FCA consultation on new prudential regime
What is happening?
The FCA’s new consultation paper, CP 20/24, issued on 14th December 2020, is the first of three consultations that the FCA will issue as a preparation for introducing the new prudential regime, known as the UK Investment Firms Prudential Regime (IFPR), in January 2022. Final rules will be published over the course of next year. Where possible, the FCA is consulting earlier on the more complex topics, so as to give firms as much time as possible to prepare themselves.
The new regime will streamline and simplify the prudential requirements for solo-regulated investment firms in the UK. At present, there are many different regimes which apply depending on the size of the firm and the type of investment business, and the new rules will extend the framework for prudential requirements to consider the potential harm firms pose to clients, consumers and the market. This includes the amount of capital and liquid assets the FCA investment firm should hold so that if it does have to wind down, it can do so in an orderly manner.
What do you need to do?
Introducing the IFPR means that there will be a single prudential regime for all FCA investment firms. The new regime represents a major change for these firms and the FCA considers it critical that firms adequately prepare for the regime.
The FCA is keen to receive feedback from stakeholders through this and the later consultations. Feedback will allow the FCA to develop final rules that are workable for firms. The consultation period for this first consultation closes on Friday 5 February 2021.
Some specific changes proposed to the existing prudential regime are as follows;
Categorisation of investment firms
All the current definitions of FCA investment firms, such as BIPRU, IFPRU and exempt CAD, will cease to exist. There will instead be two broad categories of FCA investment firm and firms will either be a ‘small and non-interconnected’ (SNI) investment firm, or they will not. The prudential requirements in the IFPR are designed to match the size and complexity of the firm.
Prudential consolidation
Prudential consolidation will apply to investment firm groups, except where the FCA has granted permission to a group to use the alternative of the group capital test. How requirements should be calculated on a consolidated basis will differ from the current regime.
Own funds
The own funds of FCA investment firms will be made up solely of common equity tier 1 capital, additional tier 1 capital and tier 2 capital. There will be a new permanent minimum requirement as one of the floors below which a firm’s own funds must not fall. This will be based on the activities that a firm undertakes.
Capital requirements
The FCA is proposing to introduce a new approach to calculating capital requirements – ‘K-factors’. This is a capital calculation based on the activities that a firm undertakes.
The FCA is proposing to put transitional provisions in place to allow firms time to move towards their new own fund’s requirements.
Concentration risk monitoring and related own funds requirements
The FCA is proposing new monitoring requirements for general concentration risk that will apply to all FCA investment firms. This includes the entities with which firms place their client assets and their own cash. Non-SNI firms will also be required to report on this general concentration risk.
Reporting requirements
Through the IFPR, firms will be required to assess and hold financial resources against the potential for harm that they present to markets and consumers. The FCA will need different information from FCA investment firms to support this, and it is proposing appropriate and proportionate data collection arrangements to capture this information. The reporting on remuneration requirements will be included in the second consultation, along with proposals for the new remuneration regime.
How can we help you?
If you’d like to know more about how we can help you with your capital adequacy arrangements or with any other aspect of FCA compliance, our expert team is here to help. Contact us today on 0207 436 0630 – or email info@thistleinitiatives.co.uk.