FCA issues first consultation paper on new UK Investment Firm Prudential Regime

15 December 2020

The Financial Conduct Authority (FCA) has issued its first consultation paper (CP) proposing rules for the UK Investment Firm Prudential Regime (IFPR), a new prudential regime for UK firms authorised under the Markets in Financial Instruments Directive (MiFID). This follows the recent announcement that the implementation of the new regime has been delayed until January 2022.

In June 2020, the FCA had released DP20/2: Prudential Requirements for MIFID Investment Firms, which set out how they were proposing to transpose EU requirements into UK regulation.

Further consultations

The FCA has made clear that this CP is the first in a series of consultations on the IFPR and that two further consultations are planned in 2021. After each one, the FCA will produce a policy statement and near-final rules. The FCA has stated that its approach is to stagger the topics on which they consult, consulting earlier on those topics that the FCA considers firms will require the most time to prepare for.

A new Prudential sourcebook

This first CP covers the following topics:

  • categorisation of investment firms;
  • prudential consolidation and the group capital test;
  • own funds requirements;
  • concentration risk requirements; and
  • reporting requirements.

The FCA has set out its proposals in draft rules for the new Prudential sourcebook for MiFID Investment Firms to be known as MIFIDPRU.

What can you do now?

Whilst remuneration code changes and proposals on how the regime will apply to CPMI firms will be covered in the subsequent consultations, firms should not miss this opportunity to provide feedback on the FCA’s proposals.

In particular, smaller firms expecting to rely on proportionality when applying the remuneration code and CPMI firms carrying out minimal MiFID activities ought to assess whether they will meet the FCA criteria for SNI firms. Proportionality will enable firms which do meet the FCA’s SNI firm criteria to apply lighter touch requirements in respect of prudential requirements, disclosure and remuneration. See our previous article for our thoughts on the potential impact of the IFPR on CPMI firm’s remuneration requirements. Firms requiring support for determining the scope of IFPR which will apply are welcome to contact us to receive access to our scoping tool.

The FCA has proposed the below cumulative quantitative criteria for being a SNI firm. These criteria are in addition to the requirement that the firm must not be permitted to deal on own account. Importantly, whilst the FCA has stated that the thresholds for SNI firms (with the exception of the on- and off-balance sheet total) only relate to the MiFID activities the firm undertakes, the FCA has stated that (save for the client money and client assets thresholds), the below thresholds should be assessed on a group basis, taking account of the MiFID activities of certain firm types in a firm’s group. The FCA has clarified however that gross revenues within a group may be excluded where this would lead to double counting. 

Consequently, there is a risk that smaller firms and CPMI firms carrying out minimal MiFID activities, and expecting to be able to apply proportionality, may not be able to benefit from the SNI firm exemptions due to the activities of other members within their group.

Assets under management*
< £1.2bn
Client orders handled – cash trades
< £100m per day
Client orders handled – derivative trades
< £1bn per day
Assets safeguarded and administered
Client money held
On- and off-balance sheet total
< £100m
Total annual gross revenue from investment services and activities
< £30m

* Whilst not defined in the CP, in line with DP 20.2 assets under management is expected to include assets under ongoing advice.

Consultation response date

Firms have until 5 February 2021 to respond to the CP.

The new regime will streamline and simplify the prudential requirements for solo-regulated investment firms in the UK.