On 23 June, the FCA released an important discussion paper which addresses its intended approach to the new investment firms prudential regime (IFPR), which comprises the UK’s implementation of the EU’s new Investment Firms Regulation and Directive (IFR/IFD). Although the FCA’s discussion paper relates to the introduction of a more bespoke prudential regime for the entire population of investment firms, this alert focuses on the specific impact for BIPRU firms. Please visit reedsmith.com for our other alerts highlighting the specific impact on firms from other current prudential categories.
The new IFPR regime will increase the capital requirements of those MiFID investment firms that are currently categorised as BIPRU firms by the FCA. These are firms which are authorised to execute client orders and/or provide portfolio management services (and may also provide investment advice and/or receive and transmit orders) but do not hold client money or securities. Since January 2014, the FCA has exercised its discretion to exclude these firms from the more onerous CRR/CRD regime and they have been subject instead to the less complex requirements in the recast CAD; they have therefore been treated differently from so called ‘IFPRU firms’. In exercising such discretion, the FCA acknowledged that the CRR/CRD was essentially the EU implementation of Basel III for banks and its application to investment firms conducting less risky activities was a temporary measure pending the outcome of the Commission’s review of the prudential regime for investment firms.
BIPRU firms currently benefit from a base capital requirement of just EUR 50,000 and have a relatively simple variable capital requirement (which is: one quarter of audited annual fixed overheads or, if higher, the sum of the credit risk and market risk calculation). As most BIPRU firms operate on an exclusively agency model, the fixed overheads requirement is usually the relevant variable capital requirement. This capital treatment is not carried forward in the new IFPR regime, which the FCA states is scheduled to apply from Summer 2021 to broadly coincide with the EU’s implementation of the IFR/IFD on 26 June 2021. Such firms will remain subject to a fixed overheads requirement but, in some cases, will be subject to a new and more complex variable capital requirement involving the so-called K-factors.
Some collective portfolio management investment firms (CPMI), such as alternative investment fund managers with top-up permissions to provide MiFID services, are also currently categorised as BIPRU firms. The FCA has stated in its discussion paper on the IFPR that it intends to apply the provisions of the IFPR to CPMIs, in addition to the requirements imposed on them by AIFMD/UCITS Directive.