IFPR – Paved with good intentions, but unintended consequences for investors utilising Goodwill.

Written by Mike Dalmiras – Consultant

The implementation of the new Investment Firms Prudential Regime (IFPR) is at the top of the UK regulatory agenda for this year. The new regime, which is for firms authorised under the Markets in Financial Instruments Directive (EU/2014/65) (“MiFID”), is set to come into force on 1 January 2022.

The IFPR introduces a single prudential regime for all MiFID investment firms regulated by the FCA and establishes a ‘risk-based approach’ that focuses on capturing any risks arising from the firms’ activities that could pose threats to their clients and the markets in which they operate.

The FCA’s first Consultation Paper (CP20/24) covered the proposed prudential consolidation requirements for FCA investment firm groups. Under the proposed rules, an FCA investment firm group will comprise a UK parent undertaking and its relevant subsidiaries, where at least one entity is an FCA investment firm. The FCA investment firm may be the parent or a subsidiary entity.

One of the unexpected (unintentional?) consequences of this approach is in situations, such as in a management buyout or acquisition, where a “BidCo” or “TopCo” is established to act as a holding company for the target firm.  In some cases, and, in addition to holding the shares in the target firm, the BidCo/TopCo in a buyout/acquisition will be used to house the debt that the acquirer has raised to fund the acquisition.

Under the FCA’s proposed prudential consolidation rules, the assets and liabilities of the parent and the subsidiary company are added together, so any debt that has been used to finance the acquisition is brought into this important calculation.  Furthermore, in many cases, the acquisition price of the target firm will include an amount of “goodwill”, which, of course, is an intangible asset.

The problem materialises when calculating the Common Equity Tier 1 (CET1) Capital needed to meet the minimum financial resource requirement because, under the provisions of MIFIDPRU 3.3.6R, certain items, such as goodwill, will have to be deducted from the groups’ consolidated financial resources in addition to any debt in the group.  Therefore, a situation may arise where despite the FCA regulated firm being fully able to meet its financial resource requirement, the financial resource requirements of the group may not be met under IFPR.

This will be of particular concern to private equity businesses thinking of acquiring financial services firms and to managers of existing businesses considering management buy-outs, and may potentially necessitate changes to the structures of any deals.

A previously straight-forward acquisition, will need to take account of the new prudential rules, due to be introduced in January 2022.

How Complyport can help?

If this article has raised any questions or you think your firm may require assistance assessing the impact of the new IFPR and meeting the new prudential requirements, please contact Jonathan Greenstein now, via jonathan.greenstein@complyport.com, and book in a free consultation.