The FCA has begun surveying solo-regulated MiFID investment firms and CPMI firms in its preparation for the new prudential regime, EU’s Investment Firm Directive and Regulation. The purpose of the survey is to assist the FCA to better understand the impact of the new regime on firms in terms of the costs and benefits. The purpose of the survey is to assist the FCA to better understand the impact of the new regime on firms in terms of the costs and benefits. The deadline for submitting responses is Monday 4 January 2021. This month’s insight summarises what you need to know about IFD/IFR.
The new regime replaces the existing prudential requirements for investment firms set out in the Capital Requirements Regulation (CRR) and the CRD IV Directive (collectively known as, CRD IV). The regime will still apply after Brexit. The FCA recently published a discussion paper to consult on its proposed approach to IFD/IFR implementation. For additional background and supporting details, please refer to the FCA’s DP.
About the regime
The new prudential regime is designed specifically for investment firms in contrast to the existing rules under CRD IV, which were developed largely with deposit-taking institutions in mind. The regime is due to apply from 26 June 2021. The FCA recently published a discussion paper to assist with their implementation in the UK.
Under the new regime, investment firms fall into one of three categories:
- Class 1 – Systemic investment firms
- Class 2 – Investment firms which exceed certain size and risk thresholds, but are not systemically important
- Class 3 – The smallest and non-interconnected firms, that are subject to reduced requirements
The impact on firms include:
- New capital requirements, to be calculated using the “K-factor” methodology designed to reflect the risks presented by firms
- New rules on prudential consolidation, liquidity and concentration risk
- A new approach to the Internal Capital Adequacy Assessment Process (ICAAP)
- New requirements on remuneration policies
- Extensive reporting and disclosure requirements.
Implementation will require GRC professionals to work with other teams such as Legal, Finance or Corporate Treasury and HR. Tasks to undertake as part of the implementation will include the following:
- A K-factor assessment to determine your classification and capital requirements
- Changes to prudential consolidation arrangements
- Consideration of transitional relief
- Revising internal governance processes
- Reviewing remuneration policies and updating them
- Updating systems to capture data required for K-factor analysis and new disclosure and reporting requirements.