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Are you prepared for the UK Investment Firm Prudential Regime (IFPR)?

05 August 2021

The IFPR comes into force on 1 January 2022.  It builds on the FCA’s financial resilience framework of FG20/1, and additionally the FCA's two Consultation Papers (CPs) on IFPR and near-final rules as contained within the FCA Policy Statement PS21/6, with another CP and two further Policy Statements and rules to be published in 2021.

The IFPR will affect all current BIPRU, IFPRU, matched principal brokers and exempt-CAD firms, amongst others.  This article considers the key impact areas for firms caught within the scope of IFPR.

The impact areas of the IFPR can be put into the following categories:

  • Firm Categorisation- a firm will either be a Small and Non-interconnected Firm (SNI) or a Non-SNI depending on financial thresholds and regulatory permissions.  Certain large (systemically important) firms (approximately 8 investment firms) will continue to be subject to the Capital Requirements Regulation (UK CRR) and not the IFPR.  The IFPR will impact on over 3,000 FCA regulated firms.
  • Capital Requirements- initial and base capital requirement thresholds of €50,000, €125,000 and €730,000 will move to what is known as the Permanent Minimum Requirement (PMR), with thresholds of £75,000, £150,000 and £750,000 respectively.  Matched principal brokers currently with a base capital requirement of €125,000 will move to £750,000 over 5 years.  For SNI firms, the own funds (capital) requirement (OFR) will be the higher of the PMR and the Fixed Overhead Requirement (FOR) which is based on a quarter of the recurring expenses of the previous year’s audited accounts.  For non-SNI firms, the requirement is the higher of the PMR, FOR and the K-factor requirement (KFR) which replaces credit and counterparty risk and market risk calculations under the UK CRR.  The KFR addresses the risks to the firm, to the customer, and to the market.
  • Liquidity Requirements- the IFPR introduces the Basic Liquidity Assets Requirement (BLAR) that Core Liquid Assets (CLA) must be greater than a third of the FOR plus 1.6% of any guarantees provided to clients. CLA can be coins/bank notes, short-term UK bank deposits, units in short-term regulated money market funds, UK government bonds/gilts, and trade receivables <30 days for SNIs and non-SNIs that do not deal on own account.  Non-core liquid assets would include items such as short-term deposits in non-UK banks.
  • Financial Threshold Conditions- the FCA links capital and liquidity requirements directly with their financial thresholds, under the IFPR.  The Own Funds Threshold Requirement (OFTR) is the sum of the OFR and the Additional Own Funds Requirement (which is derived from the firm’s internal assessment similar to the current ICAAP and Pillar 2 process).  The Liquid Assets Threshold Requirement (LATR) is the sum of the BLAR and the Additional Liquid Asset Requirement (derived from the firm’s internal assessment).  A breach of the OFTR or LATR will be considered to be a breach of the FCA’s threshold conditions.
  • Group Consolidation Requirement- prudential consolidation groups will be categorised as either SNI or non-SNI groups.  SNI groups will have to hold the higher of consolidated PMR and consolidated FOR.  Non-SNI groups will have to hold the higher of a consolidated PMR, consolidated FOR and consolidated KFR.  The Group Capital Test provides an alternative to the Group Consolidation Requirement. 
  • Risk Management- the Internal Capital Adequacy and Risk Assessment (ICARA) will be the centre piece of a firm’s risk management framework and will be a continuous process which should a) identify and monitor harms (to the firm, customers, and to markets), b) undertake harm mitigation, c) undertake business model assessment, planning and forecasting, d) undertake recovery action planning, e) undertake wind-down planning, and f) assess the adequacy of own funds and liquidity requirements.  The ICARA process will replace the current ICAAP and ILAA/ILSA processes for firms under IFPRU and BIPRU.
  • Governance- all firms are expected to have robust governance arrangements that include a) a clear organisational structure with defined, transparent and consistent lines of responsibility, b) effective processes to identify, manage, monitor and report the risks the firm is or might be exposed to, or pose or might pose to others, and c) adequate internal control mechanisms, including sound administration and accounting procedures.
  • FCA Supervisory Intervention Points- firms will have to monitor and report to the FCA on its capital early warning indicator (110% of OFTR), capital and liquidity threshold requirements (OFTR and LATR) and the wind-down trigger (FOR).
  • Remuneration Code- the IFPR Remuneration Code categorises firms as Basic, Standard or Extended based on their IFPR firm categorisation (SNI, non-SNI, large non-SNI).  The level of remuneration requirements will be dependent on the IFPR Remuneration Code categorisation of the firm. 
  • Regulatory Reporting- FSA003 and COREP reporting will move to MIF001 Capital Adequacy reports under IFPR, and there will be additional new reports such as Liquid Asset Requirement (MIF002) and Metrics Reporting (MIF003).  Firms current reporting Balance Sheet and Income Statement under FSA001 and FSA002 will be moved to FSA029 and FSA030 respectively. Pillar 2 (FSA019) and High Earners (REP005) will be replaced by ICARA Questionnaire (MIF007) and Remuneration (MIF008). 
  • Public Disclosures- current Pillar 3 requirements will be replaced by the IFPR disclosure requirements, as will be set out in the FCA’s forthcoming third CP and future Policy Statements in 2021. 
  • Rulebook- the new prudential sourcebook MIFIDPRU will replace BIPRU and IFPRU prudential sourcebooks.  The FCA will also consult in its final CP on the remaining consequential changes to chapters of prudential and non-prudential sourcebooks and its Glossary, that are currently not covered by PS 21/06.
By now firms should have read through the IFPR CPs and have formed an IFPR working party/steering committee and have (or have a plan with timescales) modelled your forecasts for both capital and liquidity, based upon the CPs and the new prudential rules detailed within the Policy Statement PS 21/06, as well have identified the stages required to implement the new ICARA, group consolidation, governance and remuneration provisions.

DWF can provide you with IFPR implementation guidance and project planning, as well as an impact assessment and/or gap analysis on how IFPR affects your business.
 
If you require any further information, please contact Andrew Jacobs, Head of Regulatory Consulting.

Further Reading