The Investment Firm Prudential Regime – are you prepared?

Insight

Published

12 October 2021

As of the 1st January 2022, the Investment Firm Prudential Regime (IFPR), developed by the European Commission (EC), will be adopted by the FCA and will apply to all UK MiFID investment firms. The FCA has stated their objective to ‘streamline and simplify the prudential requirements for MiFID investment firms’.

Background

The incumbent prudential regime for FCA investment firms was designed around the need to protect depositors of globally active systemically important banks, by helping ensure that it is difficult for the bank in question to fail.

Investment firms on the other hand are not viewed as systemically important and can, therefore, be allowed to fail (albeit in an orderly manner). The adoption of the IFPR by the FCA for these firms instead helps ensure that the harm that can be caused by these firms to others, including to their clients and the market, from the activities they carry out, is considered. It also considers the amount of capital resources and liquid assets they should hold, so that if it does have to wind down it can do so in an orderly manner.

Who does it affect?

IFPR impacts all MiFID firms deemed to be non-systemic. In practice, this means all UK firms apart from eight larger institutions who will continue to be supervised under CRR and adopt CRD V.

As of 1st January 2022, the adoption of IFPR will mean that these firms are required to change the way that they think about and manage risk. We also expect that firms will need to commit significant resource and planning in order to be ready for its implementation. In this piece, we talk with Wheelhouse Advisors on the key challenges this new regulation imposes on investment firms and how you should be preparing for 1st January 2022.  

Wheelhouse Advisors

For any firms that will be impacted by the new IFPR regulations from 1st January 2022, it is essential that you take the time to fully understand how this will affect your business and way of working. Wheelhouse Advisors has put together the below guidance and advice on next steps to help assist firms in understanding the new regulation, assessing its impact,  transitioning from ICAAP to ICARA and embedding the ongoing governance and reporting frameworks.

View the IFPR Impact Assessment Report from Wheelhouse Advisors to understand how the new regime will impact your firm.

The challenge

The new prudential framework for investment firms brings in fresh standards on capital, liquidity, reporting, consolidation, governance, risk, remuneration and disclosure.

The IFPR is intended to be simpler and more proportionate to a firm’s operations than the existing bank-like regulations. The result being that the vast majority of investment firms are required to adapt their approach to prudential regulation. The phrase “simpler and more proportionate” was originally a cause for rejoice among investment firms. The unshackling from the banking regime was expected to warrant lower capital requirement and less onerous governance standards and reporting obligations. Many firms have questioned whether the end product does indeed meet with the original objectives. For many, the burdens will be higher than now and for others there is at least a transition to manage from one regime to another.

Most notably, some firms are required to hold significantly more capital than under the existing regime. Further, for many firms, the IFPR introduces a new obligation to conduct an ongoing Internal Capital Adequacy and Risk Assessment (ICARA) process, to document the ICARA in a formal report at least annually, and to make certain public disclosures. This is no small task, particularly for firms whose regulatory framework has, to date, been relatively light-touch.

Next steps - Investment firms should now start to prepare.

  1. Look at all areas of your business and understand the key areas that are affected by the new IFPR regulations
  2. Take time to understand the evolving financial impact of the new regime on a forward looking basis, and use this to build a robust governance framework
  3. Look to design, implement and document internal capital and risk assessment processes.
  4. Ensure you are keeping on top of updates from the FCA on regulatory reporting procedures. The FCA has published draft reporting templates so firms can begin to build out their processes, ensuring the flow of data from the various sources is established and agreed.  With the reporting burden being more complex, more frequent and within a tighter deadline than the current regimes, the process will need to be efficient.
  5. If you have had to make significant changes to your risk profile due to these regulation changes, we strongly suggest that you discuss this with your insurance broker at your next renewal.

If you would like further information on Wheelhouse Advisors and their services, please contact Michael Chambers at [email protected]

The following article is provided by Wheelhouse Advisors and the opinions and views stated in this article are those of Wheelhouse Advisors and not Howden Insurance Brokers Limited (“Howden”). Howden is an insurance broker and is not authorised or regulated to provide advice on investment firm regulation. Howden shall not (i) owe or accept any duty, responsibility or liability to you or any other person; and (ii) be liable in respect of any loss, damage or expense caused by your or any other party’s reliance on this article.