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FCA’s new prudential regime to adversely affect UK investment firms

FCA new prudential regime to affect UK investment firms severely
Jordan Major

The FCA’s new prudential regime for MiFID investment firms might affect more than a thousand UK-based investment companies. On August 25, 2020, reports emerged that these new capital requirements might make UK firms less competitive in the global scene.

Additionally, Bovill financial consultancy firm believes that the new measures will make the UK less attractive for investors. The country’s economy is currently receiving a double blow from COVID-19 and Brexit. Thus, these measures may crumble the economy further.

All regulated firms have one month left to respond to the FCA’s consultation paper on the new regulations. Around 33% of the UK’s 3,844 MiFID investment firms are exempt from the European Union’s Internal Capital Adequacy Assessment (ICAAP).

Additional regulations

Firms that were previously exempt will have to undergo an Internal Capital Adequacy and Risk Assessment (ICARA) for the first time after the UK leaves the EU. The FCA plans to take a harder line with the new prudential regime.

28% of firms that participated in a Bovill poll said they would need additional resources, including systems and people, to meet these ICARA requirements.

FCA’s new Investment Firm Prudential Regime (IFPR) is set to replace the EU’s Investment Firms Regulation (IFR) and Investment Firms Directive (IFD). Reports indicate that the new regulation is scheduled to take effect in the summer of 2021.

Managing Consultant at Bovill, Harpartap Singh, said:

“This is a clear move by the FCA to gold-plate prudential regulations, and it seems unjustified and disproportionate for smaller investment firms. Many of these firms will have never done this kind of assessment before, and so the administrative and resource burden will be a challenge. One of the key objectives of the new regime was to be risk-oriented and it doesn’t make sense in terms of risk to include smaller firms in the ICARA when they are already covered by the FCA’s guidance on assessing adequate financial resources.”

 The ICARA may be an onerous and rigorous process and the FCA never gave much warning. Analysts think some smaller firms will struggle.

Affected organizations

Most of the polled organizations are worried about the new regime’s group capital requirements. 45% of them said that they would be affected. These new requirements and regulations mean that groups of British firms may need to hold capital in the UK. The rule will affect firms even if their parent company is based elsewhere.

Singh believes that the group capital requirements affect many firms. They might might make the UK less attractive for investment fund managers seeking to set up or expand. Almost 50 firms said that they will respond to the FCA’s consultation paper on IFPR. Singh commented:

“The IFPR seems to have touched a nerve; which has been made clear by the number of firms indicating they will respond to the consultation paper.”

With just a month until the deadline, firms are encouraged to have their say. They can respond directly to polls to influence regulation that will affect them adversely for years to come.

Methodology: Survey results taken from a poll of 134 attendees at Bovill’s webinar on 16th July entitled: “A new prudential regime – what the FCA’s announcement means for you“.

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