Investment Firms Prudential Regime

Consultation paper (CP) 21/26 and Policy Statement (PS) 21/9 have now been issued by the FCA. This is the third consultation paper and the second policy statement on IFPR.

• CP 21/26 covers the remaining aspects of IFPR including disclosure, applications and notifications, technical standards and depositaries.
• PS 21/9 contains the near final rules as well as the FCA’s response to feedback received to CP 21/7. Comments are requested by 17 September 2021.

IFPR is aimed at protecting clients, consumers and the wider market of FCA investment firms and will seek to shield them from any potential harmful impact of the firms’ activities.

This paper summarises CP 21/26 and Policy Statement 21/9, with a focus on the main points relating to ICARA/wind down. It does not cover all points covered within the publications, however more information is available from Devlin Mambo if needed.

In summary, what does CP 21/26 say?

1. As a result of the desire to be internationally consistent with ESG disclosures, there are no specific requirements for ESG These will be covered in a subsequent CP.
2. Detailed disclosures required on risk management, governance arrangements, own funds, own funds requirements, remuneration and investment policy are summarised. The majority apply to non-SNI’s, and not to SNI’s, unless they have issued additional Tier 1 capital. The disclosures are required annually, at the same time as the financial statements, in an easily accessible part of the firms website.
3. The gateway for MIFIDPRU applications opened in July 2021; some forms are now available in relation to the permissions that firms need to apply for in advance of MIFIDPRU coming into force. The rest will be available in autumn.
4. In the autumn, a questionnaire will also be sent out to all affected firms allowing the FCA to capture information on expected SNI/non-SNI status, investment firm group membership/composition and the expected ICARA reporting date. This will allow the FCA to set up existing FCA investment firms and their groups on the system.
5. The third policy statement is due in Q4 2021.

In summary, what does PS 21/9 say?

1. A transitional provision for the PMR for CPMIs is introduced.
2. In relation to the FOR calculation, clarification is made that it uses total expenditure before distribution of profits. The deduction of amortisation on all intangible assets (as long as they are deducted from own funds) is now allowed.
3. The ICARA is now recommended once a year (not twice), unless there are any material changes.
4. Firms requested guidance, the FCA confirmed it is their intention to provide ongoing support with IFPR and general guidance over the next 12 to 36 months as the new approach is rolled out and embedded. The FCA will use what they believe to be best practice from firms in order to support others.
5. There is no transitional provision for the ICARA process as the ICARA process will need to be used to determine the amount of financial resources firms need to hold to meet the OFAR. The FCA recognise there will be some adjustment and expect firms to make their best efforts to comply. The FCA expect to adopt a proportionate and risk based approach to supervising these requirements at the beginning of the regime.
6. The transitional own funds threshold requirement will be calculated by reference to the ICG amount averaged over the 12 months covered by the firm’s last own funds reports submitted before 1 January 2022. The transitional liquid assets threshold requirement will be determined by the methodology used to determine their current ILG, as applied on an ongoing basis.
7. Firms with a current ICG/ILG will need to submit MIF007 for the first time by 31 March 2023 at the latest.
8. The FCA will give firms flexibility on how they allocate the financial impact of potential harms identified by the group ICARA and wind-down requirements between their group entities. However, they must be allocated such that all FCA investment firms still satisfy the OFAR on an individual basis and have sufficient resources to wind down, as entities are wound down individually. They do not propose to require specific allocation methodologies.
9. The FCA expects firms to review their ICARA process during 2022 and submit their MIF007 report on their review of the ICARA process within a reasonable period after the review date. This may mean that for some firms the first ICARA has a review date late in 2022, and the subsequent first ICARA submission is in early 2023. Firms are asked to undertake their ICARA reports during 2022 on a ‘best efforts’ basis and the FCA will provide aggregate feedback on first submissions.

What other points are brought out?

• The CP clarifies how MIFIDPRU remuneration code applies to consolidation groups and carried interest and how non-SNI firms should use to calculate the metrics to see if they need to comply with the extended remuneration requirements.
• It also clarifies expectations in relation to setting a ratio between variable and fixed remuneration, the annual review of remuneration policies, malus and clawback, severance pay and buy-out awards.
• In relation to governance, the CP clarifies that a non‑SNI firm can rely on a group level remuneration committee where the firm is part of an FCA investment firm consolidation group, and where the remuneration committee of the UK parent entity meets certain criteria. The PS clarifies how non-SNI firms should calculate the metrics they will use to determine whether they are subject to the committees requirement.

Firms are asked to respond to the consultation paper by 17 September 2021.

How can we help?

Devlin Mambo have extensive experience in assessing the impact of new regulations and in assisting in their effective implementation in a controlled, measured and robust way.  With a clear focus on long term partnerships, we will work hand in hand with you to help build the optimal IFPR framework for your business, with due consideration to your entity specific and consolidated requirements.

For further information contact cathy@devlinmambo.com or your usual relationship contact.