Understanding the UK’s Investment Firm Prudential Regime (IFPR)

If you haven’t already heard and you’re a UK MiFID investment firm, then pay very close attention to what follows.

We’re guessing, however, since you’re on top of things as a part of the LGCA network, then you must be fully aware.

In any case, read on.

What is the IFPR?

As of January 1, 2022, all UK MiFID investment firms will have to abide by the Financial Conduct Authority’s (FCA) brand-new Investment Firm Prudential Regime (IFPR).

According to the FCA, the IFPR’s overall objective is “to streamline and simplify the prudential requirements for MiFID investment firms that we prudentially regulate in the UK (FCA investment firms).”

More specifically, FCA is looking to shift the industry’s “prudential requirements and expectations away from the risks firms face” and focus more closely on how to better “manage the potential harm firms can pose to consumers and markets.”

The IFPR, says the FCA, will establish “a single prudential regime for all FCA investment firms, simplifying the current approach for globally active systemically important banks” and reducing “barriers to entry and [allowing] for better competition between investment firms.”

Who does the IFPR apply to?

If you run or work for one of the following types of companies, then make sure you know the ins and outs of the regulation so that you remain fully compliant:

  • MIFID investment firms in the UK that are subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR). This includes:
    • Investment firms subject to BIPRU and GENPRU.
    • Full scope, limited activity, and limited license investment firms subject to IFPRU and CRR.
    • Local investment firms.
    • Matched principal dealers.
    • Specialist commodities derivatives investment firms using exemption on capital requirements and large exposures such as oil and energy market participants.
    • Exempt CAD firms.
    • Investment firms that have opted-in to MiFID although they would have been exempt under Article 3.
  • Collective Portfolio Management Firms (CPMIs).
  • Regulated and unregulated holding companies of groups that contain an investment firm authorised and regulated by the FCA and is authorised under MiFID and/or a CPMI.
  • Depositaries.

If you are an investment firm designated by the UK’s Prudential Regulation Authority (PRA), then no need to worry about IFPR since your company will remain under the PRA’s supervision.

What does the IFPR entail?

Here’s what you and your company must keep in mind with regards to the IFPR.

Some of the changes to be effectuated include:

  • A different system to supervise prudential risk, one that focuses on an Internal Capital and Risk Assessment (ICARA) instead of the Internal Capital Adequacy Assessment Process (ICAAP) that’s being used now.
  • Changes to the liquidity requirements for affected firms. This includes new K factor requirements that will look at three risk areas (client, market, and firm) and set the capital requirements for firms that are not small non-interconnected firms (SNIs).
  • Alterations to what is meant by capital. For instance, the definition of liquid assets will be broader than that of the European Banking Association’s (EBA) Capital Requirements Regulation (CRR).
  • Additional obligations related to remuneration policies.
  • Modified thresholds for the initial capital required for new firms and different requirements for new own funds and permanent minimums.
  • Additional requirements for prudential consolidation and group risk and a more extensive definition of concentration risk that will incorporate a client’s source of income and the location of their money.
  • New reporting forms that are not as burdensome as those for COREP and FINREP. Non-SNIs will have to start reporting on their concentration risks.

There is plenty of minutiae to study under this new regulation. So, print out a copy of the latest version as it’s being workshopped and commented on to get a better overall picture of what this entire project will entail.

What can you do to be better prepared to comply with the IFPR?

With little under three months to go before the IFPR rule kicks in, UK investment firms have plenty to do to prepare for this new regulatory obligation.

There are a few things your company can do to lessen its work when the time to report is right around the corner:

  • Assign a specific person from the get-go to manage your firm’s IFPR project.
  • Ascertain how changes to your prudential category will affect your business. For instance, determine whether you are an SNI.
  • Once this has been established, calculate your new capital requirements and consolidated requirements if you belong to a group.
  • Figure out which of the many new requirements covering remuneration, risk management, liquidity, concentration, public disclosure, and reporting will apply to your specific case.

If you’re looking for in-house training to prepare your team for the reporting requirements laid out by IFPR, get in touch at info@lgca.uk and we’d be happy to set up a call to discuss this in greater detail.