Prudential regime for UK investment firms proposed

The plans for the introduction of a new prudential regime are set out in a discussion paper published earlier this week by the UK's Financial Conduct Authority (FCA).

The new UK framework will be introduced in different terms to but in parallel to a new EU prudential regulatory regime for investment firms provided for in the EU's Investment Firm Directive (IFD) and Regulation (IFR). The IFD and IFR take effect from the end of June 2021, six months after the current Brexit transition period is scheduled to end.

Investment firms are currently subject to prudential regulation in similar form to banks and other credit institutions. Elizabeth Budd of Pinsent Masons, the law firm behind Out-Law, who specialises in financial services regulation, said that while the EU-driven reforms are designed to "reduce the capital needed to be held by investment firms" there is no guarantee this will be the case and that firms "need to familiarise themselves with the details sooner rather than later".

Budd said the discussion paper addresses core areas in the EU’s legislation. These include initial capital and permanent capital requirements, the minimum for which have increased under the IFD and IFR. The paper also addresses the definition of capital, own funds requirements, and rules around liquidity and remuneration, among other issues.

Budd said: "These are, admittedly, complex areas of rules in their own right, but they cannot be viewed in isolation. They must be assessed by respondents in conjunction with what the FCA refers to as less significant but still important features of the EU’s regime. So investment firms need to familiarise themselves with all of this to share their views on questions about detailed, technical points from the EU’s regime to assess how the regulator may design rules achieving similar outcomes in the UK."

"The FCA had supported the EU’s work to create a new prudential regime when the UK was an EU member state and points out that UK stakeholders contributed significantly to that policy debate. This consultation reflects that degree of prior involvement and is certainly not an entry-level discussion," she said.

Christopher Woolard, interim chief executive of the FCA, said: "We have long advocated for a bespoke prudential regime for investment firms. A new UK regime would represent a significant improvement in the prudential regulation of investment firms. For the first time, it would deliver a regime that has been designed with investment firms in mind."