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EXEMPT-CAD FIRMS – ARE YOU READY?

23/08/21

Reading Time: 3 minutes

23 August 2021

Changes are afoot for investment firms, as the FCA strives to strengthen the integrity of financial markets and provide consumers with greater protection and consistency.

In January, new rules are being implemented that will see Markets in Financial Instruments Directive (MiFID) firms reclassified. They are known as the UK Investment Firm Prudential Regime (IFPR).

The old prudential terminology of BiPRU and IFPRU is being scrapped, replaced by the umbrella definition ‘investment firms’ and the existing handbooks will be replaced by a new one, catchily entitled MIFIDPRU.

MiFID firms who fall under the current prudential regime will see an increase in their responsibilities and requirements, however, the biggest changes will be for those who fall outside the full scope of existing regulations, in particular Exempt-CAD firms.

Time to reclassify?

The Exempt-CAD classification was typically applied to firms who, prior to Brexit, held passports into Europe. These passports have ceased, so now would be a good time to review your permissions to see if you can become Article 3 (MiFID exempt). If you meet the requirements, it is worth considering applying for a Variation of Permission to avoid the new legislation.

Historically, Exempt-CAD firms were only subject to the lightest touches of the prudential regime, but they will no longer benefit from this approach. You will be added to the entire population of investment firms and subject to increased capital requirements. The aim of which is to enhance client and counterparty protection.

IFPR will also change the way MiFID authorisation is handled. There will be an additional form in the application pack that asks for information upon which the FCA can assess your suitability for the new regime and ensure you are set up on the correct reporting schedule. As a side point, the regulator is also reviewing its authorisation forms in light of the new rules, so more changes may be forthcoming.

Preparing for the new regime

MiFID firms need to start putting measures in place in advance of the new regime. Here is a quick list of points to consider:

  1. Firm categorisation: What will you be classified as? Small and non-interconnected (SNI), non-SNI or Significant?
  2. Liquidity: The new rules address how much capital and liquidity a firm should hold. You need to assess the impact of these liquid assets requirements using the regime’s quantitative approach and develop policies and procedures for making the required calculation.
  3. Internal Capital and Risk Assessment process (ICARA): Develop a plan to align your current risk management framework to the ICARA process. Establish who will own and be responsible for it and create a methodology to quantify and govern the liquidity requirements detailed above.
  4. Technology and data: What data do you need to meet your requirements? Assess the quality of the data you hold already, identify applicable gaps and work out where the information needed to plug them can be sourced. Establish whether the current systems you have in place are adequate for the data required.
  5. Remuneration: Carry out a gap analysis of current remuneration policies and structures against the new requirements. For example, you need to establish a ratio of fixed and variable pay according to role types, the variable pay approach, financial and non-financial performance assessment, etc.

Don’t delay

The new IFPR might sound complex, but in fact, the FCA’s aim is to simplify the prudential requirements for solo-regulated firms and move away from the current complexities caused by the different firm types. The intention is to minimise the risk of harm to consumers, clients and the market by ensuring a failed firm can wind down in an orderly manner.

If you will be caught by the new regime, it is essential to start gearing up for its implementation as soon as possible. The January deadline will soon be upon us! The best place to start is to review the FCA’s consultation proposals and near-final rules when they are published.

If you want to know more, you can also sign up for the FCA’s email newsletter service by emailing IFPR-newsletter@fca.org.uk with ‘sign up’ in the subject line.

For more information about reclassifying an Exempt-CAD firm or the new IFPR rules, don’t hesitate to contact B-Compliant on (0161) 521 8641, visit: www.b-compliant.co.uk or email: info@b-compliant.co.uk

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