Investment Firms Prudential Regime (IFPR) – The New Year brings new regulatory requirements to FCA investment firms

5 mins

From 1 January 2022, the new UK Investment Firms Prudential Regime (IFPR) will come into effect. A major change for UK investment firms, it is important you adequately prepare for the changes.

What is the background behind IFPR?

Whilst IFPR follows the same lines of EU’s Investment Firm’s Regulation (IFR) and Investment Firm’s Directive (IFD), it will streamline reporting and focus more on risks directly concerning the investment market and consumers.

On the 22 October, the FCA published the IFPR final rules and are in the legal instruments – FCA 2021/38 and FCA 2021/39.

Who does IFPR apply to?

  • Markets in Financial Instruments Directive (MiFID) investment firms authorised and regulated by FCA,
  • Collective Portfolio Management Investment Firms (CPMIs), and
  • Regulated and unregulated holding companies of groups that contain either of the above.

For these firms (exempt CAD, BIPRU and IFPRU), of which there are 3,200 in the UK, it will see changes to their prudential standards.

Some of the largest changes will be for Exempt CAD firms, some of whom will need to consider holding additional capital and have additional procedures to consider.

* Please note that there are some transitional provisions, the main being that Exempt CAD firms will have five years from 1 January 2022 to gradually increase their capital.

What are the key IFPR changes?

Significant changes to the framework include, but are not limited to;

The categorisation of investment firms

Small and non-interconnected (SNI) firm, or a non-SNI.

Risk management

A framework, which centres on potential ‘harms’ rather than risks.

Initial Capital Required (ICR)

Base requirements are increasing for all firms.

Regulatory reporting requirements

Several new regulatory returns to be completed on a quarterly basis.

Remuneration policy

Only basic aspects of the policy need to be followed by SNIs.

Liquidity

Firm’s may be required to hold at least one month of fixed overheads in liquid assets.

Own funds requirements

Higher of permanent minimum capital and Fixed overhead requirements (and K factors for Non-SNI firms).

Concentration risk

All firms will be required to monitor their concentration risk.

K-Factor requirements

Reporting thereon for Non-SNI firms only.

Prudential consolidation

Or a Group Capital Test, subject to FCA permission.

What sections of IFPR will impact my firm?

A sensible place to start is to think about whether you will be a small and non-interconnected (SNI) investment firm, or non-SNI. A firm’s continuing requirements will differ depending on how each firm is categorised. Given the classification criteria, the FCA expect that the majority of firms effected will be classified as SNI firms.  All FCA investment firms will receive a questionnaire from the FCA in November 2021, asking them to confirm their SNI status, investment firm group membership/composition, and expected Internal Capital and Risk Assessment Process (ICARA) reporting date.

As an SNI firm, when benefits can I expect under the new regime?

According to the FCA, SNI firms should have a reduction in reporting and more time to spend on the business, mitigating risk and improving service standards for the benefit of its clients. SNIs benefit from additional proportionality and less stringent prudential requirements.

What do I need to do?

You will need to review your requirements under the new IFPR scheme now to ensure you are ready and compliant for 1 January 2022. The impact of this new scheme shall vary firm to firm, and whilst some may only notice minor changes to the way they operate, others may be impacted significantly by increased reporting, capital and governance.

Firstly, you need to confirm your classification as an SNI or non-SNI firm. Then you can calculate the new capital requirement (including any K-factor requirements, if necessary). You should also determine if your firm is part of a consolidated group or not for the purpose of IFPR, and whether you are able to make use of the Group Capital Test which requires permission from the FCA, requested via a separate application. Additionally, your firm should decide on what steps are needed to comply with the new remuneration code and risk management (specifically ICARA). It’s important that your firm has a process in place to monitor and evaluate the risks that your firm poses to clients and the wider financial markets.

In addition, for Exempt CAD firms, we would suggest reviewing your business/permissions to see if you actually need to remain under MiFID to conduct investment business, for example, where you opted in to MiFID to access EU pass porting, may mean you fall within the scope of the Article 3 exemption to MiFID and with a change of permissions would mean you fall outside of IFPR.

This article, written by Anthony DeMartino, Director in Price Bailey’s Corporate team, is a brief overview of the reforms and is not a substitute for reading the relevant rules.  For further information on how the reform will affect your firm generally, and for support in calculating your metrics, you can contact Anthony using the form below.

We always recommend that you seek advice from a suitably qualified adviser before taking any action. The information in this article only serves as a guide and no responsibility for loss occasioned by any person acting or refraining from action as a result of this material can be accepted by the authors or the firm.

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