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FCA’s new prudential regime set to disadvantage over a thousand UK investment firms

Source: Bovill

Over a thousand UK investment firms will be adversely impacted by the FCA’s new prudential regime for MiFID investment firms, according to research by financial consultancy Bovill.

Bovill believes the new capital requirements could make UK firms less competitive and the UK less attractive for investors, just as the economy receives a double blow from Brexit and Covid-19. Regulated firms have just one month left to respond to the FCA’s consultation paper on the new rules.

Just over a third of the UK’s 3,844 MiFID[1] investment firms are currently exempt from the EU’s Internal Capital Adequacy Assessment (ICAAP). The FCA is proposing to take a much harder line with the new prudential regime, meaning all firms who were previously exempt will have to undergo an Internal Capital Adequacy and Risk Assessment (ICARA) for the first time, once the UK leaves the EU. In Bovill’s poll, 28% of firms said they would require extra resources, including people and systems, to meet the ICARA requirements.

The FCA’s new Investment Firm Prudential Regime (IFPR), will replace the EU’s Investment Firms Directive (IFD) and Investment Firms Regulation (IFR) and is expected to come into effect in the summer next year.

Harpartap Singh, Managing Consultant at Bovill, commented:

“This is a clear move by the FCA to gold-plate prudential regulations, and it seems unjustified and disproportionate for smaller investment firms. Many of these firms will have never done this kind of assessment before, and so the administrative and resource burden will be a challenge. One of the key objectives of the new regime was to be risk-oriented and it doesn’t make sense in terms of risk to include smaller firms in the ICARA, when they are already covered by the FCA’s guidance on assessing adequate financial resources. The ICARA may be an onerous and rigorous process and the FCA didn’t give much warning. I think some smaller firms will struggle.”

Those organisations polled said one of the areas they were most concerned about was the new regime’s group capital requirements, with almost half of respondents (45%) saying they would be impacted. The new requirements mean that groups of UK firms may have to hold capital in the UK, even if their parent company (regulated or otherwise) is located elsewhere.

Harpartap Singh, Managing Consultant at Bovill, continued:

“The group capital requirements affect a large number of firms and could make the UK a less attractive place for investment fund managers looking to set up or expand. This combined with ICARA and the more stringent rules around holding capital could put UK firms at a disadvantage on the global stage, at a time where we arguably need to be at our most competitive.”

There is now one month left until the FCA’s consultation paper on IFPR closes. Bovill’s poll suggests that almost 50 firms are planning to respond, which is comparatively high.

Harpartap Singh, Managing Consultant at Bovill, continued:

“The IFPR really seems to have touched a nerve, which has been made clear by the number of firms indicating they will respond to the consultation paper. With just one month until the deadline, we urge firms to have their say and respond either directly or by contributing to Bovill’s response, in order to influence regulation which will have an impact on them for years to come. “


Survey results taken from a poll of 134 attendees at Bovill’s webinar on 16th July entitled: “A new prudential regime - what the FCA’s announcement means for you“.

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