FCA publishes first consultation on new prudential regime for UK investment firms

The FCA is seeking views on its proposed rules to introduce the UK Investment Firm Prudential Regime (IFPR) for FCA prudentially-regulated investment firms (FCA investment firms).

This is the first of 3 consultations that the FCA will issue to introduce the regime in January 2022. Final rules will be published over the course of next year. Where possible the FCA is consulting earlier on the more complex topics. This is to give investment firms as much time as possible to ready themselves.

The new regime will streamline and simplify the prudential requirements for solo-regulated investment firms in the UK. At present, there are many different regimes which apply depending on size of firm and type of investment business.

The new rules will extend the framework for prudential requirements to consider the potential harm FCA investment firms pose to clients, consumers and the market. This includes the amount of capital and liquid assets the FCA investment firm should hold so that if it does have to wind down, it can do so in an orderly manner.

There are approximately 3,200 FCA investment firms in the UK. Many people have products with investment firms, ranging from workplace or personal pensions and investment ISAs to those who use a platform to trade stocks themselves. It’s important that FCA investment firms minimise the harm they could cause consumers.

Introducing the IFPR means that there will be a single prudential regime for all FCA investment firms. It should reduce barriers to entry and allow for better competition between investment firms.

The new regime represents a major change for FCA investment firms. It is critical that firms adequately prepare for the regime.

The FCA is keen to receive feedback from stakeholders through this and later consultations. Feedback will allow the FCA to develop final rules that achieve its, and Parliamentary, objectives for the regime, and that are also workable for FCA investment firms.

The consultation period for this first consultation closes on Friday 5 February 2021.

Further information

This consultation follows the Discussion Paper DP20/2: Prudential Requirements for MIFID Investment Firms issued in June 2020. That set out the FCA’s initial views on introducing the IFPR, as well as technical details on the European Union’s (EU) Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR). It requested feedback to support the FCA’s development of a UK version of the EU’s proposed regime. The FCA has taken this feedback into account when developing this and subsequent consultations.

The EU IFD and IFR came into force on 26 December 2019 and will enter into effect on 26 June 2021. As an EU Member State authority, the FCA strongly advocated introducing such a regime, and was heavily involved in policy discussions on creating the regime that took place through the EU and European Banking Authority (EBA) papers and consultations.

The FCA supports the aims of the IFD/IFR. The FCA proposes that the IFPR will achieve the same overall outcomes. The FCA believes that this is consistent with its statutory objectives and Mission. However, as it is introducing the regime after the UK has exited the EU, it believes it is right to also consider what amendments are appropriate to account for the specifics of the UK market, and its duties to have regard to certain factors, including those set out in the Government’s recently introduced Financial Services Bill.