The FCAs third consultation paper on the IFPR

On 6 August 2021, the FCA issued its third consultation paper in respect of the Investment Firm Prudential Regime (IFPR). This follows two recent FCA Policy Statements on the IFPR: PS21/6, which provides feedback on the FCA's December 2020 Consultation Paper (CP20/24); and PS21/9, which provides feedback (see our briefing here) on the FCA's April 2021 consultation paper (CP21/7). The IFPR is set to apply from January 2022, subject to the Treasury issuing the necessary secondary legislation under the Financial Services Act 2021.

The consultation paper will be of interest to firms seeking to know more about the nature of disclosures that they will need to make under the IFPR. We set out further details below.

Disclosure

In the consultation paper, the FCA sets out plans for disclosure requirements covering risk management; governance arrangements; own funds; own funds requirements; remuneration; and investment policy. Under FCA proposals, all non-SNI firms would be required to make disclosures in respect of these areas (apart from disclosures required on an investment policy which would apply only to the larger non-SNI firms). SNI firms issuing additional tier 1 instruments would also be required to make disclosures in these areas. The FCA confirms that these disclosure requirements would also apply to the UK parent entity of an FCA investment firm group where it is: subject to prudential consolidation; and treated as a non-SNI firm. The FCA would also apply these disclosure requirements to UK parent entities that are subject to prudential consolidation, treated as SNI firms and relying on AT1 instruments to meet their consolidated own funds requirement.

Disclosure: own funds

The FCA is proposing that firms disclose a breakdown of the makeup of own funds, and a reconciliation of this with the capital recorded in the audited balance sheet. The FCA is also proposing that firms should describe the main features of the own funds instruments they issue (examples provided by the FCA include type of instrument; and amount recognised in regulatory capital). The FCA is planning to introduce a template for disclosing own funds to aid consistency and comparability in disclosure.

Disclosure: own funds requirements

The FCA is proposing that firms disclose their fixed overheads requirement, their K-factor requirement (for non-SNIs), and a summary of their approach to assessing the adequacy of their own funds needed to support their ongoing operations. For the K-factor requirement, the FCA is proposing that firms disclose their total K-factor, split into the sum of each of the following groupings:

• assets for which the firm is responsible (K-AUM, K-CMH & K-ASA);

• execution activity undertaken by the firm (K-DTF & K-COH); and

• its exposure-based risks (K-NPR, K-CMG, K-TCD & K-CON).

Disclosures on qualitative information: approach to remuneration and incentives

The FCA is proposing that firms, including SNI firms, disclose a summary of:

• approach to remuneration for all staff;

• objectives of its financial incentives; and

• decision-making procedures and governance around the development of remuneration policies and practices.

The FCA is proposing to include a guidance provision to help firms understand the types of information that could be included in the summary of their approach to remuneration.

Disclosure: quantitative information on remuneration

Under FCA proposals, firms would be required to make quantitative disclosures about the remuneration outcomes of their staff (these are intended to complement the qualitative information disclosures). The FCA is proposing that firms disclose information in line with their obligations under the MIFIDPRU Remuneration Code (i.e. basic, standard and extended remuneration requirements).

Diversity Policy

The FCA is proposing that non-SNI firms would publish a summary of a diversity policy setting out:

• the objectives of the diversity policy;

• any target set out in the policy;

• the extent to which the objectives and any targets have been met; and

• where the objectives or targets have not been met, the reasons and the proposed actions and timeline to address the shortfall.

UK resolution regime

Currently, investment firms with an initial capital requirement of €730,000 are subject to the UK resolution regime. In June 2021, the Government confirmed that these firms would no longer be subject to this regime. In PS21/9, the FCA set out rules in MIFIDPRU 7 that would introduce a requirement for FCA investment firms to consider recovery planning in risk management as part of the ICARA process. The FCA is also introducing a wind-down regime for all FCA investment firms. The FCA is intending to delete IFPRU 11 and to make consequential amendments to ensure that FCA Handbook rules (e.g. SUP 16) reflect the updated regime.

Own funds: excess drawings by partners and members

The FCA is proposing to introduce a rule to address the situation where excess drawings can be made by partners in a partnership or members in a limited liability partnership without being recorded as a loss and would be treated as a loan to partners or members.