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  • UK Regulator Publishes Proposals for New Investment Firm Prudential Regime

    Following the discussion paper published earlier this year, the U.K. Financial Conduct Authority has launched its first consultation on the new U.K. Investment Firms Prudential Regime. The IFPR is a new prudential regime for U.K. firms authorized under the Markets in Financial Instruments Directive, which it is proposed will be introduced from January 1, 2022, subject to the progress of the Financial Services Bill. The IFPR is intended to simplify the prudential requirements applicable to solo-regulated U.K. investment firms. It will not apply to the larger investment firms that will remain dually regulated, that is, prudentially regulated by the Prudential Regulation Authority and regulated by the FCA for all other aspects. The consultation closes on February 5, 2021.

    This is the first consultation in a series of three consultations that the FCA intends to run on the IFPR. The second consultation will begin in Q2 2021 and will cover the remaining aspects of the application of IFPR, own funds requirements and reporting requirements, risk management and governance, liquidity, compensation and permissions. The third consultation will start in Q3 2021 and will cover disclosure rules, the approach to the existing provisions of the Bank Recovery and Resolution Directive and Financial Conglomerates Directive and final application provisions. Following each consultation, the FCA will publish a policy statement and near-final rules. The final rules will be published once all the consultations are complete and the Financial Services Bill has been made into law.

    The U.K.'s IFPR will be a version of the EU's regime introduced through the Investment Firm Regulation and the Investment Firm Directive and 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. IFPR will take into account the U.K.'s position outside of the EU. The IFPR will introduce a more tailored prudential regulatory regime for FCA-regulated U.K. investment firms that will 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 global systemically important firms.

    The FCA's first consultation on the new IFPR includes proposals on the following topics:
    1. Application and scope: the prudential requirements will be constructed to fit the size and complexity of firms. The existing definitions of FCA investment firms will fall away and instead there will be two types of firms: the small and non-interconnected firms (SNIs) and other investment firms.
    2. Prudential consolidation: the FCA is proposing that prudential consolidation will apply to investment firm groups, unless the FCA grants permission to a group to use a newly introduced group capital test.
    3. Own funds: to improve the resilience and capacity to absorb losses of FCA investment firms, the FCA proposes that own funds should solely comprise common equity tier 1 capital, additional tier 1 capital and tier 2 capital. The proposed own funds requirements include:
      • increasing the initial capital required for a firm to become an FCA investment firm, which will match the ongoing permanent minimum requirement following authorization;
      • introducing a new permanent minimum floor below which own funds must not fall, which will be based on the activities undertaken by an FCA investment firm;
      • introducing a new approach to calculating capital requirements, based on the activities an FCA investment firm undertakes, the so-called "K-factors." In its consultation paper, the FCA only discusses the proposed K-factors for firms that deal in investments as principal; and
      • a transitional period for FCA investment firms to move toward satisfying the new own funds requirements.
    4. Monitoring requirements for general concentration risk, which will apply to all FCA investment firms. An additional K-factor, the K-CON, is proposed for firms that undertake proprietary trading. The FCA is also proposing maximum levels of concentration risk for trading book exposures.
    5. Reporting requirements. These will be designed to capture the information needed to assess whether a firm holds financial resources to protect against the potential harm it presents to markets and consumers. The FCA is aiming to remove unnecessary and inappropriate reporting requirements. The FCA has published a proposed reporting template and a draft guide to completing it.

    View the FCA's consultation paper (CP 20/24).

    View the FCA's webpage, including the proposed reporting template.

    View details of the FCA's discussion paper on the U.K. IFPR.

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