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1 Introduction
In the hierarchy of topics that are liable to cause headaches for regulated firms, prudential requirements and remuneration typically feature somewhere near the top of the list. Both areas often cut to the core of firms' economic propositions and both require navigation of potentially complex and detailed regulatory frameworks. Recently, both subjects have also been rising up regulators' agendas again.
After a period of bedding in of their respective prudential frameworks for MiFID investment firms, both the UK and the EU are now looking to update their respective rulebooks, although in significantly different ways.
On 15 October 2025, the UK Financial Conduct Authority (FCA) published a policy statement (Regulatory Capital PS), setting out its final rule changes to the definition of capital used by UK MiFID investment firms under the MIFIDPRU rules. This responds to an earlier consultation paper published in April 2025, which aimed to simplify the existing MIFIDPRU framework.
On the same day, the European Securities and Markets Authority (ESMA) and the European Banking Authority (EBA) published a report setting out their technical advice to the European Commission on the operation of the EU Investment Firms Directive (IFD) and Investment Firms Regulation (IFR). This heralds the start of a journey towards potential substantive amendments to the EU framework, although there is still a long way to go before these suggestions would become binding law. Although it is primarily relevant to EU investment firms, some observations in the report will also be of interest to EU AIFMs, UCITS managers, article 3 exempt firms and cryptoasset firms.
To round off a day of prudential publications, the FCA and the UK Prudential Regulation Authority (PRA) also published a joint policy statement (Remuneration PS) confirming changes to the remuneration rules that apply to UK banks, building societies and PRA-designated investment firms (i.e. dual-regulated firms). Although these changes will not directly affect solo-regulated UK firms, the commentary in the policy statement also suggests that the FCA may be amenable to reforming the equivalent requirements for solo-regulated firms in the near future.
In this briefing, we summarise key points arising from each of these publications and consider what these recent changes might mean for the future direction of the UK and EU regulatory capital frameworks and the UK remuneration rules. In each section, we have included an "At a glance" summary box for ease of reference, followed by a more detailed discussion of the relevant issues. You can navigate to each section via the links below:
2 Changes to the MIFIDPRU definition of regulatory capital
AT A GLANCE SUMMARY
- The new rules will apply from 1 April 2026 and will be relevant to MIFIDPRU investment firms (i.e. soloregulated UK MiFID firms).
- Existing cross-references in MIFIDPRU to the UK CRR will be deleted and relevant material will be simplified and incorporated directly into MIFIDPRU.
- As MIFIDPRU 3 is being substantially restructured, firms may need to update rule references in their existing materials (e.g. policies, procedures and ICARA documents).
- Transitional provisions apply so that any permissions or waivers granted by reference to existing MIFIDPRU rules will be deemed to refer to the relevant successor rule in the restructured rulebook.
- Firms will be able to recognise interim profits as CET1 by notifying the FCA, rather than needing FCA permission. However, an independent audit of the profits will still be required.
- There will be additional guidance clarifying some aspects of the criteria for instruments to be recognised as CET1 instruments, but this is unlikely to result in significant changes from the current position.
- To qualify as retained earnings that count as CET1 capital, any retained profits of a partnership or LLP must be able to be retained by the firm on an unconditional basis (i.e. subject to the full discretion of the management committee or other governing body). Retained profits can be allocated to partners to determine their tax liability, but can only count as CET1 retained earnings if the partners have no legal right to require the payment of the relevant profits.
- Existing rules for the deduction of a firm's qualifying holdings in non-financial sector entities have been clarified.
- The rules around when a consolidating UK parent undertaking can recognise minority investors' interests in an entity included within the consolidation group as contributing to the group's consolidated regulatory capital have also been clarified.
- The FCA has again emphasised its longer-term intention to move towards a cross-cutting rulebook that contains a single set of core regulatory capital rules for all solo-regulated UK firms. This is likely to take the form of the COREPRU sourcebook which the FCA is consulting on in connection with its prudential proposals for cryptoasset firms. In the future, this could result in onerous requirements being extended to other firms such as UK AIFMs, UCITS managers and MiFID-exempt firms.
Background
The Investment Firm Prudential Regime (IFPR) was introduced on 1 January 2022 and applies to all UK MiFID investment firms, unless they are regulated by the UK PRA. In the UK, these solo-regulated MiFID firms are known as "MIFIDPRU firms". The rules governing their regulatory capital requirements are set out in the FCA's Prudential Sourcebook for MiFID Investment Firms (MIFIDPRU).
When the IFPR was introduced, the FCA adopted the approach of cross-referring to various provisions of a "frozen in time" version of the UK Capital Requirements Regulation (UK CRR). This reduced the amount of legal drafting required and meant that the subset of MIFIDPRU firms which had previously already been subject to UK CRR (former IFPRU firms) could continue to refer to existing UK CRR provisions when determining the eligibility of their regulatory capital resources. However, this also resulted in a complex and sub-optimal user experience for firms seeking to navigate the rules, as they were required to consult multiple sources simultaneously to understand the relevant requirements. At the time, the FCA indicated that this was intended to be a short-term solution, pending the full integration of the UK CRR provisions into the MIFIDPRU rules.
