The FCA issues second consultation paper on the new IFPR

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As we have mentioned in previous blogs, the new IFPR is due to come into effect on the 1st January 2022 and will apply to all firms authorised by the FCA under the Markets in Financial Instruments Directive (MiFID) as well as holding companies of groups that contain one or more of these firms, irrespective as to whether they are regulated or not. The purpose of the regime is to replace the rules currently in operation with a single harm focused one, designed to simplify current prudential obligations.

The FCA has recently issued its second consultation paper (CP 21/7) which follows the first one in December 2020. The final consultation is scheduled for later this year.

As expected, CP 21/7 is more comprehensive than its predecessor introducing more comprehensive text to the new prudential sourcebook, MIFIDPRU and changes to other parts of the FCA Handbook

Over the next few weeks we will publish small, bite-sized information pieces on how the IFPR affects the following

  1. Own funds requirements
  2. Remuneration
  3. Risk management and governance (ICARA and SREP)
  4. Reg reporting

In this post we discuss

Own funds requirements

This concerns the calculation of expenditure for the purposes of the Fixed Overhead Requirement (FOR) which will be a level below which the company’s own funds cannot fall. The FOR is intended to calculate a minimum amount of capital that an FCA investment firm would need available to absorb losses if it has cause to wind-down or exit the market. Under the proposed rules the firm will need to calculate its total expenditure after any distribution of profits and then make specific deductions for other expenses.

Additionally, the FCA introduces a new calculation called K-factors which are used for the calculation of remaining activity-based capital requirements. These are:

  • assets under management (K-AUM);
  • client assets safeguarded and administered (K-ASA);
  • client money held (K-CMH); and
  • client orders handled (K-COH).

In the consultation paper the requirement for firms to calculate an adjusted coefficient for the daily trading flow K-factor (K-DTF) in periods of extreme market stress and volatility. It also sets out specific proposals on own funds requirements and firm categorisation for firms when they provide clearing services as clearing members.

For asset managers it contains guidance on the treatment of assets where there is a formal delegation of portfolio management and interaction between the K-AUM and K-COH requirements.

If you would like help understanding this or any other GDPR issues, please contact Dan, Ben, Simon or one of the team.