FCA has published a discussion paper on a bespoke prudential regime for investment firms. FCA has long wanted to introduce a better regime for firms, but has been constrained largely by MiFID.
The EU is now introducing changes to the regime for MiFID investment firms, but the changes will take effect after the end of the Transitional Period, so FCA is consulting on its own rules. The changes are largely aimed at firms that are currently MiFID firms. The UK supported the changes the EU is making in its Investment Firms Directive and Regulation, and so the proposed changes are intended to have a similar outcome while bearing in mind the specifics of the UK market. The paper discusses the IFD/IFR changes and the UK take on them.
FCA proposes to no longer apply the detailed range of prudential categories it currently uses, and instead will refer to all firms as “investment firms”, with smaller firms falling within a new banner of “small and non-interconnected investment firms” (SNIs). The paper goes into detail on the relevant requirements applying to the various types of firm.
The key changes the regime would introduce are:
- new levels of initial capital – under the IFD/IFR these are to be €75K, €150K and €750K;
- a new definition of capital;
- new own fund requirements – firms will need a Permanent Minimum Requirement, a Fixed Overhead Requirement and some will also need an activity based K-factor capital requirement;
- liquidity requirements for investment firms, based on holding liquid assets equivalent to at least one third of the fixed overheads requirement;
- the potential for an individual firm requirement following a supervisory review;
- provisions on group risk and the possible application of a group solvency test;
- requirements on calculation of concentration risk;
- new remuneration and disclosure requirements, so that firms above a certain size will need a clearly documented remuneration policy, set an appropriate ratio between variable and fixed components of total remuneration and meet requirements around the structure of variable remuneration. They will also have to publish information on remuneration together with information on risk management, governance, own funds and investment policy, and, in due course, ESG.
The changes would operate in tandem with FCA’s general expectations on solo-regulated firms to manage their resilience.
The paper explains the rationale behind changes, seeks comments on the detail and sets out the proposed timetable for implementation – which will apply the new capital requirements in gradual increases up to June 2025.
FCA asks for comment by 25 September.