FCA seeks industry views on a new prudential regime for UK investment firms.

(MIFID Investment Firms)

Christopher Woolard, interim Chief Executive of the FCA, said:

‘We have long advocated for a bespoke prudential regime for investment firms.

‘A new UK regime would represent a significant improvement in the prudential regulation of investment firms. For the first time, it would deliver a regime that has been designed with investment firms in mind.’

In light of all that has happened in the last 12 months and the end of the transitional period of UK leaving Europe, it should come as no surprise that the FCA have issued a Discussion Paper on the future of regulatory oversight of Investment firms including Asset managers.  LINK HERE for full document.

Ahead of a Consultation Paper, the regulator is giving notice of proposed approach to domestic regime which is designed to;

  • Lower regulatory costs
  • Produce better alignment of requirements to business models
  • Strengthen supervisory dialogue
  • Improved competition
  • Produce better prudential outcomes

This will impact all investment firms that are authorised in accordance with the provisions of the Markets in Financial Instruments Directive (MiFID) and those who will be affected by the IFD/IFR.  Certain firm will  remain subject to Capital Requirements Directive (CRD) and the Capital Requirements Regulations (CRR).

Secondly of note, there are some new abbreviations for us to get our heads around, IFD – Investment Firm Directive, IFR – Investment Firm Regulation, KFR – K-Factor Requirement and ICARA- Internal Capital Adequacy and Risk Assessment.  There are others but these stand out as expected to be in common parlance.

So what are the key changes in this 166 page document?  There is a lot of “meat” in this document which should be considered at senior level to decide on the impact and what processes would need to change in order to meet the new requirements if implemented in their entirety.

The concept of a Small and non- interconnected investment firm is introduced (SNIs) and the threshold criteria should be reviewed to see who might get captured but all investment firms meeting this criteria will benefit from additional  proportionality and less onerous prudential requirements which includes reporting, disclosure and remuneration requirements.

Below is table summarising the main prudential requirements for investment firms and SNIs. This is merely a summary and we strongly suggest those of you working in investment firms review the detail of each area;



Investment Firm


Definition of capital

Uses the same CRR definition, with a few simplifications for deductions


Capital requirements

The higher of:

• Fixed overheads requirement

• Permanent minimum requirement

• K-factor requirement (KFR)

KFR is a new way of accounting for the potential harm that an investment firm can do to its clients, the markets in which it operates and to itself. It is based on the type and scale of the investment firm’s activities. A requirement is calculated for each activity and the sum of these is the KFR.  The KRF has three broad categories

  • risk-to-client (RtC)

  • risk-to-market (RtM), and

  • risk-to-firm (RtF)

The higher of:

• Fixed overhead requirement

• Permanent minimum requirement

Group risk

Either prudential consolidation or the option to use a group capital test.


Concentration risk

Broader definition of ‘concentration’ risk, including location of client money, and source of income. Additional capital requirement for ‘exposure values’ greater than 25% of own funds in a trading book.

Basic requirement to monitor and control ‘concentration risk’


Minimum liquid asset requirement. Definition of liquid assets is expanded.

Compared with that in the CRR, with no limit as to their composition. Both SNIs and non-SNIs that do not deal in their own name (including for clients) or underwrite, may also use additional items to make up a proportion of their liquid assets.


Risk management, governance & review process

Similar governance requirements to current CRD (taking account of what is in MiFID II).

Firms to consider their own risks.

Supervisory review at frequency and intensity determined by the competent authority

IFD introduces the concept of the internal capital and risk assessment (ICARA) process for non-SNI investment firms, although it may also be applied to SNI investment firms if regulators deem it appropriate.

While superficially similar to the Internal Capital Adequacy Assessment Process

(ICAAP) in the CRD, there are key differences in how it is expected investment firms to think about risks as part of their ICARA process, compared to the CRR. It is important that investment firms which currently undertake an ICAAP understand these differences.

Under the IFD, non-SNI investment firms must have robust governance arrangements that are appropriate and proportionate to their nature, scale and complexity. These arrangements must include the following:

• a clear organisational structure with well defined, transparent and consistent lines of responsibility

• effective processes to identify, manage, monitor and report the risks investment firms are or might be exposed to, or pose or might pose to others

• adequate internal control mechanisms, including sound administration and accounting procedures

• remuneration policies and practices that are gender neutral and are consistent with and promote sound and effective risk management

No additional governance requirements to those in MiFID II.

Firms to consider their own risks but no individual review mandated.

Can be requested by the competent authority.


Same as SNI, plus risk and remuneration reporting.

Large own account dealers may also be required (by Article 55 of the IFR) to report against the thresholds in Article (1)2 of the IFR for monitoring where the CRR is to be applied (instead of the IFR).

Limited reporting on own funds, capital, balance sheet and revenue.

Reporting to confirm they meet conditions in Article 12(1) of the IFR


No bonus cap but similar core remuneration principles and approach to variable remuneration as current CRD.

Malus and clawback to be applied by all non-SNIs.

The IFD remuneration requirements apply to categories of staff whose professional activities have a material impact on the risk profile of the investment firm or of the assets that it manages (paragraph 1 of Article 30). These are often referred to as ‘material risk-takers’ (MRTs). They must include at least senior management, risk takers, staff engaged in control functions and any employee receiving overall remuneration equal to at least the lowest remuneration received by senior management or risk takers.

No additional requirements to those in MiFID II.

Public disclosure

Limited disclosure including risk management,  governance, and remuneration policy.

Only for firms that have issued AT1 instruments.


N.B Another new feature of the IFD/IFR compared to the existing regime are the new requirements on investment firms for environmental, social & governance (ESG) issues.

For now, these are limited to disclosure requirements for larger non-SNIs.

However, the EBA (European Banking Authority) is mandated to report on ESG risks and may recommend further requirements in this area.

Investment firms and other interested stakeholders will have until 25 September to respond. We would encourage all firms to respond.

Barry Howard

Partnership Advisor