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The Investment Firms Prudential Regime (IFPR): an overview
The Investment Firms Prudential Regime will apply to qualifying UK investment firms from 1st January 2022 as a set of pre-emptive requirements to reduce consumer risk.
Introducing the Investment Firms Prudential Regime
The Investment Firms Prudential Regime (IFPR) will come into force early next year. The Financial Conduct Authority (FCA) is facilitating its introduction, with updates to the permanent minimum capital and liquid asset requirements of these investment firms. The FCA published an initial consultation paper in June 2019, and has since published three more as it continued to investigate the state of risk and prudential measures in the UK’s financial industry.
The IFPRs purpose is to increase the stability of financial systems in the UK by outlining 10 steps for managers to undertake. Previously, risk reduction regulation focused on the investment firm itself and the effect of threats. But this policy statement aims to reset the focus of risk reduction onto customers. In theory, this should mean that the IFPR’s prudential requirements will better protect consumers against poor investment practices.
The new prudential regime will simplify old frameworks and should make it easier for investment firms to comply, falling under the Financial Services Bill. The EU underwent similar reforms in 2020 so these changes align with the EU regime (specifically the Investment Firm Directive and EU investment firms regulation). Post-Brexit, this is the UK’s answer to updated regulation for investment firms.
Who must comply?
The IFPR applies to investment firms that fall under the Markets in Financial Instruments Directive (MiFID). Not only does this include certain investment firms, but also credit facilitators that allow customers to have investment capabilities. Alternative investment fund managers (AIFMs) with certain MiFID permissions will also be subject to IFPR.
There are two sets of IFPR rules; with the nature of your investment firm determining which applies. For example, small and non-interconnected investment firms (SNI) benefit from proportional prudential rules, whereas each larger non SNI firm will be subject to more general prudential standards.
If your company is not a MiFID investment firm, you are not required to comply with the IFPR but may be subject to other regulatory requirements. If you’re not sure, it’s best to compare your permissions profile of your company with that of the FCA’s MiFID handbook.
From 1st January 2022, those applying for MiFID status will have reporting requirements indicating that they comply with this new regime of prudential consolidation. This can only be a positive, since it brings new standards of regulation to protect the industry. The FCA also advises that current MiFID investment firms familiarize themselves with the new UK regime in order to meet expectations from January onwards.
Examples of IFPR framework
As mentioned, there are 10 steps within the IFPR framework that managers must comply with to show that they are taking the necessary precautions to protect customers from investment risk. These are enforced by the Prudential Regulation Authority (PRA).
One of these steps is a capital requirement, to show that a firm has enough financial resources to fund its operations- known as the overall financial adequacy rule (OFAR). To do this, firms must establish an ICARA process, referring to an internal capital adequacy risk assessment. ICARA is designed to highlight, track and prevent potential risks to ongoing operations or reduced capacity.
Another of the ten steps aims to bring transparency to the remuneration requirements of investment firms. SNI firms will be required to set and maintain proportionate fixed or variable remuneration policies, whereas non-SNI firms have more complex regulations. These include:
- Publishing the remuneration structure and amounts of the three highest earners
- Establishing risk and remuneration committees
- Comply with the “pay-out process”
Other steps include a liquidity requirement, which refers to the amount and availability of liquid assets such as cash, short-term shares and credit deposits.
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