The regulatory remit of the Prudential Regulation Authority (PRA) could change once a new regulatory regime for UK investment firms takes effect, an expert has said.
The UK Treasury and financial regulators are currently consulting on the details of the new investment firms prudential regime (IFPR), which is expected to come into force from January 2022. The Treasury has now published in draft form a new statutory instrument which would, once enacted, allow the PRA more flexibility to designate investment firms for prudential regulation.
It is the PRA’s intention to increase the base capital resources requirement for PRA-designated investment firms, in order to better align it with other changes to the regime, according to its latest IFPR consultation. This would require consequential amendments to its policy statement on designation and the ‘definition of capital’ part of the PRA rulebook, both of which it intends to take effect from 1 January 2022.
The Treasury is planning to lay the draft Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order (PRA RAO) before parliament by the end of this year.
Financial regulation expert Charlotte Pope-Williams of Pinsent Masons, the law firm behind Out-Law, said: “Whilst firms often and understandably focus on the FCA, it is important for firms to monitor the powers that the PRA will have as part of the new IFPR regime”.
“Whilst the PRA RAO amendments are relatively minor, firms should keep a look out for those statutory instruments that will underpin the new regime in the run up to 2022 when it is expected to come into force,” she said.
“The Treasury’s February 2021 consultation on the implementation of the new regime (28-page / 298KB PDF) acknowledged that the IFPR presented a limited number of delegated powers for it to exercise to ensure the effective implementation of the regime. The previous order allowed the PRA to choose to designate any investment firm that satisfied the criteria of both dealing in investments as principal and being subject to an initial capital requirement of €730,000. The draft PRA RAO allows all investment firms that deal in investments as principal to be eligible for designation by the PRA. It follows that this legislative programme is one to watch for those investment firms whose regulator may change,” she said.
The PRA is proposing to increase the capitalisation threshold from €730,000 to £750,000, denominated in sterling. It said that no currently designated investment firms would be affected by this “small increase”, as they currently hold capital “well in excess of the proposed amount”.
The IFPR is the UK’s first dedicated prudential regulatory regime for investment firms, which are currently subject to prudential regulation in similar form to banks and other credit institutions. It follows the introduction in June of an EU-wide investment firms regulatory framework under the Investment Firms Directive (IFD) and Regulation (IFR). The UK, as a member of the EU, played a substantial role in the policy debate leading up to the introduction of the new rules, and the IFPR is designed around similar principles and with the same outcomes in mind as its EU equivalent.
Pope-Williams said: “Whilst the IFPR largely mirrors the EU’s prudential regulation regime of investment firms contained in the IFR and IFD, following the UK’s departure from the EU there will be key differences in approach”.
The FCA opened its third consultation on proposed IFPR rules, covering changing prudential standards, earlier this month. The consultation should be read in conjunction with its IFPR policy statements of June and July 2021, and closes on 17 September.
