Implementation of Investment Firms Prudential Regime – Final Policy Statement – PS21/17

The FCA issued its third and final IFPR policy statement (PS21/17) on 26th November 2021. PS21/17 covered a wide range of subjects and tied up some of the loose ends from the earlier consultation papers and policy statements.

The November statement was in response to the consultation paper CP21/26 issued August 2021.The FCA sought to answer concerns and to clarify a wide range of topics, based on responses they received from the firms and the market representations, including :-

Disclosure

The FCA are concerned about the risk of harm to markets and consumers from poorly run firms. The public disclosures will give stakeholders and market participants an insight into how firms are run.

The FCA clarified when investment firms are required to publish their first set of disclosures under the new regime. Furthermore, the FCA provided information on some exemptions from the requirement to disclose quantitative remuneration data, dependent on certain criteria being met.

Own funds – excess drawings by partners and members

The FCA responded to questions regarding an investment firm that is a partnership or LLP, will be required to deduct from own funds drawings from the business made by its partners or members that exceed the profits of the firm.

Technical Standards

Within PS21/17, the FCA expanded on how it intends to apply the on shored UK equivalents of EU-derived Binding Technical Standards (BTS) under the IFPR. These include: –

  • The FCA advised it has deleted some technical standards provisions from the CRR Own Funds Binding Technical Standards (BTS) where they are no longer applicable or relevant under the IFPR.
  • There are some minor changes to the CRR technical standards that relate to market risk. The existing approach to calculating market risk under the UK CRR will continue to apply, when calculating the K‑NPR requirement under IFPR (e.g., closely correlated currencies)
  • In addition, the FCA has removed all references that consider the maximum distributable amounts and buffers under the CRD, as there is no equivalent under the IFPR.

Depositaries

The FCA provided feedback for FCA investment firms that have a Part 4A permission to act as a depository for various types of investment fund, including: –

  • A MiFID investment firm acting as a depositary will be considered as a non‑SNI firm under MIFIDPRU.
  • Any non-MiFID business (including depositary business) must still be considered as part of the firm’s ICARA process.
  • Depositaries are not required to have the ‘dealing on own account’ permission, however,’ they should provide the MiFID ancillary service of ‘safe-keeping and administration of financial instruments’.

UK resolution regime

The FCA expanded on its approach to the UK resolution regime, including: –

  • FCA solo regulated investment firms with an initial capital requirement of €730,000 will be removed from the scope of the UK resolution regime.
  • However, MIFIDPRU 7 includes a requirement for all FCA investment firms to consider recovery planning as an integrated feature of their risk management, as part of their ICARA process.
  • All FCA investment firms are required to undertake wind-down planning, set out at entity-level, including timelines for when and how to execute these plans.

Consequential changes

The FCA tied up some loose ends of various FCA Handbook modules because of implementing the IFPR, including: –

  • Consequential amendments so that they refer to MIFIDPRU or SYSC 19G by deleting provisions that are no longer required and ensuring that interactions between existing provisions and MIFIDPRU work in practice
  • ‘Significant IFPRU firm’ will now be named ‘significant SYSC firm’
  • 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. For this purpose, it is not relevant whether the directorship is held in an entity that pursues a predominantly commercial objective.

Enforcement

The FCA has made some minor amendments to Decision Procedure and Penalties manual (DEPP) and Enforcement Guide (EG) to reflect the additional powers the 2021 FS Act provided them, including investigatory powers and to impose disciplinary sanctions on non‑authorised parent undertakings and persons knowingly concerned in a breach by the parent undertaking. Sanctions include requirements, prohibitions, and financial penalties.

Applications and notifications

The FCA require investment firms to notify them, as soon as they are aware of changes in the formation or whether an existing investment firm group has changed.

  • The FCA’s website contains details of all the new MIFIDPRU application and notification forms. The website will be updated as the implementation of the IFPR regime progresses.
  • FCA Investment firms are required to inform the FCA immediately as soon as there is a group, or the existing group has changed by submitting the group notification form on Connect.

Explanation of how we meet our obligations under section 143H (2) of the Financial Services and Markets Act when making Part 9C prudential rules

Part 9C of FSMA placed a duty on the Authority to make rules to impose prudential requirements on FCA investment firms. Under section 143C (2) of FSMA we were required to address the risks to:

  • consumers arising from FCA investment firms
  • the integrity of the UK financial system arising from FCA investment firms
  • which FCA investment firms are exposed.

Prepare for 1st January 2022 Implementation 

The FCA emphasized that firms falling under IFPR regulations should ensure that they make the necessary preparations to be able to comply with the new requirements.

Firms are reminded, that they should complete and return the set up questionnaire that was sent out on 12 November 2021. This will allow the FCA to schedule the appropriate regulatory returns to each firm and, where appropriate, UK parent entity.

In addition, firms were reminded that they must start collecting data on K-factor metrics that are relevant to the activities they undertake – no later than 1 December 2021.

How can Complyport help?

Complyport has been working hard to ensure that our clients are adequately prepared for the implementation of the IFPR. We want to ensure that our clients will be able to meet the new IFPR requirements; ranging from holding additional liquid assets, increased regulatory capital, and the new governance, remuneration and reporting requirements before the expected date of implementation.

IFPR Impact Assessment

Complyport can help regulated firms meet the requirements of the IFPR on time by undertaking an IFPR Impact Assessment. Following this review, we will provide a report that will act as a roadmap, outlining what needs to be completed and by when to ensure compliance with the new requirements by the commencement date of 1st January 2022.

As part of Complyport’s IFPR Impact Assessment, you will receive:

  • An assessment of the new initial capital requirement and classification system;
  • Analysis of your firm’s new overall capital and liquidity requirements;
  • An assessment of whether adequate own funds are in place to cover the new capital requirements; and
  • A summary of the governance arrangements needed to comply with the new prudential requirements.
  • Review of your firm’s consolidation requirement based on the new prudential regime (i.e. Group Capital Test’)

To learn more, please click the following link or email Jonathan Greenstein on jonathan.greenstein@complyport.co.uk.

About Complyport

Complyport is the City’s market leading consulting firm supporting the UK financial services industry for over 20 years. We specialise in providing Governance, Risk and Compliance services to support the regulated financial services industry to raise standards and thrive.

Complyport advises and assists firms to become authorised and to comply with the rules and requirements of regulators on an ongoing basis. Our vision is to be there for our clients every step of the way, helping them change, grow, and excel through expertise, insight and innovation, and in so doing to become our clients’ most valued supplier and trusted advisor.

We have successfully assisted over 1000 firms to become authorised with the FCA and EU and are providing regulatory support to over 600 regulated firms on an ongoing basis globally. With presence in the UK and EU, as well as via our Associates Network, Complyport can assist firms across multiple jurisdictions.

Complyport’s multidisciplinary consultants possess deep expertise in their field, having acted in FCA skilled person reviews, as expert witnesses in legal cases and as expert investigators for firms or their legal advisers.

Day to day, we conduct audits and reviews of a firm’s products, processes, policies and procedures to identify scope for business, to determine the impact of regulatory developments and to verify compliance with local regulations. Our clients tell us we live our values; we are driven, agile and collaborative.