The IFPR (Investment Firm Prudential Regime) is due to be implemented on 1st January 2022, and there are reasons to think that it is going to be Exempt CAD firms that will be most affected from a prudential and regulatory point of view. Here we consider the nature of the new requirements that Exempt CAD firms will be subject to under the IFPR as well as alerting firms to the options they may have to change their permissions so as to fall outside the regime. Once the IFPR comes into force, Exempt CAD firms will cease to exist and will either be Small and Non-Interconnected investment firms (SNIs) or, for the very largest firms, Non-SNI’s. This information focusses on firms that are currently Exempt CAD firms that would be SNI’s under the IFPR.

Capital Resources Requirement

Exempt CAD firms are currently subject to an absolute Initial and Own Funds Requirement of Euro 50K.

Own Funds Requirement

With the introduction of IFPR, Exempt CAD firms, as SNI’s, will be subject to an Own Funds Requirement of the higher of the following:

  • PMR (Permanent Minimum Requirement) of GBP 75K
  • FOR (Fixed Overheads Requirement) of one quarter of annual fixed overheads

For most Exempt CAD/SNI firms, it is likely the FOR will become the applicable requirement. There will be a 5 year transition period over which there will be a gradual stepping up of the applicable requirement.

Basic Liquid Assets Requirement

In addition to the Own Funds Requirement, Exempt CAD/SNI firms will be required to hold an amount of liquid assets that is at least equal to the sum of:

  • one third of the amount of its FOR, and
  • 1.6% of the total amount of any guarantees provided to clients; though it is unlikely that this will be part of the business model of many Exempt CAD/SNI firms.
    What counts as liquid resources is clearly defined.

Concentration risk monitoring

Although Exempt CAD/SNI firms will not become subject to any Own Funds Requirement for breaching the limits set, they will be required to monitor and report exposures.

Risk Management and the Internal Capital Adequacy Assessment (ICARA)

Exempt CAD/SNI firms will need to document their ICARA on an annual basis, though they will be able to adopt a proportionate approach. This requires the firm to consider and account for the risk of harm it poses to consumers and markets and forms the centrepiece of the firms’ risk management processes.

Internal Governance and Controls

Exempt CAD/SNI firms will need to demonstrate that they have robust governance arrangements that include:

  • a clear organisational structure with well defined, transparent and consistent lines of responsibility
  • effective processes to identify, manage, monitor and report the risks they are or might be exposed to, or pose or might pose to others
  • adequate internal control mechanisms, including sound administration and accounting procedures

Regulatory Reporting

The regulatory reporting regime for Exempt CAD/SNI firms will be different from the current requirements for Exempt CAD firms, with additional reports reflecting the additional requirements.

What should Exempt CAD Firms be doing?

The first thing that an Exempt CAD firm should be doing now is to consider whether or not its business model means it actually needs to remain an Exempt CAD firm and so become an Investment Firm, albeit as an SNI. Many firms that are currently Exempt CAD firms may have sought authorisation under MiFID because this allowed access to the MiFID passport without imposing very much additional regulatory burden; it was in effect a “no-brainer”. With the loss of passporting rights following the UK’s departure from the EU, there is no longer any obvious benefit to being a MiFID Firm and so becoming an Investment Firm under the IFPR, and significant regulatory downside to doing so. It is by no means clear that such passporting rights will ever be revived, although that is one of those currently unknowable things.

Exempt CAD Firms that do not need to be authorised under MiFID to conduct the business that they do, for example, because they would fall within the scope of the Article 3 exemption to MiFID, should weigh up the additional burden they will have to bear as an SNI; particularly where their fixed overheads, such as salaries, mean that the difference between their current €50k Own Funds Requirement and their Fixed Overhead Requirement is quite significant; albeit coming in over a 5 year period. For these firms, it may be that the sensible option will be to vary their permission to fall outside the IFPR.

Exempt CAD Firms that will fall within the IFPR

For those Exempt CAD firms that have concluded that they will fall within the IFPR, or have otherwise decided to do so, should now be considering the following to prepare for the implementation of the IFPR:

  • Capital Resources Requirements – identifying what the firm’s financial resources requirements are likely to be over the 5 year transition period post IFPR implementation and planning to ensure that the firm will have adequate capital and liquid resources
  • Risk Management and the Internal Capital Adequacy Assessment (ICARA) – implementing an adequate risk management framework and documenting the firm’s ICARA to ensure compliance on implementation of IFPR
  • Internal Governance & Controls – ensuring processes are in place and being monitored in line with governance arrangements
  • Concentration risk monitoring – ensuring processes are in place to identify breaches of thresholds to enable the firm to comply with the new notification requirements and take remedial action
  • Remuneration – documenting remuneration policies to comply with the IFPR

Please note that transitional provisions only apply to capital resources requirements.

If any of the matters outlined in this note are of interest to you and you would like to discuss these further, please contact sholman@cclcompliance.co.uk