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  • FCA Discussion Paper covers the future of the UK’s prudential regime for investment firms
  • UK Government sets out how the UK will address certain ongoing EU initiatives after 31 December 2020

Prudential regime for investment firms

The FCA has published a discussion paper (DP20/02) that sets out proposals regarding the new prudential regime for UK investment firms.

This will be based upon the EU’s Investment Firm Directive (“IFD”) and Investment Firm Regulation (“IFR”), which shall take effect, in the EU, from 26 June 2021. Click here to read our earlier article on this.

The UK has left the EU and therefore the IFD/IFR will not be implemented. However, the UK Government intends to create domestic legislation to introduce a UK equivalent regime.

The discussion paper sets out that this regime shall – broadly speaking – be based upon the IFD/IFR. However, there are instances where a national regulator has the discretion to interpret the legislation in a certain way, either because they have the discretion to do so or the text is ambiguous.

The paper details the FCA’s interpretations and proposed approach regarding these discretionary aspects. It also asks stakeholders to provide responses to 35 questions, which cover aspects of the regime including:

  • Defining of the fixed overheads requirement;
  • How to calculate assets under management for the purposes of the K-factor, ‘K-AUM’ (plus determination of certain other K-factor calculations);Group consolidation;
  • The new liquidity requirements;
  • The updated ‘Pillar 2’ disclosure requirements (as an aside, the term ‘ICAAP’ which for many market participants is a well-established component of the vernacular vis-à-vis the prudential requirements, may be replaced with ‘ICARA’ – the Internal Capital Adequacy and Risk Assessment!);
  • The updated remuneration framework; and
  • The application of ‘proportionality’ for smaller investment firms.

The deadline for responding to the questions is 25 September 2020.

Future of UK regulation

In the foreword to the discussion paper Christopher Woolard, the (then) Interim Chief Executive of the FCA, acknowledges that the future of the UK/EU relationship will be determined by ongoing political negotiations. In addition, he asserts that the UK prudential regime should achieve similar intended outcomes to the IFD/IFR, but “taking into consideration the specifics of the UK market”.

Elsewhere in the discussion paper, reference is made to the UK’s involvement with, and influence over, the drafting of IFD/IFR, as the (erstwhile) member of the EU with the largest financial services sector.

As we have previously commented, the ability of UK investment firms to access the EU marketplace might depend upon the extent to which the UK regulatory framework aligns with that of the EU, within the framing of whatever can be agreed between the respective parties over the coming months.

Alongside prudential considerations, the UK government has provided detail on how it intends dealing with certain other EU initiatives after 31 December 2020. For example:

  • The existing provisions of the EU’s Securities Financing Transactions Regulation (‘SFTR’) shall apply, however the UK will not be taking action to incorporate into UK law the reporting obligation for non-financial counterparties (‘NFCs’), which is due to apply in the EU from January 2021;
  • Amending the Benchmarks Regulation to ensure continued market access to third country benchmarks until 2025;
  • Amending the Market Abuse Regulation, for example, to confirm and clarify that both issuers and those acting on their behalf must maintain their own insider lists; and
  • Improving the functioning of the packaged retail investment and insurance-based products (‘PRIIPs’) regime in the UK.

This perhaps sends a signal that the UK will – initially at least – continue to broadly replicate the EU regulatory framework, but with some exceptions.

The real test, however, might come when the EU starts to make substantive updates to existing legislation; thus prompting the UK to make a determination on the extent to which it wishes to become a ‘rule taker’.


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