31Aug

The FCA’s new Investment Firms Prudential Regime (IFPR) comes into force on 01 January 2022 and will affect all MiFID investment firms. Those investment firms need to understand how they will be categorised under the IFPR and what the new requirements will be.

The IFPR will apply to any MiFID investment firm that is not currently categorised as a Personal Investment Firm (PIF)[1]. Previously MiFID investment firms were categorised very differently based on their permissions and activity and fell under different regimes. The aim of the IFPR is to bring all of these investment firms under the same regime and apply similar standards.

Categorisation

Most smaller firms will likely need to do more than they do now and will almost certainly have a higher capital adequacy requirement. Under the IFPR, firms will now fall under two different categories, either:

  1. Small and non-interconnected (SNI) investment firms; or
  2. Non-SNI investment firms.

SNI investment firms will be subject to less onerous requirements under the IFPR. A firm will only be classed as an SNI firm if it meets all of the thresholds under the rules, this includes having Assets Under Management (AUM) of less than £1.2 billion, not having permission to deal on its own account and having a total gross annual revenue from investment services and/or activities of less than £30 million. However, firms must assess themselves against each of the thresholds to make sure they know how they will be categorised under the new regime.

Capital requirements

No matter the investment activity conducted, all investment firms have a capital requirement. The exact calculation and requirements were spread across different FCA handbooks depending on the firm’s categorisation. The IFPR now puts these into one handbook and gives firm’s their capital resource calculation criteria which is determined by categorisation, activity and the risks posed by the firm’s operations.

Investment firms that are subject to the IFPR must at all times maintain their own funds that are at least equal to their own funds requirement. For Non-SNI firms, this is the highest of their:

  • permanent minimum capital requirement.
  • fixed overheads requirement (FOR).
  • K-factor requirement.

SNI firms must have capital that is the highest of their:

  • permanent minimum capital requirement
  • FOR.

Permanent minimum capital requirement

The minimum capital requirements for investment firms subject to the IFPR is as follows:

Firms conducting the activity of dealing on own account and/or underwriting of financial instruments or placing of financial instruments on a firm commitment basis

  • £750,000

Firms conducting operating an organised trading facility (OTF) that are not subject to a limitation that prevents them from carrying certain activities (regarding dealing on own account)

  • £750,000

Firms who are not permitted to hold money or securities and undertake one or more of the following activities:

  • receiving and transmitting orders;
  • executing orders on behalf of clients;
  • portfolio management;
  • investment advice; and
  • placing of financial instruments without a firm commitment basis.
    • £75,000

All other firms

  • £150,000

Fixed overheads requirement (FOR)

The FOR for an investment firm is an amount equal to one quarter of the firm’s relevant expenditure during the preceding year (although the FCA can amend this if the firm materially changes its business during that year).

To calculate the FOR a firm must use the figures in its most recent audited annual financial statements or unaudited annual financial statements.

K-Factors

One of the new elements brought about by the IFPR regarding capital requirement calculation are K-factors. These are split into two wide groups:

  1. Those that apply only to firms that have permission to deal as principal, relating to:
    1. risks to market access or liquidity (RtM); and
    2. risks to the firm itself (RtF).
  2. Those that can apply to all firms (including those that deal as principal), relating to risks to customers (RtC).

Risk management

The Overall Financial Adequacy Rule (OFAR)

The OFAR requires firms to hold their own funds and liquid assets so the firm can remain viable and be able to address any potential harm from its ongoing activities as well as enable its business to wind-down in an orderly way.

The internal capital and risk assessment (ICARA)

Firms must operate internal systems and controls to identify and manage potential harms that may arise from the operation of their business. All those firms subject to IFPR must undertake an ICARA. This should be the foundation of an investment firm’s risk management framework and includes elements such as:

  • business model assessment and capital and liquidity planning;
  • recovery action planning; and
  • wind‑down planning.

The supervisory review and evaluation process (SREP).

The SREP is the FCA’s own assessment of the adequacy of a firm’s own funds and liquid assets. The FCA may enforce additional requirements on the firm following a SREP, such as requiring them to hold additional own funds or liquid assets.

There are of course many other elements to the IFPR and the FCA handbook rules contained in MIFIDPRU. Firms must ensure they know which elements of the rules apply to them and that, by 1 January 2022, they are compliant with them. This may be a long process and firms should begin this process now.

How Scott Robert can help

Scott Robert can assist your firm by helping you to understand how the IFPR affect you. Whether by helping you determine your categorisation under the regime or advising you on the changes to your existing requirements, Scott Robert can provide the advice to help support your firm transition to IFPR compliance.

If you would like to find out more about Scott Robert’s service offering, please call us on 0161 914 5727

[1]A MiFID exempt firm. However, if a PIF has chosen to comply with MiFID, then it will be subject to the IFPR