The new prudential regime for UK MiFID investment firms

One of the most widely debated topics since Brexit has been the UK’s approach to EU legislation at the end of the transitional period. Several EU proposals are due to come in force at the end of December 2020; including the settlement discipline regime under the Central Securities Depositary Regulation (CSDR) and the reporting obligation for non-financial counterparties (NFCs) under Securities Financing Transactions Regulation (SFTR). Most significant perhaps is the change in the prudential regime for investment firms set out in the EU’s Investment Firm Regulation and Directive (IFD/IFR).

IFD/IFR overhauls the prudential regime for investment firms, with the intention of moving away from the Basel capital standards and towards a regime specifically engineered for the business models of investment firms. It was finalised at the end of last year and published in the Official Journal on 5 December 2019. The new regime comes into force in the EU on 26 June 2021, subject to extensive transitional arrangements. EBA is tasked with developing 18 regulatory technical standards (RTS), three implementing technical standards (ITS), six sets of guidelines, two reports and a list of eligible capital instruments. The first tranche was published by EBA on 4 June 2020, with three more tranches to follow.

On 2 June 2020, the FCA published a lengthy discussion paper (DP20/2) on the new UK Investment Firm Prudential Regime (IFPR). This is effectively the UK’s implementation of the EU’s IFD/IFR. The consultation is open until 25 September 2020. It appears to be the FCA’s intention to introduce the IFPR in the summer of 2021 in line with the introduction of the IFD/IFR, and, although this date is not guaranteed, we would suggest planning for introduction on 26 June 2021.

The UK Treasury confirmed - in its June update to its policy statement “Prudential standards in the Financial Services Bill” - that it intends to revert to the earlier way of regulating capital – that is, less detail will be contained in legislation and the FCA and PRA rules will become again more fulsome as they were before Capital Regulation (CRR.) Detailed and comprehensive engagement with the regulators’ proposals would therefore be advisable. The regulators’ increased rule-making power will be subject to increased scrutiny by Parliament and the public.

It is well known that the UK regulators had a hand in developing the EU proposals. What is now clear is that IFR/IFD did not quite end up where the FCA wanted the proposals to land. Broadly supportive of the changed regime, the FCA has decided not to adopt the IFD/IFR as is but to create a regime that has a similar outcome to that of the EU regime. That said, the FCA plans to take into account Level 2 provisions and EBA guidance in developing its final consultation paper. The discussion paper remains a first step, and the FCA emphasizes that further detail is to follow once the necessary legislation is in place. Much of DP 20/2 is taken up by summarising and explaining the IFD/IFR, often without further comment. Having considered DP 20/2, it seems to us that the FCA’s plan is to apply the Pillar 1 proposals of IFD/IFR more or less as is but elaborate significantly on the Pillar 2 requirements.

So, what are the main features of the new regime?

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