On December 14, the UK’s Financial Conduct Authority (FCA) published its first consultation paper on the implementation of the Investment Firms Prudential Regime (IFPR) (CP20/24) with its proposal for the UK’s new regulatory capital/ prudential rules following the end of the Brexit transition period (the Consultation Paper).

The FCA intends to create a new Prudential sourcebook for Markets in Financial Instruments Directive (MiFID) Investment Firms (MIFIDPRU).

The key proposals addressed in the Consultation Paper by the FCA include:

• replacing the current categorization of FCA investment firms (e.g., BIPRU, IFPRU and exempt-CAD) with just two categories of firms: (A) ‘small and non-interconnected’ (SNI) investment firms; and (B) non-SNIs. SNIs are firms that are not permitted to deal as principal or hold client money or assets, and typically include smaller asset managers and advisers. SNI firms will benefit from a proportionate implementation of the IFPR in key areas such as calculating capital requirements, reporting, disclosure and remuneration requirements. The non-SNI category comprises all other FCA investment firms;

• applying prudential consolidation to investment firm groups excluding firms that have been granted permission by the FCA to use the group capital test;

• amending the definition of own funds to solely include common equity tier 1 capital, additional tier 1 capital and tier 2 capital;

• introducing a permanent minimum requirement that FCA investment firms should not fall below based on their activities, increasing the initial capital a firm requires to be authorized as an FCA investment firm and implementing a new approach to calculate capital requirements based on quantitative indicators;

• launching new monitoring requirements for general concentration risk that will apply to all FCA investments firms; and

• revising the data collecting approach to support the IFPR and removing reporting requirements that the FCA considers are no longer necessary.

The FCA intends to publish two more consultation papers in the second quarter and the third quarter of 2021, one concerning IFPR issues and the other addressing final points and any gaps identified through the consultation process.

The FCA will not publish final rules until the Financial Services Bill 2019-21 has passed through Parliament.

The deadline for comments on the Consultation Paper is February 5, 2021.

The Consultation Paper is available here.