May 31, 2021
All MiFID investment firms will be subject to a new prudential regime tailored for their business model, risk profile, complexity and interconnectedness.
MiFID investment firms across the EU will be subject to the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD) from June 2021. Whilst the FCA has made clear its intention to introduce a prudential regime for UK MiFID investment firms, the Investment Firms Prudential Regime (IFPR), which is largely based on EU IFR/IFD with amendments to account for the specifics of the UK market.
Explore our insights and what this might mean for your firm.
The current prudential regime of the Capital Requirements Regulation and the Capital Requirements Directive (CRR/CRD), which was introduced after the last financial crisis, is more suitable for credit institutions like banks that take deposits and make loans, and is not suited to investment firms.
In December 2019, the European Parliament approved a new prudential regime for investment firms which represented a significant reform in the EU regulatory framework and will likely have a material impact on most investment firms.
Both the UK and EU regimes present a range of challenges for firms covering capital, liquidity, risk management, remuneration, group consolidation, disclosure and reporting.
The EU IFD/IFR creates a prudential framework tailored to various ‘classes’ of investment firms that is intended to be more proportionate, risk-sensitive, and adapted to investment firms’ business models and risk profiles, than the current CRD regime. The new regime will re-focus the prudential requirements and expectations away from the risks the firm faces, to prioritise the assessment of potential harm to clients and the market.
As part of its implementation of the investment firms’ prudential framework the European Banking Authority (EBA) has published a number of consultation paper on:
The FCA has so far published two of its three proposals to implement a new prudential regime specifically tailored for MiFID investment firms in the UK, based largely on the EU’s IFD/IFR.
In June 2020, the FCA issued its proposal for the implementation of equivalent requirements in the UK through Discussion Paper (DP20/2 Prudential requirements for MiFID investment firms).
First Consultation Paper
In December 2020 the FCA issued their first consultation (CP20/24) on the new UK Investment Firm Prudential Regime (IFPR), the consultation paper covered the following areas:
Second Consultation Paper
Following the first consultation (CP20/24), on 19 April 2021, the FCA issued their second consultation paper (CP21/7) on the new prudential regime for investment firms. This second consultation paper seeks views on:
Next steps: The FCA will publish the Policy Statement to their first CP (CP20/24) and near-final rules in Q2 2021, and will also issue a third and final consultation in Q3 2021, ahead of the final rules coming into force on 1 January 2022.
With the exclusion of a few large and systemically significant investment firms that will remain subject to CRD/CRR, all investment firms that are currently authorised under MiFID (including exempt Capital Adequacy Directive (CAD firms)) will be in scope of the new regime. The degree of regulation will depend on the firm's particular business activity, risk profile and structure, which in turn dictates their new prudential Class.
EU IFR vs UK IFPR Divergence
|Divergence||IFR (EU)||IFPR (UK)|
|Go Live Date||26 June 2021||01 January 2022|
|Reporting Frequency||Class 2 – Submit returns on a quarterly basis.
Class 3 – submit returns on an annual basis.
|All firms to submit on a quarterly basis.|
|Class 1 Systemic Frame||Systemic investment firms will need to be re-authorised as credit institutions under CRR.||PRA designated investment firms.|
|Collective Portfolio Management Investment (CPMI) Firms||Out of scope – but amendments to Undertakings for the Collective Investment in Transferable Securities/ The Alternative Investment Fund Managers Directive (UCITs/AIFMD) to ensure own funds must not be less than Fixed Overhead Requirement (FOR).||In Scope – with clarification in subsequent consultation paper.|
|Reporting Template||More detailed data requirements.
Separate sets of templates for Class 2 and Class 3 firms.
|Single set of MIFIDPRU templates, simpler in comparison.|
|Prudential Consolidation||Investment firm groups can be prudentially consolidated in a similar way to the current process under CRR.||Applies where this is an investment firm group which can comprise of UK parent, subsidiaries, connected undertaking, investment holding or mixed financial holding company.|
|Capital Deduction (Software)||European Banking Authority’s (EBA) Regulatory Technical Standards (RTS) allows intangible assets subject to prudential amortisation to be risk weighted.||UK regulators have indicated intention to apply full deduction.|
|Liquidity||Exemption from liquidity requirements for class 3 firms at the discretion of national competent authorities.||Minimum liquidity requirement for all investment firms, including SNIs.|
|Remuneration||Class 3 firms are exempt.||All investment firms are subject to elements of the remuneration requirements.|
IFR/IFD contains a new set of rules on remuneration. Many MiFID investment firms will already be subject to, and therefore familiar with, remuneration rules under the current Capital Requirements Directive, which align very closely with the IFD/IFR remuneration rules.
IFD’s renumeration rules apply depending on the investment firm’s classification:
The second consultation paper (CP21/7) sets out the FCA’s proposed remuneration requirements for the investment firms, including draft proposals for all FCA investment firms to be subject to a new remuneration code (SYSC 19G).
The proposals further include:
Although the proposed prudential regime for MiFID investment firms is better aligned to their business models, some firms will face significant changes under the new regime. Those firms who experience a significant increase in their capital requirement can avail of transitional phasing over a five-year period out to June 2026 (EU-based firms). The introduction of K-factors brings the most significant challenges for firms who will need to monitor relevant data to facilitate their reporting responsibilities.
Impacted firms should be project planning, identifying which classification they will fall into and identifying any changes that they need to make to their regulatory capital, liquidity arrangements and remuneration policies.