* A key point to note is that the new rules will now be contained in a new FCA Handbook Sourcebook called MIFIDPRU which will replace BIPRU, IFPRU and some parts of GENPRU.

Rules relating to the categorisation of investment firms (whether or not they are Small and Non-interconnected firms (SNIs)), the own funds requirements methodology including some K-factors (K-NPR, K-CMG, K-DTF and K-TCD), capital classes for both SNIs and Non-SNIs and how firms will need to monitor concentration risk and K-CON (where applicable) are the same as published within the Discussion Paper (DP20/2) in July 2020. (More details on this can be found in our previous articles included at the end of this insight.) 

The permanent minimum capital requirement has now been fixed in GBP as £75,000, £150,000 and £750,000 as opposed to the original corresponding equivalent amounts in Euros. 

Prudential consolidation and the Group Capital Test (GCT)

The CP provides further clarification of a consolidated situation for an FCA investment firm. The FCA have defined an FCA investment firm group as a group that includes a UK parent undertaking and subsidiaries where at least one entity is an FCA investment firm. Where this situation arises, the FCA proposes that the investment firm group should be treated as if it were a single FCA investment firm.

The default position is that such investment firm groups would need to apply prudential consolidation with the following obligations on a consolidated basis:

• composition of own funds
• own funds requirements (consolidated PMR, FOR and KFR)
• concentration risk
• liquidity
• disclosure
• reporting

The FCA will consult on how the ‘Internal Capital Adequacy and Risk Assessment’ (ICARA) process should be implemented on a consolidated basis in the next consultation paper.

As an alternative to prudential consolidation, investment firm groups that have a ‘sufficiently simple’ structure will be able to use the Group Capital Test (GCT). Firms will need to apply to the FCA for permission and must also ensure that there’s no significant harm to others by not applying prudential consolidation. The CP sets out several conditions that firms must meet in order to qualify for the application to use the GCT.

Transitional provisions

The CP provides for generous transitional provisions which allow firms up to five years from 1 January 2022 to fully comply with the regime. This will allow firms to build up their capital gradually to meet the increased requirements. However, firms will still be required to calculate the impact on a continuing basis to meet requirements relating to on-going monitoring as well as thresholds-reporting. 

BIPRU and IFPRU firms will be able to effectively cap the Fixed Overheads Requirement (FOR) or the K-factor requirement (KFR) at twice their current own funds requirement calculated under GENPRU or the UK CRR. 

Exempt CAD firms, who currently have a capital requirement of €50,000, are expected to see a big increase in their capital requirement based on the FOR or potentially the KFR and the applicable transitional rules would be very helpful. 

Regulatory reporting

The FCA are proposing a single suite of regulatory reporting for all FCA investment firms. Currently, firms have to complete different sets of returns depending on their category and which prudential sourcebook they fall under. 

Regulatory reporting frequency for financial and capital adequacy returns has been set as ‘quarterly’ for all firms. This is one of the biggest deviations so far from the original legislation of the EU’s ‘Investment Firm Directive and Regulation’ which stipulated an annual reporting frequency for SNI firms. COREP reports, FSA001 and FSA002 will be retired by the FCA and replaced with FSA029, FSA030 and a series of new or tailored regulatory returns as follows:

1.        MIF001 – Capital
2.       MIF002 – Liquidity
3.       MIF003 – Monitoring metrics
4.       MIF004 – Non-K-CON concentration risk monitoring (N/A to SNI firms)
5.       MIF005 – K-CON – concentration risk reporting where the ‘soft limit’ has been exceeded (N/A to SNI firms)
6.        MIF006 – GCT reporting

The above list is expected to get longer once the FCA publishes the remaining rules on regulatory reporting in the second consultation paper. 

It is also worth noting that although the number of data fields within the returns appear to be lower prima facie, far more complex calculations are required in order to complete the returns accurately. Also, the deadline is more stringent and for some UK based firms, the frequency increases from half-yearly to a quarterly basis. Further, if a firm’s accounting reference date is not aligned with the calendar quarters, firms may face the additional burden of having to report returns for different periods.  

Where applicable, firms will need to also report on a consolidated basis. If a firm is subject to prudential consolidation, firms will need to submit most returns on a consolidated basis. However, if the Group Capital Test applies to an investment firm group, each UK parent in the group must submit a separate return explaining how it complies with the relevant requirements. 

Looking forward

Despite the decisive tone of the rules being consulted on within this CP, there are a number of important outstanding areas which will be clarified in the second round of consultation. Of most significance are rules relating to fixed overheads requirement calculation and monitoring, liquidity, application of Pillar 2 assessment/ICARA and risk management process, additional regulatory reporting, remaining K-factors (K-AUM, K-ASA, K-CMH and K-COH) remuneration requirements and any specific gold-plating for ‘Collective Portfolio Management Investment’ (CPMI) firms. These collectively with the first CP will form the foundation for the IFPR regime in the UK. The second CP will also open the window for firms to consider the new permission and application forms available to them for the various rules of the regime.

The FCA have indicated that the second CP will be published at the start of Q2 and that should prompt firms to accelerate their preparation in order to be compliant by 1 January 2022.

Given that the implementation date is now less than a year away, firms should consider carrying out impact assessments as soon as possible.