Impact of CRD IV on Investment Firms

The FCA has published its 400+ page consultation paper on CRD IV: CP13/6 “CRD IV for investment firms”. The CRD comes into effect on 1 January 2014.

The paper advises that there are around 2,400 firms regulated by the FCA which are potentially subject to CRD IV – the table on page 63 of CP13/6 provides an interesting breakdown of the firms both by prudential status and by activity – although perhaps 1,000 or so of these firms may benefit from a discretion granted to Competent Authorities (see below).

As is probably known, CRD IV is aimed at banks even though parts of it apply to investment firms. With this in mind it will be reassuring for firms to know that the European Commission is required to review the appropriateness of the whole prudential regime for all firms carrying out MiFID investment activities by the end of 2015. The FCA is adopting a pragmatic approach in that it intends to “do the legal minimum and, where possible, not seek to change current policy”.

CRD IV is actually comprised of a Directive (CRD) and a Regulation (CRR). In keeping with previous approaches, the CP only covers requirements relating to the CRD rather than the CRR (save where it relates to e.g. a national derogation) as the requirements in the latter are directly applicable and take effect in all Member States without the need to transpose into national law. As such the applicable rules and guidance will consist of:

  • CRR
  • Technical standard from the European Banking Authority
  • FCA Handbook

The FCA Handbook will contain a new prudential sourcebook for “investment firms” (IFPRU) as well as other changes e.g. to SYSC to ensure consistency with CRD IV. IFPRU will replace GENPRU and BIPRU for IFPRU investment firms (although, perhaps confusingly, BIPRU 12 ‘liquidity standards’ will apply to an IFPRU investment firm).

IFPRU will also apply to a collective portfolio management investment firm, a term which includes both a UCITS investment firm and a full-scope UK AIFM that also undertakes permitted additional MiFID type activities under the AIFMD, but generally only to the extent of its designated investment business i.e. excluding managing a UCITS and managing an AIF (however the ICAAP will apply to the whole of its business).

The remuneration provisions in CRD III, which are reflected in SYSC 19A (Remuneration Code), are largely carried over to CRD IV but with one important change: a 1:1 limit on bonuses (“the variable component shall not exceed 100% of the fixed component..”). The use and extent of national discretions, and proportionality, is currently under consideration by the FCA and the Treasury and for now is not being consulted on in CP13/6.

The definition of what constitutes an investment firm will change. Although the MiFID definition remains as the starting point, excluded from the definition are those firms that do not provide safekeeping and administration nor hold client money or assets and that provide only one or more of:

  • reception and transmission of orders (RTO);
  • investment advice;
  • portfolio management; and/or
  • execution of client orders.

It will be noted the similarity with the current recast CAD carve-out for exempt CAD firms save that portfolio management and execution has been added to the list. Such firms will not be an ‘IFPRU investment firm’ and hence the IFPRU prudential sourcebook will not be relevant.

Current exempt CAD firms (limited to RTO and investment advice) will continue to be treated as exempt CAD firms which means that a new prudential regime will apply to those firms that undertake only portfolio management and/or execution as they are neither IFPRU investment firms nor exempt CAD firms.

At the risk of causing confusion the FCA has created a new prudential category for such firms; a firm that only executes orders or manages will be a ‘BIPRU firm’ and will be subject to the (amended) GENPRU and BIPRU sourcebooks. It is worth reminding ourselves that the changes above, including to what is an ‘investment firm’, mean that the definition of what is a ‘BIPRU firm’ has also changed and that most firms currently classified as BIPRU firms will become IFPRU firms. The effect of CRR Article 95 means that the new BIPRU firms will be subject to a ‘higher of’ own funds requirement that is similar to current Pillar 1 requirements save for a stricter definition of ‘own funds’. Another change of note is that the FCA’s current ‘simplified’ approach to calculating credit risk will not be available. The paper tells us that no other parts of the CRD IV requirements would apply.

Tucked away in CRR Article 95(2) is a discretion afforded to competent authorities that the new BIPRU firms can follow the own funds requirements that are in force as at 31 December 2013; the FCA proposes to exercise this discretion – and will extend this to include current Pillar 2, Pillar 3 and Remuneration Code requirements – which will be reflected in the new BIPRU sourcebook.

The FCA invites comments on CP13/6 by 30 September; the intention is to publish final rules before 1 January 2014.

For the avoidance of doubt the PRA is publishing a separate CP on CRD IV as it applies to its authorised firms.

Complyport will be keeping its clients updated on CRD IV progress and implementation.