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What has happened?

The FCA has published a discussion paper, DP 20/2, on a proposed prudential regime for UK investment firms within the scope of MiFID. This marks the first step in introducing a set of prudential rules for investment firms intended to better reflect their business models and the risk of harm they pose to consumers and markets.

Investment firms and other interested stakeholders will have until 25 September to respond to the DP. The FCA will consider their feedback and will publish a Consultation Paper later in 2020.

The new regime is planned to represent a significant improvement in the prudential regulation of MiFID investment firms. For the first time, it would deliver a regime wholly designed with investment firms in mind, replacing many rules that were largely designed for deposit-taking credit institutions.

What will you need to do?

Under the regime, UK investment firms would be subject for the first time to liquidity requirements across the board. The levels of initial capital required for authorisation would be updated, and there would be a new methodology for calculating capital requirements, the K-factor approach. There would also be new remuneration and disclosure requirements. The FCA has wider expectations for FCA solo-regulated firms, as set out in its recent finalised guidance, ‘FG20/1 Our framework: Assessing adequate financial resources’. In line with these, it would expect investment firms to consider not only the threats they face, but also the harms they could pose, as part of their internal assessment of financial adequacy and wind-down.

Below are just some of the key features of the new regime.

Initial capital required for authorisation

The initial capital required for authorisation has increased for most firms. The new levels are EUR 75k, EUR 150k, and EUR 750k, depending on the investment activities the firm carries out.

Own fund requirements

An investment firm’s permanent minimum requirement (PMR) will be the same as the initial capital required for authorisation. All MiFID investment firms will now be required to calculate a fixed overhead requirement (FOR). Some investment firms will also have to calculate a new activity based, or K-factor, capital requirement (KFR). The minimum capital requirement will be the higher of PMR and FOR, or the higher of PMR, FOR and KFR where the latter applies.

Concentration risk

All investment firms will be required to monitor and control their concentration risk. They will also have to calculate their exposure value for concentrated exposures in a trading book to a client or a group of connected clients.

Liquidity

All investment firms will now have a basic liquidity requirement based on holding liquid assets equivalent to at least one third of their FOR.

Individual investment firm requirements

Following a supervisory review, investment firms may be required to hold additional capital. Other requirements, such as limiting variable remuneration, additional reporting requirements or a specific liquidity requirement may also be imposed.

Regulatory reporting requirements

Investment firms will all have broadly the same regulatory reporting requirements, which will apply on either a quarterly or an annual basis.

Remuneration

Investment firms above a certain size will need to have a clearly documented remuneration policy, set an appropriate ratio between variable and fixed components of total remuneration, and meet requirements around the structure of variable remuneration.

Public disclosure

Investment firms will generally have to publish information on their risk management, governance, own funds, remuneration, and investment policies. In due course, they will also have to publish information relating to environmental, social and governance risks.

How can we help you?

If you’d like to know more about how we can help with your FCA prudential or reporting arrangements, or 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.