In December 2022, the FCA published CP22/26 Quarterly Consultation which covered a number of proposed changes to specific areas of regulation. However, one of the most interesting elements came within Chapter 5 relating to MIFIDPRU. This article aims to provide some clarity on the regulatory changes and how the regulator proposes to steer direction within this area.
Changes to MIFIDPRU
There are a number of minor clarificatory amendments, but the main amendments relate to the following issues:
- SNI/Non-SNI classification
- Prudential consolidation
Updates to SNI and non SNI classifications
The FCA intends to amend MIFIDPRU 1.2.10R to clarify the conditions an investment firm must assess on a combined basis when part of a group to determine if they are classified as an SNI firm or not. This clarifies that the Assets Under Management (“AUM”) metric will only need to be considered if the firm also manages assets. A similar clarification is proposed for the Client Orders Handled (“COH”) metric. These clarifications mean that firms not themselves subject to the AUM or COH metrics will not be classified as non-SNI investment firms where the thresholds for AUM or COH are triggered by other investment firms in the same group that exceed the respective thresholds. In addition, the FCA provided further information regarding the appropriate methodology for calculation of the potential future exposure via the derivative netting ratio approach as part of the K-TCD requirement for investment firms.
Changes to the rules on calculation of fixed overhead requirement on a group basis
There will also be a new point added to MIFIDPRU 2.5.25R (point 2c) for a group calculating its fixed overheads requirement on a consolidated basis. If the consolidated annual financial statements of a group include entities that are not also part of the investment firm group, the group can revert to the MIFIDPRU calculation method set out in MIFIDPRU2.5.25R(2)(b), resulting in the fixed overheads requirement not being larger than intended.
Changes to Group Capital Test reporting
An amendment proposition has also been made to MIFIDPRU 2.6.11R, which sets out that entities may submit Group Capital Test reports (MIF006). This will allow a MIFIDPRU investment firm (that is not a parent undertaking) that is part of the same investment group to submit the MIF006 on behalf of the Group Capital Test parent undertaking. This will result in a reduction in the administrative burden on some investment groups and will also be reflected in MIFIDPRU 9.4.5G.
Reduction of Common Equity Tier 1 for LLPs
MIFIDPRU 3.3.16R(2) and MIFIDPRU 3.3.17R(2) are proposed to be amended to allow a reduction of common equity tier 1 (CET1) own funds instruments where the FCA has given permission in line with MIFIDPRU 3.6.2R or deemed to have given permission in line with MIFIDPRU 3.6.3R or MIFIDPRU 3.6.4R. This will enable capital contributed by partners or by members of limited liability partnerships to be reduced under the same conditions as can the CET1 in joint stock companies that issue own funds instruments.
Liquid Asset Calculation
In order to clarify the extent to which a firm can count on liquid assets in non-sterling currency towards basic liquid asset requirements, MIFIDPRU 6.3.4R(1) will be amended to confirm that the liquid assets listed may be treated as ‘core liquid assets’ as intended at the outset. There will also be an amendment to MIFIDPRU 6.3.4R(2) to explain that the proportion of non-sterling assets held to meet the basic liquid asset requirement cannot be more than the proportion of fixed overheads or guarantees to clients that the firm has in the same currency.
Non-core liquid assets
For the purpose of the ICARA process, MIFIDPRU 7.7.8R(1) will be amended to confirm the original intention that short-term non-sterling deposits at a UK bank can be treated as non-core liquid assets. Previously, the rules indicated that only short-term non-sterling deposits at a non-UK bank could meet this requirement. This expands the list of non-core liquid assets available for firms. This will also mean that short-term non-sterling deposits at a UK bank are included in the list of liquid assets with a haircut of 0%.
Reporting
Due to an oversight when implementing the IFPR, the FCA inadvertently deleted the requirement to complete FSA038 (volumes and types of business) from RAG group 4 in SUP 16.12. This will be reinstated as part of this consultation.
The FCA is proposing a series of amendments to the guidance for completion of various financial returns including MIF001 (own funds), MIF002 (liquid assets), MIF007 (ICARA) and, for firms subject to IPRU(INV) Chapter 3, FSA033 (capital adequacy).
How can Complyport help?
Complyport’s MIFIDPRU Support Team can help regulated firms with classification and reporting needs. If this article has raised any questions about the upcoming changes to MIFIDPRU permissions, or you think your firm may require assistance, contact Jan Hagen via jan.hagen@complyport.co.uk to book a free consultation.
About Complyport
Complyport is a 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. 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.
We specialise in supporting the UK financial services industry with compliance guidance, advice and best practice including support with:
- MIFIDPRU permissions
- Prudential support, IFPR, ICARA and financial resilience advice
- Consumer Duty implementation advice
- Cryptoasset registration
- Financial Promotions guidance, support, and management software solutions
- Operational resilience & Cybersecurity advice
- CASS advice and protections of client assets
- Compliance managed services and resourcing compliance personnel
- Financial Crime and Forensics
- Skilled Person Reviews and Regulatory Investigation
Contact our Head of Regulatory Business Solutions, Jan Hagen via email at: jan.hagen@complyport.co.uk to book a free consultation.
