The Financial Conduct Authority's new UK Investment Firms Prudential Regime (IFPR) will mean significant changes from 1 January 2022. Newgate Compliance Managing Director, Matthew Hazell provides clarity on investment firms' most frequently asked questions.
What is IFPR and why is it relevant to me?
It is a new prudential regime tailored for investment firms to be held in a single MIFIDPRU rulebook. It will impact any firm that is able to conduct MiFID business. The extent to which it will impact you will depend on whether you fall in the category of a small and non-interconnected firm (SNI) or not (non-SNI), which depends on the activities you carry out and the scale of activities.
I am an AIFM. Can I can ignore this?
Not if you are a collective portfolio management investment (CPMI) firm that has permission to conduct MiFID activities. Generally, IFPR will apply in relation to the MiFID business you conduct. A CPMI firm would be still subject to Chapter 11 of IPRU-INV as well as relevant parts of the MIFIDPRU rules.
What are the new capital requirements?
Base requirements will raise to £75k, £150k and £750k depending on your firm type with variable requirements being either a quarter of fixed annual costs or a sum of the K-factors.
What are K-factors?
They are a mix of activity and exposure-based requirements that Non-SNI firms need to calculate that capture potential harm in your business activities. They will apply to firms that hold client money and/or assets or dealing on their own account.
I am in a group structure with a UK parent/subsidiary, what does that mean for me?
The parent company, whether regulated or not, will need to meet certain consolidated regulatory requirements in relation to capital, capital requirements, concentration risk, liquidity, disclosure and reporting. Regulated firms will also need to meet capital requirements on an ongoing basis.
Will there be any changes to the type of capital I have to hold under IFPR?
You will no longer be able to use tier 3 capital and will only be able to use tier 2 capital up to a maximum of 25% of your capital requirement.
What are the new liquidity requirements?
You will need to maintain a minimum of one third of your fixed overhead requirement in core liquid assets. If your liquid assets fall below this the FCA will expect you to wind the business down. Through the Internal Capital and Risk Assessment (ICARA) process you will also need to determine your liquid asset threshold requirement that informs the FCA of the additional liquid assets you need to fund your ongoing business and ensure you can wind down in an orderly manner.
What is the ICARA process? I already do an ICAAP
ICARA replaces the Internal Capital Adequacy Assessment Process (ICAAP) and is seen by the FCA to be the centrepiece of a firm's risk management process and will be a continuous process through which you should: identify and monitor harms; outline how harm is mitigated; perform business model assessment, planning and forecasting; outline recovery plans and triggers; and outline wind down planning. The result of the ICARA should be the determination of your liquid asset threshold and own funds threshold requirements to ensure the firm can remain viable and address harm from its activities, as well as enabling an orderly wind down.
Will my reporting obligation change?
Yes. A single suite of reporting forms will be introduced. All firms will have a quarterly reporting obligation in relation to own funds, liquid assets, SNI threshold monitoring, balance sheet and income statements. Annual returns will be required on remuneration and ICARA. Firms that deal on own account will need to report quarterly on concentration risk. Certain FSA0xx returns and common reporting (COREP) returns will be retired.
I've heard that the FCA is getting rid of their Remuneration Codes. Is this correct?
Unfortunately not. CPMI firms will still be bound by the AIFMD remuneration code for its material risk takers. IFPR will introduce basic remuneration requirements for all staff involved in MiFID activities. Non-SNI firms will be subject to standard remuneration requirements with the largest population being subject to enhanced remuneration requirements.
Newgate have developed a readiness assessment to undertake a gap analysis of a firm's systems and controls against the requirements identifying any remediation actions to be undertaken. Contact Newgate Compliance at www.newgatecompliance.com/contact-us to book an IFPR Readiness Assessment.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.