FCA Consultation: Investment Firm Prudential Regime

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On 14 December 2020 the FCA announced the first of three consultations in relation to the implementation of the new UK Investment Firm Prudential Regime. This first paper focusses on reporting, capital requirements and proposes a range of transitional provisions for firms that would face the largest capital increases.

This consultation paper proposes to replace the current definitions of FCA regulated investment firms (eg BIPRU – the Prudential Sourcebook for Banks, Building. Societies and Investment Firms) with two broad categories, being small and non-interconnected (SNI) or not SNI. To qualify as an SNI a firm must not carry out activities:

  • Which have the largest potential to cause harm to customers or markets in which it operates; and
  • On a scale that would cause significant harm to customers or market in which it operates. The FCA has proposed thresholds for assessing the scale of activities carried out. These include assets under management (AUM) of less than £1.2 billion, client money held being nil, annual gross revenue from investment services being less than £30 million, amongst other measures.

This consultation paper also outlines the changes in the reporting requirements for all FCA investment firms. FCA regulated investment management firms will now all report the same documentation, rather than the previous approach which differed depending on which prudential sourcebook they fell under. The FCA proposes that all investment firms should report quarterly, with reference dates being March, June, September and December.

The Internal Capital Adequacy Assessment Process (ICAAP) will be replaced by the Internal Capital Adequacy and Risk Assessment (ICARA), which continues to be based on a pillar 2 risk based assessment. The requirements and additional information on the ICARA is expected to be included in a later consultation.

These proposed rules broadly align the UK with EU rules and given the timetable for implementation, we recommend that firms should review the consultation papers to assess the impact of these new rules on their business and FCA reporting. This is a drastic change of FCA reporting and therefore its impact on FCA regulated investment management firms should not be underestimated, and a pro-active organised approach is required to ensure minimal disruption to the business.

It is expected that these rules will come into force on 1 January 2022.

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