3 September 2021
The New Prudential Regime – IFPR
The new IFPR rules come into effect from January 2022 and will have a significant impact on almost all investment firms. Policy Statements have been released covering the implementation of the new rules and can be found here:
Implementation of Investment Firms Prudential Regime_July 2021
Implementation of Investment Firms Prudential Regime _June 2021
Background to the New Prudential Regime
The Investment Firm Prudential Regime (IFPR) has been in the pipeline for several years and has been subject to a number of delays but it is finally being implemented from January 2022.
The aim of the new rules is to simplify the existing handbook and bring all investment firms under a common standard, rather than the current varying rules for BIPRU, IFPRU, and Exempt-CAD firms.
Some of the largest changes will be for Exempt-CAD firms, who have been used to relatively light touch regulation. They now have a number of new requirements in terms of capital to hold and documentation to produce.
Preparations
Most firms will have begun this process already and many will have received a questionnaire from the FCA asking them how the IFPR will affect them.
The first thing to do will be to establish which section of the IFPR applies to your firm. The new rules will be covered by a new MIFIDPRU handbook and this only applies to MIFID-authorised firms. Article 3-exempt firms for example are outside the scope of the changes.
Firms will either be ‘small and non-interconnected firms’ (SNIs) if they don’t hold client money, and have activities which sit below certain thresholds. Other firms are non-SNIs (with large systemic firms subject to further requirements).
Capital requirements
The base requirements are increasing for all firms, but Exempt-CAD firms (who may previously have had a requirement of £5k as relied upon PII to reduce their requirement) will feel a significant change as they are no longer be able to rely on this.
These firms may also be calculating their fixed overhead requirement (FOR) for the first time. SNIs will be subject to a capital requirement of the higher base of £75k and their FOR.
Note the rates for all firms are changing and are no longer in Euros:
| Existing | New |
| €730k | £750k |
| €125k | £150k |
| €50k | £75k |
Transitional reliefs are available but firms which are subject to a large increase in capital will need to plan how to increase their capital base. Exempt-CAD firms have five years under transitional rules to meet these requirements.
K-factors
In addition to holding the higher of base and FOR, non-SNIs will also be subject to K-Factor requirements which are based upon multiples of various factors, and will have to hold capital at the higher of these three calculations.
The K-factors are calculated as follows:
| Area | Description | Factor |
| Risk to Customer | Assets Under Management | 0.02% |
| Client Money Held | 0.4% / 0.5% (segregated vs non-segregated) | |
| Assets safeguarded and administered | 0.04% | |
| Customer Orders Handled (Cash) | 0.10% | |
| Customer Order Handled (derivatives) | 0.01% | |
| Risk to Market | Net Position Risk | This is calculated under existing CRR rules |
| Risk to Firm | Trading Counterparty Default | Based on simplified counterparty credit risk |
| Daily Trade Flow (Cash trades) | 0.10% | |
| Daily Trade Flow (Derivative Trades) | 0.01% | |
| Concentration Risk | Detailed guidance | |
| TOTAL | Sum of the above = K-Factor formula |
The calculations are performed on a rolling basis, and there are specific rules for each one. Firms may therefore need to adapt their reporting systems to ensure they can extract the data they need in order to accurately calculate K-factors each day.
Consolidation groups
Some firms will need to be part of a consolidation group for the first time for reporting purposes. Under these rules consolidated capital and consolidated capital requirements are required to be reported also.
There is an exemption to group capital reporting called the Group Capital Test (GCT), although an application is needed to the FCA to take advantage of this. Firms should think about that now and apply as soon as possible.
Those who qualify for the use of the GCT have a transitional period of 2 years to use it while the FCA reviews their application.
ICAAP vs ICARA
Larger regulated firms will have been very familiar with the requirement to prepare an ICAAP (Internal Capital Adequacy Assessment Process) document. The high-level purpose of an ICAAP is to identify any further capital which should be held by the firm in excess of the capital required under Pillar 1 rules.
ICAAPs are being replaced by the ICARA (Internal Capital Adequacy and Risk Assessment) process, but importantly the ICARA will apply to all investment firms. Exempt-CAD firms previously did not need to produce an ICAAP, but will now be in scope for ICARA and it is a significant process to both undertake and document.
As outlined in consultation paper CP21/7 The ICARA should:
- Identify and monitor harms: Operate systems and controls to identify and monitor all material potential harm.
- Undertake harm mitigation: Consider and put in place appropriate financial and non‑financial mitigants to minimise the likelihood of crystallisation and/or impact of the material harm.
- Undertake business model assessment, planning and forecasting: Forecasting capital and liquidity needs, both on an ongoing basis and were they to have to wind-down. This must include expected- and stressed-scenarios.
- Undertake recovery action planning: Determine appropriate and credible recovery actions to restore own funds or liquid resources where there is a risk of breaching threshold requirements tied to specific intervention points.
- Undertake wind‑down planning: Set out at entity-level credible wind-down plans, including timelines for when and how to execute these plans.
- Assess the adequacy of own funds and liquidity requirements: Where, in the absence of adequately mitigating risks through systems and controls, the FCA investment firm assesses that additional own funds and liquid assets are required to cover the risk.
Other requirements
The IFPR also introduces liquidity requirements for all firms, and they will be required to hold at least one month of fixed overheads in liquid assets.
All firms will be subject to remuneration requirements which vary based upon the firm’s categorisation. This process is more onerous for non-SNIs and the rules, especially around fixed vs variable remuneration.
Firms who were used to reporting COREP returns in XBRL format will be relieved to hear reporting will no longer be in XBRL format but directly through RegData.
CAN WE HELP?
If you would like to discuss any of these developments or have questions for our specialist Finance Services team, please do get in touch.
Specific advice should be obtained before taking action, or refraining from taking action, in relation to this summary. If you would like advice or further information, please speak to your usual Shipleys contact.
Copyright © Shipleys LLP 2021
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