates to accounting equity at an aggregate level; and
• the enhanced disclosures will explain the specific loss-absorption features of individual instruments (where not immediately apparent).

The FCA has emphasised that cases of firms with non-standard capital structures are expected to be rare, and that most firms with straightforward structures consisting only of ordinary shares and subordinated debt will not trigger these requirements. 

For more information, please refer to pages 15-18 of PS25/14.

The FCA has clarified that capital attributable to external investors in a participation cannot count towards a group’s consolidated own funds. Rather, only capital ultimately owned or controlled by the members of the group is eligible.

The FCA has also introduced a new hierarchy for consolidation treatment. For more details about this, please see page 27 of PS25/14.

We recommend that FCA investment firms:

• review internal policies and documentation for updated MIFIDPRU 3 references;
• where relevant, review any existing partnership agreements to confirm how profit rights are currently structured; and
• consider whether the firm might have a non-standard capital structure, meaning that it will be subject to the new enhanced disclosure requirements in MIFIDPRU 8 Annex 1R.