Now is the time to get to grips with the IFPR – Who will fall in scope and how will they be impacted?

Hello, everyone, and thank you for joining us today for today’s webinar on “Now is the time to get to grips with the IFPR. Who will fall in scope and how will they be impacted?” I’ll pass you over to my colleague, Miriam Wall, executive director at Waystone. Thanks, Miriam.

Good afternoon, everyone. I’m pleased to welcome you all today to discuss and review the UK’s Investment Firms Prudential Regime or IFPR which have come into effect on the 1st of January 2022. Today, we have experts from the team at Waystone Compliance Solutions who will be providing insights and advice on the analysis your firm will require to complete in order to address the various requirements under the IFPR.

About Waystone Compliance

Waystone Compliance Solutions offers a new and unique approach to compliance services at a corporate level. It was formed this year by merging four specialist compliance companies, Titan Regulation, Argus Global, ISAS, and CCL Compliance. Waystone Compliance Solutions has the capabilities to help you manage a regulatory risk right across your organization and on a global scale. We can provide key services from initial registration and licensing to compliance program integration and ongoing monitoring. Our aim at Waystone is to enable our clients to navigate the complex regulatory environment with confidence.

Today, we will provide you with some insights and advice on the analysis your firm will require to complete in order to address the various requirements under the IFPR. We’ll speak about the biggest challenges that firms are facing while successfully transitioning to the IFPR, including capital resource requirements, liquidity requirements, concentration risk monitoring as well as realistic timelines for implementation of the IFPR.

Now, I would like to introduce you to my colleague, Stuart Holman, from CCL to set the scene for today’s webinar.

Thank you very much, Miriam. And, hello, my name is Stuart Holman, and I am a managing director at CCL Compliance, a specialist FCA regulatory consultancy that was recently acquired by Waystone during the summer. We form the UK arm of the Waystone Compliance Solutions division, and we’ve been helping UK-regulated firms meet their compliance requirements since 1988. And we’re delighted to be part of the wider Waystone Compliance Solutions division.

Over 30 years, we’ve been helping firms manage regulatory transition, helping them from being regulated by the SROs to the FSA, the ISD to MiFID, AIFMD, and after that MiFID, too. And now we’re helping firms with the transition to the IFPR.

Background on IFPR

So, the Investment Firms Prudential Regime (IFPR), that is something that has its genesis in the EU and predates Brexit. Some years ago, the EU decided to develop a Prudential regime which was more appropriately suited to investment firms rather than the slightly squeezed and squashed version of the…CRD that firms were subject to.

And so that led to the development of the EU investment firms directive and investment firms regulation, IFD and IFR. These measures were not enforced when the… And so they weren’t automatically… UK regulation, but early on in the process, the UK treasury and the FCA said that they were going to put in a pretty much equivalent regime to those…

The impact of the IFPR is going to be significant on those firms that are affected. And the purpose of the IFPR was to create a more proportionate and appropriate Prudential regime or investment firms. Now, I’m going to hand it over to my colleague, Atma Dhariwal, who’s going to take you through the intricacies of the IFPR, and I’ll leave you to decide whether you think they’ve achieved…

The Intricacies of IFPR

Hello, everyone. My name is Atma Dhariwal from the CCL Compliance Ltd., a part of the Waystone group. We are issuing this webinar as an alert to our clients as well as firms in the financial services industry who are going to be subject to the IFPR regulation with effect from 1st of January 2022.

Now, as you can see from the slide, pretty much all authorized FCA investment firms will be impacted, and the only real exceptions are credit institutions that are the banks, insurance companies, large investment firms that have a systemic impact on the market, and non-MiFID as well as Article 3 exempt firms. All of the firms are pretty much covered and the biggest impact as far as we’re concerned is going to be on exempt CAD firms who will now be subject to the IFPR and matched principal firms who will be subject to much higher own fund’s requirements.

As far as the IFPR is concerned, as you can note from the slide, there are a number of issues that are being highlighted here and that need to be compliant with effect from 1st of January 2022. There are quite significant changes in own funds and capital requirements. Firms need to be assessing these before the 1st of January 2022 so that they’re able to comply with these financial resource’s requirements. And if there is a need for them to inject more capital into the firm to comply, then they should be doing that prior to the 1st of January 2022.

Robust Corporate Governance Structure

Another requirement which a lot of firms are already complying with, but is being strengthened under the IFPR, is a robust corporate governance structure which takes or integrates risk management and capital planning into the governance framework. Then there is the ICARA, Internal Capital Adequacy Risk Assessment process, which a lot of firms are already familiar with as an ICAAP under the current regime. There are some changes that need to be reflected in the putting together of the ICARA and the risk management frameworks. The remuneration policy. The IFPR defines the covenants for remuneration policies for firms that will be subject to the IFPR.

Concentration Risk Monitoring

Concentration risk monitoring. A lot of large firms with the matched principal trading permissions and with own account trading permissions currently are subject to this requirement, but this is being widened to cover all firms, especially non-SNI firms going forward. There will be monitoring as well as reporting to the FCA on a quarterly basis.

Consolidation

Consolidation. A lot of firms again are aware of consolidation requirements under the current regime, but there are firms currently authorized as exempt CAD firms which have not been subject to any consolidation requirements. These firms will now become subject to consolidate.

