UK: A Firm Impact - Getting Ready For Capital Requirements Directive IV

Last Updated: 22 October 2013
Article by Guy Swarbreck and Sam Williams

Capital Requirements Directive IV (CRD IV) is the EU's implementation of Basel III for banks which affects approximately 2,400 investment firms prudentially regulated by the Financial Conduct Authority (FCA).

CRD IV is split into two instruments: the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). The CRR instrument relates mainly to capital and reporting requirements and the CRD instrument relates primarily to governance and operational requirements. The implementation of CRD IV represents one of the most significant changes to the capital, reporting and operational requirements for investment firms in recent years and firms should ensure they are prepared for the changes following its application from 1 January 2014.

Capital impact for investment firms

Many firms currently classified as BIPRU investment firms will be subject to a new sourcebook, 'Prudential Sourcebook for Investment Firms' (IFPRU). Broadly, firms currently classified as BIPRU €730k, €125k or €50k will be classified as IFPRU €730k, €125k, or €50k.

However, for investment firms which only execute orders or manage portfolios the FCA is proposing to maintain the current CRD. Such firms would be subject to the current applicable GENPRU, BIPRU and SYSC rules and for handbook purposes are to be referred to as BIPRU firms.

CRD IV introduces significant changes to what comprises eligible capital or own funds, notably it removes what is currently Tier 3 capital. Additionally it changes the way a firm's own funds requirement is calculated, namely the requirement is expressed as ratios of capital against the firm's total risk exposure:

  • Common Equity Tier 1 (CET 1) capital ratio of 4.5%
  • Tier 1 capital ratio of 6%
  • Total capital ratio of 8%.

As part of the implementation process, the ways in which the elements of own funds are recognised are subject to transitional arrangements for a period from 2014 to 2017.

As LLP or partnership capital is not explicitly addressed by CRD IV, the FCA is consulting on what capital instruments currently used by partnerships and LLPs are expected to satisfy the criteria for CET 1 capital. The FCA will inform the European Banking Authority (EBA) that it intends to accept such instruments as CET 1 capital.

Some current exempt CAD firms (e.g. certain private equity firms) are permitted to hold client assets. These exempt CAD firms will lose certain exemptions under current CRD/CAD from 1 January 2014 and will become subject to CRD IV, thus becoming IFPRU firms.

Regulatory reporting

CRR brings in a new EU wide framework for Financial Reporting (FINREP) and Common Reporting (COREP) that applies to IFPRU investment firms. COREP covers capital requirements, own funds and liquidity reporting whereas FINREP covers consolidated financial reporting for supervisory purposes for IFRS reporting firms.

CRR requires the EBA to devise Implementing Technical Standards (ITS) on supervisory reporting. These standards contain the scope and detail of what IFPRU investment firms will have to report under COREP and FINREP, including the reporting templates. The final draft ITS on supervisory reporting was published on 26 July 2013 and is available on the EBA website.

COREP and FINREP will apply from 1 January 2014 and 1 July 2014 respectively. The FCA will consult in the autumn on non- COREP supervisory information and how the FCA Handbook will be restructured as a result of the introduction of COREP/FINREP.


One of the most publicised expected impacts of CRD IV was on remuneration, specifically the proposal to cap bonuses at 1:1 of fixed remuneration, or 2:1 with shareholder approval. However the FCA has announced that it is deferring consultation on policy changes in this area as it is considering the matter with the Treasury.

This article highlights some of the primary changes arising from CRD IV; however this summary cannot draw out all matters relevant to you or your firm. Should you wish to discuss how the new requirements affect you please do not hesitate to contact us.

Smith & Williamson LLP Regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. A member of Nexia International. Smith & Williamson Financial Services Limited Authorised and regulated by the Financial Conduct Authority. Nexia Smith & Williamson Audit Limited Registered to carry on audit work and regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. Member of Nexia International. The Financial Conduct Authority does not regulate all of the products and services discussed in this newsletter.

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