The FCA issued the IFPR newsletter to firms detailing its observations after the implementation of Investment Firms Prudential Regime (“IFPR”), something that could easily be missed in the barrage of emails we all receive. The newsletter highlights areas that the FCA think require more clarity and this article will highlight some of the most interesting points made in the newsletter. Please read the entire newsletter to gain a full appreciation of all of the issues raised by the FCA.
Investment Firm Groups
The FCA noticed that some confusion has occurred regarding which financial undertakings are within scope when being classified as an investment group. The rules in MIFIDPRU 2.4 are highlighted, which detail how to determine the existence and the content of an investment group.
The definition of an investment firm group (see MIFIDPRU 2.4.2G) covers:
- Parent undertakings incorporated in the UK or has the UK as its principal place of business;
- Subsidiaries of a parent undertaking in the UK (incorporated or principal place of business) and at least one being a MIFIDPRU investment firm; and
- Connected undertakings, which are relevant financial undertakings that are not subsidiaries.
The key information that needs to be identified is whether a MIFIDPRU investment firm forms part of a investment firm group, and then identify all relevant financial undertaking that are either subsidiaries or connected undertakings. Decisions then need to be regarding the use of prudential consolidation detailed in MIFIDPRU 2.5.
Another area the FCA highlighted in this area is its powers, where there are two or more investment firms that are subsidiaries of the same non-UK parent undertaking, to compel the firms to establish parent with a UK based head office.
Misreporting of Common Equity Tier 1 capital (“CET1”)
Issuance of new capital instruments as part of a firm’s CET1 capital requires notification to (i.e. MIFIDPRU 3 Annex 2R) and approval by the FCA if the firm is to consider the capital as qualifying regulatory capital. However, firms could gain deemed permission of existing capital at implementation of IFPR by utilising the appropriate transitional provision in MIFIDPRU TP7.
Consequently, some firms, during the transition, have submitted a TP 7.4R Notification to count existing capital instruments as CET1. However, the FCA has noticed that some of the instruments that have been notified to be included as CET1 under IFPR do not satisfy all the conditions under the UK CRR, as applied through MIFIDPRU 3.3. As such they do not qualify as CET1 and cannot be used as regulatory capital.
Therefore, where firms have relied on MIFIDPRU TP 7, it is recommended that a review of the instruments used to form CET1 capital is conducted as soon as possible. If it is discovered that some capital cannot be considered to be CET1 capital and therefore firms have been misreporting to the FCA, those firms should consider the need to notify the FCA under Principle 11.
Matched Principal Restrictions – Permission to Deal on Own Account
PS21/9 contained detailed discussion about the removal of certain limitations, such as the matched principal broker limitation, upon authorisation, where the limitation determined the prudential category of a firm but where such definition was no longer necessary. However, existing limitations have yet to be removed and are still in force, unless a firm has submitted a Variation of Permission to remove said limitation.
Whilst the limitation is no longer applicable to new authorisations, where it still exists for existing firms, the restriction on business that the limitation imposes is still applicable. The FCA has noted that some firms with an existing matched principal broker limitation are potentially acting outside their permissions by failing to adhere to the conditions imposed by the limitation. These conditions include:
- A firm holding positions for its own account due to failure to match investors orders precisely;
- Total market value of a position being no higher than 15% of the Firm’s initial capital; and
- Positions are incidental and provisional in nature, whilst being strictly limited to the time required to carry out the transaction in question.
It is important that all the above conditions are met for matched principal brokers with the relevant restriction to be compliant. If your firm does hold the matched principal broker limitation it is advised that a review of your business model and activities is carried out to ensure the relevant conditions above are met or to undertake a Variation of Permission to remove the limitation.
K-factors and IFPR Reporting
The FCA has noted that some firms are failing to report the relevant monitoring metrics in forms MIF001 and MIF003. In particular, firms that deal on their own account are classified as non-SNI MIFIDPRU investment firms and, as such, are required to report appropriate K-factors to the FCA using form MIF001 (and MIF003). However, the FCA has observed that some firms are not reporting Dealing on Own Account related K-factors (i.e. K-DTF, K-TCD, K-NPR and K-CON) correctly, even when some K-factors might be zero, and has reminded firms of the necessity to report information accurately.
Moreover, if a firm does not use a relevant permission, it should consider whether it may need to apply to remove it to reflect accurately the nature of its business activity.
How Complyport can help?
At Complyport we can assist you with your prudential needs to ensure that you are compliant with the IFPR and your internal standards are appropriate. We can assist with the:
- Preparation and submission of the MIF00X returns to the FCA via RegData;
- Preparation or review of ICARA documentation to ensure your prudential information reflects your firms requirements;
- Calculation of the Overall Financial Adequacy Rule as per the provisions of MIFIDPRU 7;
- Assessment of the additional harms and wind-down planning including the respective capital requirements allocation; and
- Preparation and submission of the MIF007 ICARA questionnaire.
Our solution delivers audit-ready evidencing of calculations and processes. Complyport provides ongoing support services for validation, testing, and regulatory submissions
Get in Touch
If you have any questions regarding this article or anything else we can assist with please do contact us at thomas.salmon@complyport.co.uk so we can understand how we can assist you.
About Complyport
Complyport is a market-leading consulting firm supporting the UK financial services industry for over 22 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.
Complyport can assist with the preparation of a GAP analysis and impact assessment on the investment firm’s capital adequacy and risk management framework of the Company under the regulatory framework.
We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice.
- Skilled Person Reviews and Regulatory Investigation
- Prudential support, IFPR, ICARA and financial resilience advice
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Contact Thomas Salmon in our Regulatory Solutions team via email at: thomas.salmon@complyport.co.uk to book a free consultation.
