Investment Firm Prudential Regime (IFPR)
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 2022, 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 terms, BiPRU and IFPRU, are being scrapped and replaced by the umbrella definition ‘investment firms.’ The existing handbooks will also 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 change will be for those who are currently outside the full scope of the existing regulations, in particular Exempt-CAD firms who will find themselves inside IFPR.
To whom does the new regime apply?
IFPR will apply to MiFID investment firms authorised and regulated by the FCA (those currently categorised as BiPRU, IFPRU and Exempt-CAD), Collective Portfolio Management Investment Firms (CPMIs) and regulated and unregulated holding companies of groups that contain any of the aforementioned investment firm types.
Why are the rules changing?
The FCA’s aim is to simplify the current prudential requirements for solo-regulated firms and move away from the complexities of having different regimes applying to different types of firms.
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. This will trigger a move from the current regime, whereby firms are focused on the potential harms they face.
The FCA also believes that IFPR will ease barriers to entry and facilitate better competition across the investment market.
Preparing for the new regime
MiFID firms need to start putting measures in place in advance of January’s switch to IFPR. Here is a quick list of points to consider:
- Firm categorisation: What will you be classified as? Small and non-interconnected (SNI), non-SNI or Significant?
- 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.
- 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.
- 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 to plug them can be sourced. Establish whether the current systems you have in place are adequate for the data required.
- Renumeration: 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.
Applications and notifications
IFPR will also change the process around MiFID authorisation applications. There will be an additional document in the application pack called the MIFIDPRU supplement form, which requires you to provide information upon which the FCA can assess suitability for the IFPR regime and ensure the firm is set up on the correct reporting schedule.
The FCA is currently reviewing its authorisation forms to reflect the new rules, so more changes might be forthcoming.
Time to reclassify?
The Exempt-CAD classification was typically applied to firms who, prior to Brexit, held passports into Europe. They have now ceased, so it is a good time to review your permissions and consider becoming Article 3 (MiFID exempt). If you meet the requirements, it is worth 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 this will no longer be the case. You will be added to the entire population of investment firms and bound by increased capital requirements, with a view to enhancing client and counterparty protection.
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 to the FCA’s email newsletter service by emailing [email protected] with ‘sign up’ in the subject line.
Expert help from B-Compliant
We have created an IFPR toolkit to help firms implement the new legislation. It provides all the information you need to understand the rules and consider how they will affect your firm. It also includes the following template documents and instructions to get you ready for January 1:
- A one-hour video tutorial explaining the new regime
- IFPR whitepaper, offering further insight into the regime, written in plain English
- ICARA template document to provide a good starting point for building your ICARA.
- ICARA master worksheet including calculators for:
- Breakdown of Own Funds
- T-KFR (Exempt CAD)
- T-FOR & KFR (BIPRU & IFPRU)
- Liquid Assets
- Concentration Risk
- Stress Testing for own funds & liquid assets