The FCA has published its third Consultation Paper on the implementation of the Investment Firms Prudential Regime (IFPR) (CP21/26), which will take effect from January 2022. CP21/26 is the third and last in the expected series of consultation papers that sets out the FCA’s proposed rules to introduce the IFPR.
The proposals of the CP should be read in conjunction with two Policy Statements, PS21/6 and PS21/9, that the FCA has already issued. The FCA is planning to publish final rules for the whole regime in autumn 2021. The main topics covered in CP21/26 is disclosures around remuneration, risk management, own funds, and own funds requirements. The FCA considers that public disclosures are a core part of market discipline and provide essential information that allow markets to work efficiently.
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When and how should firms disclose
The FCA proposes that disclosures should be published annually, at the same time as their financial statements, in an easily found and accessible part of firms’ websites (readily searchable or clearly signposted). Firms that do not have websites would still be required to make the disclosures freely available (as part of their annual report or investor brochure). The information disclosed should be easily understandable and firms should use clear language and supportive diagrams where needed. Whilst disclosures are expected annually, if businesses undergo significant changes, firms should consider updating their disclosures more frequently.
Risk Management disclosures
All non-SNIs (including SNI firms that issue additional tier 1 instruments), should disclose their risk management objectives and policies for the own funds requirements, concentration risk, and liquidity categories of risk.
The FCA does not provide any templates but proposes that the disclosures include a summary of the relevant potential for harm posed by the firm’s business strategy and a summary of the strategies and processes used to manage these categories of risk and how this helps reduce the potential for harm.
Own funds and own funds requirements
Firms will be required to disclose details of the composition of own funds, and a reconciliation of own funds with the capital in the firm’s audited accounts. Also, it is proposed that firms should describe the main features of the own funds instruments that they have issued (including but not limited to the type of instrument, the amount recognised in regulatory capital, perpetuity, etc). Unlike for risk management disclosure, the FCA has proposed a template for disclosing own funds to allow consistency and comparability.
Firms will also be expected to disclose their fixed overheads requirement, their K-factor requirement (for non-SNIs), and a summary of assessing if their own funds are adequate to support their ongoing operations and wind down process if needed. For own funds requirements disclosures, the FCA is not proposing a template.
Additionally, firms will be required to disclose a summary of their approach to complying with the overall financial adequacy rule (part of the ICARA process) but not any of the relevant amounts required for ongoing operations or the wind down of the firm.
Investment policy
The FCA proposes disclosures for firms’ investment policy for certain investments, primarily shares traded on regulated markets where the firm holds more than 5% of the voting rights, unless the shareholders represented by the firm at the shareholders’ meeting do not authorise the firm to vote on their behalf. The FCA proposes a template for investment policy disclosures.
Governance Arrangements
All non-SNI firms are proposed to publish a summary of how they comply with the requirements of SYSC 4.3A.1R, which ensures that the management body defines, oversees and is accountable for the implementation of governance arrangements that ensure effective and prudent management of the firm.
Risk Committees
It was confirmed in PS21/9 that the largest non-SNI firms will have to establish risk committees at individual entity levels. Those firms must disclose the following:
- whether it has a risk committee;
- whether it is required to establish a risk committee under MIFIDPRU 7.3; and,
- whether it has any waiver or modification of the rule requiring a risk committee, if applicable
Directorships
The FCA proposes that all non-SNI firms must disclose the number of separate directorships held by each member of the management body, broken down into executive and non-executive directorships. Moreover, the FCA proposes a change of the name ‘significant IFPRU firm’ to ‘significant SYSC firm’, but this does not change the substantive thresholds included under the term.
Diversity Policy
Earlier this summer, the FCA published a Discussion Paper (DP21/2) regarding diversity and inclusion in the financial services sector. Given the importance of the topic, the FCA proposes that non-SNI firms must disclose their approach to diversity on the management body. In essence, firms must show the objectives of the diversity policy and the targets, as well as if those objectives have been met and to what extent.
Remuneration
Disclosure obligations are defined as either Qualitative or Quantitative disclosures.
Qualitative Disclosures
Under its qualitative approach, the FCA proposes that MIFIDPRU investment firms, including SNI firms, must disclose a summary of:
- Their approach to remuneration for all staff;
- Their objectives of its financial incentives; and,
- The decision-making procedures and governance around the development of its remuneration policies and practices.
Firms will be required to disclose the key characteristics of their remuneration policies and practices. More specifically, the consultation paper proposes the minimum disclosure requirements for three categories of FCA in-scope firms – all FCA investment firms (e.g. including SNIs), non-SNIs, and the largest non-SNIs. The requirements are cumulative i.e. non-SNIs will be required to comply with the general requirements of all in-scope firms, as well as their own requirements, and the largest non-SNIs will have to comply with requirements for all in-scope firms and non-SNI firms as well as their own.
Disclosures applicable to all FCA investment firms include the components of remuneration and the categorisation of each as fixed or variable and a summary of financial and non-financial performance criteria used to assess the performance of the firm, business units and individuals.
SNIs will be required to provide details on the framework and criteria used for risk adjustment of remuneration. This will include the following:
- current and future risks
- how risks are utilised in adjusting remuneration
- how and if malus and clawback are applied
Largest non-SNI firms will have to disclose the deferral and vesting policy, including at least:
- the proportion of variable remuneration deferred
- deferral period
- retention period
- vesting schedule
- explanation of the rationale for these approaches
The largest non-SNI firms will also have to disclose the description of the different forms in which fixed and variable remuneration are paid.
There are also requirements for non-SNI firms relating to disclosure of material risk takers (MRTs) but the FCA has confirmed that, while firms must set appropriate ratios between fixed and variable remuneration, there will be no disclosure requirements for this element of remuneration.
Quantitative Disclosures
These disclosures relate to the three firm types set out under Qualitative Disclosures with the same cumulative approach also adopted.
All firms will be required to provide details of the total remuneration paid to all staff split between fixed and variable remuneration.
Non-SNIs will additionally split total remuneration between (i) senior management, (ii) other MRTs and (iii) other staff, as well as providing more analysis for senior managers and other MRTs.
The largest non-SNIs will, in addition to the above, be required to disclose details of exemptions under SYSC 19G.5.9R, greater detail on the composition of remuneration and the level of deferred remuneration.
And Finally…..
Whilst the main topic of discussion in this CP has been disclosure requirements, other areas included within the consultation relate to the capital rules that apply to depositaries (investment firms that have Part IV permission to act as depositories) to make them fall under the MIFIDPRU rules and not CRR (including relaxing the eligibility criteria to be a depositary), the treatment of excess drawings in partnerships (excess drawings are to be deducted from CET1 capital) and the onshoring of technical standards.
How Complyport can help?
Click HERE to view Complyport’s IFPR Implementation Support services page.
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 Jan Hagen via jan.hagen@complyport.co.uk, and book in a free consultation.
