EBA and ESMA show intentions to review Prudential regime for investment firms – will the FCA follow suit?

The EBA and ESMA have just released a discussion paper to request advice and feedback on the Investment Firms Regime (IFR), applicable to MIFID investments firms in the EU.

The IFR was implemented in the EU on 26 June 2021, with the FCA implementing its own version of the rules, the Investment Firm Prudential Regime (IFPR) on 1 January 2022. Three years on, the FCA has already provided feedback on the implementation of its own regime, and its European counterparts have now called on EU investments firms to provide their feedback on a number of areas of the IFR.

Firms with EU operations will need to consider whether this consultation (which runs to 30 August 2024) is applicable to them and provide feedback by 3 September 2024. It is not expected that any significant changes will be made to the IFR any time soon (2025 at the earliest).

However, it does raise a question of whether FCA will conduct a similar review for UK Investment Firms in the near future. The FCA has already provided clarifications on some of  the discussion areas, raised by the EBA and ESMA, in its feedback on the implementation of IFPR last year.

It remains to be seen as to whether the FCA will conduct a similar all-encompassing review.   Further, if the EBA and ESMA make any significant changes to the IFR, resulting in deviations from the IFPR, will the FCA seek to align its own regime with the approach taken in the EU?

Time will tell and we will inform you of any developments as they arise.

See below a list of all the discussion areas. 

Discussion areas

The key proposed areas of the discussion paper are as follows:

Firm categorisation

• Consistency in calculating and applying thresholds across all firm sizes and activities

K-factors - as well as risks not covered by K-factors. Feedback is being sought on the application of the following:

• K-AUM in relation to investment advice
• K-DTF suitability based on the level of activity
• K-ASA appropriateness in light of the risks associated with holding custody assets

Fixed Overhead Requirement (FOR)

• Is 3 months of relevant costs appropriate?
• Deduction of expenses related to specific business models, non-MIFID activities and FX.

Liquidity

• Should requirements be increased in line with the FOR?
• Clarification on the definition of high-quality liquid assets.

Prudential Consolidation

• Widening definitions of relevant financial undertakings and defining parent entities in scope of consolidation
• Ancillary services undertakings and regulatory arbitrage

Interaction with a new CRR3/CRD6 package of banking regulations for trading firms

Remuneration

• Tailored rules for different business models?

Additionally, there are more specific discussions regarding the following:

• Definition of trading book activities
• Future proofing the regime with regards to Crypto Assets
• Consideration of ESG risks
• Commodity and emission dealers