The Investment Firm Prudential Regime

July 5, 2021


The Financial Conduct Authority (FCA) is in the process of introducing the new Investment Fund Prudential Regime (IFPR), a single streamlined and simplified prudential regime for FCA authorised MiFID investment firms from 1 January 2022. The IFPR will be greatly aligned with the EU Investment Firms Regulations ((EU) 2019/2033) and the Investment Firms Directive ((EU) 2019/2034), which took effect from 26 June 2021 for EU Investment firms.

The new rules will make significant changes to the way UK investment firms will be regulated for prudential purposes and the remuneration rules to which those firms are subject. Currently, investment firms have to comply with a prudential regime which has been designed primarily for credit institutions. The new rules will focus on capturing risks that arise from the investment firm’s activities which could pose threats to their clients and the market in which they operate.

In the consultation papers, FCA has indicated that the current regime is not designed to address the potential harm posed by FCA investment firms. The new regime, tailored specifically for investment firms, better aligns the standards and rules which apply with the business model of investment firms as well as the possible sources of possible harm.

In this regard, the FCA published a discussion paper (DP 20/2) in June 2020 followed by the release of the first consultation paper CP 20/24 in December 2020 and the second consultation paper CP 21/7 in April 2021. The third and final consultation paper is expected to be published in the third quarter of this year.

Broadly speaking, CP 20/2 covers the own fund requirements, prudential consolidation, concentration risk monitoring as well as reporting; CP 21/7 covers remuneration, liquidity, risk management and governance and the ICARA and SREP. The last consultation paper is expected to cover disclosures.

Under the IFPR, FCA authorised investment firms are divided into small and non-interconnected investment firms (SNI) and others (Non-SNI). SNI firms will be subject to less onerous prudential requirements in respect of reporting, disclosure and remuneration whereas the Non-SNI firms will be subject to the full requirements under IFPR.

This article briefly discusses the governance, remuneration and reporting issues under the new regime. We aim to provide a more detailed analysis on the remuneration aspects under the new regime next month.

Governance

As part of the new regime, investment firms should maintain

  • clear organisational structures with well-defined transparent and consistent lines of responsibility,
  • effective process to identify, manage, monitor and report risks that they are or might be exposed to, or pose or might pose to others
  • adequate internal control mechanism, including sound administration and accounting procedures

Firms will also need to establish committees depending on their categorisation to support management bodies in their supervisory functions. This responsibility lies with the firms’ senior management who would need to fulfil their senior management functions.

Remuneration

CP21/7 sets out the proposed new single remuneration code for FCA investment firms (MIFIDPRU Remuneration Code in SYSC 19G) effective from 1 January 2022. This new regime will replace the IFPRU Remuneration Code (SYSC 19A) and the BIPRU Remuneration Code (SYSC 19C).

In brief, the MIFIDPRU Remuneration Code provides a set of remuneration requirements (basic, standard, and extended) that investment firms will have to apply based on the risk of harm they pose to customers and the markets.

CP21/7 proposes that SNI firms should comply with the ‘basis remuneration requirements’. Non-SNIs must comply with the standard remuneration requirements, which include identifying material risk takers, setting an appropriate ratio between variable and fixed remuneration as well applying appropriate risk adjustment (malus and clawback) terms to awards of variable remuneration. For large Non-SNIs, who would need to establish a remuneration committee, the extended remuneration rules will apply, including more stringent measures including deferral, payment in instruments, retention and treatment of discretionary pension benefits.

Reporting

Under IFFR, the reporting requirements of investment firms will be significantly reduced. Firms will have to submit a single suite of reporting forms. MIFIDPRU Remuneration Report (MIF008) will replace the existing Remuneration Benchmarking Information Report (REP004) and High Earners Report (REP005). The new reports should be submitted annually within 4 months of a firm’s accounting reference date. All investment firms should complete and report the liquid asset reporting form (MIF002) which should be submitted quarterly, and the ICARA questionnaire (MIF007), which should be submitted annually and will replace the current FSA019.

For further information contact JD Ghosh.

Back to News

Registered Address: 10 Queen Street Place, London, EC4R 1AG | Company Registration No: 1983794 | VAT Registration No: 577735784 | Copyright 2021 © MM&K. All Rights Reserved | Site by: Treacle