Shearman & Sterling LLP | FinReg | UK Regulator Publishes Discussion Paper on New Investment Firm Prudential Regime
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  • UK Regulator Publishes Discussion Paper on New Investment Firm Prudential Regime

    The U.K. Financial Conduct Authority has published a discussion paper setting out its initial views on establishing a new Investment Firm Prudential Regime. The EU introduced a new prudential regime for EU investment firms through the Investment Firm Regulation and the Investment Firm Directive, which will (mostly) apply from June 26, 2021. The U.K. encouraged the introduction of the EU IFD and IFR while it was a member of the EU. However, the U.K. will not implement the IFR and IFD into U.K. laws as they come into force after the U.K. has left the EU and after the Brexit transitional period ends.

    The IFPR will introduce a more tailored prudential regulatory regime for FCA-regulated U.K. investment firms that reflect the risks inherent in the diverse activities those firms undertake and amend the prudential requirements imposed on them to avoid the imposition of undue administrative burdens by removing those firms from the scope of the provisions that are designed for large banks and investment firms.

    The FCA's discussion paper provides details on the requirements that the EU IFR and IFD impose and discusses the FCA's interpretation of obligations and the intention behind them. It also sets out how the FCA would handle specific issues in the new U.K. domestic regime. The FCA is seeking feedback on the appropriateness of its interpretations and its approach to the specific issues. Respondents are also able to raise wider issues. The FCA describes the major changes that the EU regime entails, which includes changes to initial capital required for authorization, new own funds requirements based on a K-factor approach, new requirements on prudential consolidation and on group risk and concentration risk, the application of liquidity requirements to all investment firms, revised approaches to internal risk and prudential assessments, new compensation policy requirements and amendments to reporting and disclosure requirements.

    The FCA confirms that it will consult further on the changes that the IFPR will introduce. Responses to the discussion paper may be submitted until September 25, 2020.

    View the FCA's discussion paper on a new U.K. prudential regime for MiFID investment firms.

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