Reporting

Reporting. There are going to be some additional reports as a result of the implementation of the IFPR. These reports will cover capital adequacy reporting, liquidity reporting, the firm’s business metrics reporting, concentration risk reporting, and ICARA questionnaire reporting.

Thank you for the introduction, Atma. Now that we’ve set the scene for today’s webinar, we start with some questions to help our audience with their preparation. And thank you to those who have submitted questions for today’s webinar.

So, Atma, what steps do firms need to take now to successfully transition to the IFPR?

Well, I mean, I think the firms should have been looking at the impact of IFPR on their operations several months ago, but we are where we are and the important things that one needs to consider with respect to the IFPR implementation: one, they should have pretty much determined the kind of category their firms will be subject to depending on their business metrics, whether the firm will be an SNI or a non-SNI. SNIs are usually subject to a much lower impact. Whilst non-SNIs will be subject to the full impact of the IFPR.

Firms should have pretty much decided IFPR permissions they need to apply for to the FCA, and they should have either done these applications sometime ago or they should be considering doing these applications at least before the 31st of December 2021. And the other obvious things that the firms need to be looking at, because it’s Prudential regulation, there are changes in the kind of capital requirements that the firms are going to be subject to. We alluded to these earlier. They should have considered what kind of impact these financial resources requirements will have on the firm and decided on whether they have got adequate capital in place or whether they need additional capital.

Thank you, Atma. And so that leads me nicely then to my next question.

How does the ICARA, Internal Capital Adequacy Risk Assessment, process differ from the ICAAP process, which firms will already be familiar with?

The ICARA is not substantially different to the ICAAP albeit there are some salient differences. One of the salient differences between the ICAAP and the ICARA is how risks or harms should be presented within the ICARA documentation. The FCA’s guidance is that the harm should be assessed under three different headings, risks to the market, risks to clients, and risks to the firm. That in essence is one of the biggest differences. The other difference is that under the IFPR, a threshold on funds requirement is required to be met which will be met through an analysis in the ICARA, taking into account any capital that will be allocated as a result of unmitigated risks or wind-down processes and costs.

Thank you, Atma.

And so what would your advice be then to firms in their approach for the preparation of a wind-down plan as part of the ICARA?

The wind-down plan has been in place or is in place under the current regime. There is further guidance under the IFPR with respect to putting together a wind-down plan. The FCA now requires a rather most substantial wind-down plan and recovery planning prior to putting together the costs of a wind-down. In the past, people have arbitrarily selected three months, six months or whatever the case may be for a wind-down. The regulator now wants you to look at the complexity of the business more closely to determine what kind of wind-down period would be appropriate to the firm.

The guidance or a general guidance from the FCA is they are looking at nine months albeit that is not something that is communicated in the rules. Appropriateness of the wind-down period is indicated but not the nine-month period. So we will have to, sort of, keep that under review, because, I mean, nine months for some firms may be far too long. The firms that have a very simple business model, it may not take them nine months to wind down. So that’s under review.

Understood. Thank you.

And so for firms then who have not yet made plans for compliance, what would you say, Atma, is a realistic timeframe for reaching complete IFPR compliance?

I mean, I think there is an immediate need, and there is a short to medium-term need. The immediate need for firms, as I alluded to earlier, is to make the necessary applications to the FCA rule in respect to IFPR requirements. And one of the other things is they have to be able to determine what their capital requirements are going to be under the IFPR because technically the firms need to comply with those hard capital requirements. It’s not as if these are, sort of, gray areas. These are pretty well-defined capital requirements. Firms have to be able to meet this with effect from the 1st of January 2022, and this includes capital adequacy requirements as well as liquidity requirements. So that is one thing they got to have in place before implementation.

Now, as far as the qualitative kind of requirements are concerned, the ICARA, corporate governance, the remuneration policies, etc., the firms can, in my opinion, take some time getting these in place. But my suggestion is that the first reporting period is for the quarter end, 31st of March 2022. They should have most of the documentation in place by that time.

Okay, thank you for that advice, Atma. And so final question then:

What would you see as the single biggest challenge that firms are going to face at the moment while successfully transitioning to the IFPR?

I think one of the biggest challenges to my mind is the question of proportionality. The regulator indicates within the rules that the firms have to prepare some of these documentation in a proportionate manner. Proportionate manner refers to, sort of, policies, remuneration policies, ICARA documentation, corporate governance plans, etc. There is no guidance as to what one definition of proportionality is or where the thresholds are with respect to proportionality. So it is pretty much left on authorized firms to decide proportionality. And so in a sense, one of the things that firms have to do is to pretty much sit down, analyze their business complexity, and write a paragraph on proportionality to rationalize to the regulator as to why they are taking the approach they’re taking.

Thank you, everyone, for joining us today. We hope you found this very useful, and to summarize, we provided you today with some insights and advice for the preparation your firm will require to complete to address the various requirements under the IFPR. We’ve spoken about the biggest challenges that firms are facing while successfully transitioning to the IFPR, including capital resource requirements, liquidity requirements, and concentration risk monitoring. We’ve also discussed realistic timelines for the implementation of the IFPR as well as the issue of proportionality.

We hope that this was useful for you in preparing for your firm’s compliance. You can reach out after the seminar to myself, Stuart, or Atma or your usual Waystone contact with any questions. Thank you.

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