At the time of this Guide’s publication, there are less than 100 days until IFPR comes into force on 1 January 2022. The new regime sets in stone a set of prudential rules and requirements that will significantly impact FCA-authorised investment managers, advisors and brokers who provide MiFID services. The short amount of time to implement the required changes should not be underestimated.
Although the FCA’s timetable has been challenging, IFPR has been several years in the making. Its roots lie solidly in the EU’s Investment Firm Directive and Investment Firm Regulation which applied from 26 June 2021. The FCA heavily contributed to the development of this EU regime as a Member State authority, and the main architecture of the UK version is the same.
IFPR replaces a succession of prudential regimes: the Capital Adequacy Directive, and the subsequent Capital Requirements Directive and Capital Requirements Regulation ("CRR"), were originally designed for credit institutions and contained quantitative measures of risk that sat poorly when applied to the business models of investment firms.
IFPR is intended to be simpler and more proportionate, with two main structures: a less onerous set of requirements for smaller firms known as small and non-interconnected ("SNI") and a fuller regime for firms with sizeable assets under investment management, trading activity flows or who undertake activities that place their clients, the market or the firm itself at a greater risk.
The rules defining regulatory capital have been brought in line with the CRR and standardised for all investment firms. The capital requirement is based on a quantitative assessment of the size the firm, and on the activities or services it undertakes or provides. Furthermore, all investment firms must undertake a qualitative assessment of the capital held, set a risk appetite and controls for the risks against their capital, and potentially set a higher requirement through an internal capital adequacy and risk assessment ("ICARA").
The new regime also seeks to enhance the rules governing prudential consolidation, to more readily address the ‘step-in’ risks associated with being part of a group. Some of the biggest impacts of IFPR will be seen in advisory and private markets firms which will see in many cases a sharp rise in their capital requirements, albeit with transitional arrangements over the first few years.
The new remuneration requirements will also be scrutinised by management and front-line staff alike for their implications on take-home rewards. Making the changes to adhere to the FCA’s new regime is not a simple undertaking – therefore it is crucial that firms understand that preparations for the IFPR cannot happen overnight. This Guide, produced with the assistance of the ACA Group and Travers Smith LLP, is designed to provide a concise and non-accountingled overview of the main requirements.
Prudential regulation has historically been a topic of high anxiety for compliance and legal personnel who have often had to wade through hundreds of pages of technical detail in GENPRU, BIPRU and the like. We hope that the Guide will be viewed by AIMA members, if not “IFPR for dummies”, at least as a readable and logical sequence of steps to achieve compliance with the new regime.
Prudential Lead Consultant, ACA Group
Partner, Travers Smith
Purpose of the new rules
The IFPR represents the most significant change to the prudential framework for UK authorised MiFID investment firms in years. As the UK had a hand in developing the EU’s IFR/IFD, the key principles have been retained in the IFPR which aim to streamline the prudential requirements for solo-regulated UK firms, and as relevant their consolidated groups. It aims to refocus prudential requirements and expectations away from risks the firm faces, to also consider and look to mitigate the potential for harm the firm can pose to consumers and markets.
The IFPR will be effective as of 1 January 2022 and will apply to all FCA authorised MiFID investment firms (other than those which have been PRA-designated), from full-scope IFPRU firms, through to IFPRU limited licence and limited activity firms, BIPRU firms, exempt commodity firms, exempt CAD firms and to the MiFID business of CPMIs. The new prudential rules introduce more complex and onerous capital, liquidity, reporting, governance and remuneration requirements for affected firms.
Coverage of the Guide
The Guide focuses solely on the practical concerns for implementation by SNIs and Non-SNIs that do not deal on own account and/or underwrite on a firm commitment basis. The requirements for the other categories of MiFID investment firms are beyond the scope of the Guide.
There are additional tests for SNI status and additional K-factors that apply where a firm does have permission to deal on own account and/or underwrite on a firm commitment basis. Because such firms are out of scope of the Guide, the additional status tests and K-factors are not discussed in the Guide.
IFPR at a glance
A Firm’s classification will determine the types of rules within the IFPR that will apply to it.
Firms subject to the IFPR will fall into one of two categories:
- small and non-interconnected (SNI) Firms; or
- non-SNI Firms.
SNI Firms are Firms that satisfy all of the following conditions (see Chapter 2.1 of the IFPR Guide):
- does not have permission to deal on own account and/or place investments on a firm commitment basis;
- average assets under management (AUM) < £1.2 billion;
- average client orders handled (COH):
- cash trades < £100 million per day;
- derivative trades < £1 billion per day;
- average assets safeguarded and administered = zero;
- average client money held = zero;
- on- and off-balance sheet total < £100 million; and
- average total annual gross revenue from investment services and/or activities < £30 million.
There are additional SNI tests that apply but these are beyond the scope of the Guide.
SNI status generally means that a Firm can benefit from a lighter prudential treatment under IFPR. In practical terms, SNIs will need to comply with the requirements on:
- own funds, where a SNI is required to meet the higher of PMR and FOR (see Chapter 4.2);
- regulatory reporting (see Chapter 4.4);
- liquidity (see Chapter 5);
- basic remuneration (see Chapter 6,2);
- governance arrangements, including the ICARA process (see Chapter 7); and
- limited disclosures, where a SNI issues AT1 instruments (Note that the FCA is still considering stakeholder feedback on the disclosure requirements following its third IFPR consultation).
Non-SNI Firms are firms that exceed any one of the above SNI thresholds.
Non-SNI Firms will need to comply with all of the above requirements, and, in addition, with requirements on:
- prudential consolidation (see Chapter 3);
- own funds, where a Non-SNI is required to meet the higher of PMR, FOR and the KFR (see Chapter 4.2);
- standard and extended remuneration requirements, with the latter only where a Non-SNI exceeds the £300 million average on- and off-balance sheet quantitative threshold (see Chapter 6.3-6.8);
- governance arrangements, where a Non-SNI is subject to more onerous requirements (see Chapter 7); and
- full disclosures (Note that the FCA is still considering stakeholder feedback on the disclosure requirements following its third IFPR consultation).