As part of the FCA's ongoing drive to streamline regulatory requirements, the Regulatory Capital PS now contains the finalised incorporation of the UK CRR provisions into MIFIDPRU. This is not a verbatim copy out of the relevant UK CRR rules, as the FCA has taken the opportunity to modify some of the terminology and to delete elements which it considers are irrelevant to MIFIDPRU firms. The FCA's website pitches this as "slashing red tape by 70%", but this is based on the reduction in the overall number of words used in the replacement MIFIDPRU provisions relative to the UK CRR text. In reality, there are very few changes to the substantive obligations that apply to firms and therefore the overall burden in terms of the size and composition of capital requirements will not be materially reduced.
Incorporation of UK CRR material into MIFIDPRU
The new rules will delete all existing cross-references in MIFIDPRU to the UK CRR. As part of this approach, most of MIFIDPRU 3 (which sets out the rules on how firms determine their regulatory capital resources) is being deleted and then restated to include additional rules covering the relevant UK CRR provisions.
One immediate practical impact of this is that each section of MIFIDPRU 3 (except its annexes) is being converted into a newly numbered section. For example, MIFIDPRU 3.1 will become a new MIFIDPRU 3.1A, MIFIDPRU 3.2 will become a new MIFIDPRU 3.2A and so on. There will also be consequential changes to rule references in the FCA's reporting forms (e.g. the MIF00x returns) and their associated guidance.
The FCA has included a transitional provision which deems any waiver or modification granted in relation to a deleted rule to be converted into an equivalent waiver or modification of the rule which replaces it.
Where firms have internal materials (for example, procedures or their ICARA documents) that reference the existing rules in MIFIDPRU 3, they will need to undertake an exercise in updating rule references with effect from 1 April 2026.
Removal of unnecessary UK CRR content and simplification of complex provisions
When IFPR was first implemented, the FCA largely adopted an "intelligent copy-out" approach, restating key parts of the UK CRR into annexes in MIFIDPRU. This included provisions such as the complex supplementary rules in UK CRR delegated legislation around the eligibility of items to count as regulatory capital.
The FCA has now taken the opportunity to simplify its approach by moving this supplementary content into the main body of MIFIDPRU 3 and deleting elements which it considers are unlikely to be relevant to MIFIDPRU firms (for example, provisions relating to mutual societies or covered bonds).
Certain other content has been retained but in a simplified form. For example, the original rules contained detailed technical requirements which were designed to prevent a firm from providing direct or indirect funding for its own regulatory capital instruments. The FCA has now deleted the detailed provisions and instead has included a general overarching requirement that a firm must not fund its own regulatory capital instruments directly or indirectly, unless the funding is provided in the ordinary course of the firm's business. This is accompanied by limited guidance providing examples of prohibited funding, such as the firm granting a loan or guarantee to an investor in connection with the investor's acquisition of the firm's capital instruments.
The move to the use of broader principles-based provisions has the advantage of reducing the length of the rulebook and may potentially provide additional interpretative flexibility in some cases. However, it could also lead to increased uncertainty about the correct approach in some contexts and there is also the risk that in practice, the FCA's supervisory approach may still be coloured by the previous detailed provisions.
Notification-based approach for recognising interim profits as regulatory capital
Currently, if a MIFIDPRU firm wishes to include interim profits in its regulatory capital resources, it must apply to the FCA for permission to do so. Under the new rules, a firm will be able to recognise interim profits as regulatory capital simply by notifying the FCA – i.e. the FCA will not need to grant permission. The profits can be included in the firm's regulatory capital from the point at which the notification is submitted.
However, when making the relevant notification, the firm will still need to have the interim profits verified by an independent auditor. In practice, this often represents the most significant barrier to recognition of interim profits, as an interim audit may be expensive and time-consuming. As a result, this change seems likely to have relatively limited impact.
Equal ranking CET1 and non-CET1 instruments
The MIFIDPRU rules (adopting the UK CRR approach) recognise Common Equity Tier 1 (CET1) instruments as providing the highest form of loss absorption and permanent financial resources for a firm. To qualify as CET1, an instrument must meet detailed conditions set out in the rules, including that the instrument must rank behind all other claims in the firm's insolvency.
In the past, there was uncertainty about whether an instrument could qualify as a CET1 instrument where it had the same ranking in insolvency as a non-CET1 instrument. This situation could arise, for example, where a firm has two classes of ordinary shares in issue, both of which rank behind all other creditors in a liquidation, but only one class meets all the CET1 criteria
The updated rules confirm that an instrument can qualify as CET1 where it ranks equally in insolvency with another nonCET1 instrument, provided that both rank behind all other claims in the firm's liquidation. This may provide additional flexibility in the structuring of share classes, which could be helpful in connection with designing employee incentive arrangements or if a firm is seeking external investors who wish to participate in any potential equity upside.
However, the FCA has also amended the public disclosure rules in MIFIDPRU 8 so that where a firm has equal ranking CET1 and non-CET1 instruments in issue, it will need to disclose additional information about its capital structure and how loss absorption operates between the relevant instrument classes.
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