IFPR (Investment Firms Prudential Regime) is the new, UK-specific reporting regulation being introduced by the Financial Conduct Authority. The new regulation will be implemented in January 2022, so firms that fall under its scope have just a few months left to prepare. Understanding the new regulation is an integral part of firms being ready to comply when the regulation is enforced. This overview of IFPR explains why the new regulation is being introduced, what is expected of firms within its scope and how they can prepare.
IFPR (Investment Firms Prudential Regime) is the new, UK-specific reporting regulation being introduced by the Financial Conduct Authority (FCA). It will come into force on 1 January 2022.
IFPR applies to UK investment firms that are authorised under the Markets in Financial Instruments Directive (MiFID). The FCA says it has introduced the IFPR to "streamline and simplify prudential requirements for MiFID investment firms that we prudentially regulate in the UK (FCA investment firms)."
New regulations for the firms that fall under the scope of IFPR include remuneration, reporting and disclosure requirements. Firms that are under the scope of IFPR are separated into two different groups: SNI (small and non-interconnected) and non-SNI firms. The level of compliance that's expected from a firm will depend on what category it comes under.
According to the FCA, the IFPR will "refocus prudential requirements and expectations away from the risks firms face, to also consider and look to manage the potential harm firms can pose to consumers and markets."
IFPR will apply to the following firms:
- FCA-regulated MiFID investment firms, including current BIPRU (the Prudential Sourcebook for Banks, Building Societies and Investment) firms, and exempt CAD firms
- Collective Portfolio Management Investment firms (CPMIs)
- Alternative Investment Fund Managers (AIFMs)
- Regulated and unregulated holding companies of groups that contain either of the above types of firms
The FCA expects around 70% of firms to be classed as SNI. Thresholds have been created to determine whether a firm is SNI or non-SNI. Another category will also exist called "larger non-SNI". To be classed in this category, firms will need to meet certain criteria.
What disclosures apply under IFPR?
The rules on disclosures haven't been finalised yet, but both SNI and non-SNI firms will have to make certain disclosures on their websites on the day they publish their annual financial report.
IFPR regulatory capital requirements
The requirements a firm must meet depends on whether it is an SNI or non-SNI. According to Proskauer, SNI firms will be required to maintain "own funds"; that is, the higher of a permanent capital requirement (PMR, usually £75,000) and a fixed overheads requirement (FOR, an amount equal to one quarter of its relevant expenditure in the previous year). Non-SNI firms will have to maintain "own funds" that is the higher of their PMR, FOR or a K-Factor requirement. Both SNI and non-SNI firms will need to hold basic liquid assets typically equal to one third of their FOR.
IFPR remuneration requirements
All firms in scope of IFPR will need to comply with the MiFIDPRU Remuneration Code requirements, which change depending on the type of firm. Amongst other things, the MiFIDPRU Remuneration Code covers staff remuneration and interest. SNI firms will have to comply with basic remuneration requirements. Non-SNI firms will have to comply with these and will also need to take extra steps, including identifying 'material risk takers' or 'MRTs' (staff members whose activities can impact the risk profile of the firm) within the organisation.
IFPR regulatory consolidation requirements
IFPR will require all firms to say whether consolidated supervision will apply to them, which will be the case if they were part of a UK parent entity containing at least one FCA investment firm. If there is a parent entity, the prudential consolidation requirements will apply to the parent. Some UK parent entities won't be subject to this as part of a legislation called the Group Capital Test. Proskauer outline that firms will be required to hold sufficient own funds to cover:
- "the sum of the full book value of its holdings, subordinated claims and other specified instruments, in relevant entities in the investment firm group."
- "the total amount of its contingent liabilities in favour of the relevant entities in the investment firm group."
What is ICARA?
ICARA stands for Internal Capital Adequacy and Risk Assessment. It is an assessment firms will undergo to make sure they meet the Overall Financial Adequacy Rule (OFAR). As part of ICARA, firms will "determine what level of funds and liquid assets they need over and above the own funds and basic liquid assets requirements" described in the regulatory capital requirements.
How you can prepare for IFPR
The introduction of IFPR is a big change for FCA investment firms. To prepare before the regulation comes into force, firms in the scope of IFPR can get ahead by firstly establishing whether they are an SNI or non-SNI firm; finding out if they are part of a consolidated group; and finding out what their regulatory capital requirement will be. A final policy statement on the implementation of IFPR disclosure rules is expected to be published in Q4. Firms should continue to monitor developments in this area.