The new Investment Firm’s Prudential Regulation
A new framework for prudential regulation in the UK is scheduled to be implemented from 1st January 2022.
This will replace the current framework for all firms currently subject to the Capital Requirements Directive.
This new Investment Firms Prudential Regulation will bring about a number of changes. Significantly, firms will see their base capital requirements increase, albeit with transitional provisions. Existing prudential classifications will be removed, with some firms, particularly those trading on a matched principal basis, will see a substantial increase in their capital requirements.
New prudential classifications are to be introduced, determined by reference to various quantitative measures and risk profiles. A new component, referred to as “K-Factors” will be introduced into the calculation of capital requirements for firms in the higher prudential classifications, calculated according to such factors as assets under management, client money balances and orders executed.
Liquidity management, wind down planning and rules on remuneration are to be introduced for all but the lowest classification of firms.
The Internal Capital Adequacy Assessment Process (ICAAP) will be replaced by a new Internal Capital and Risk Assessment (ICARA) process, the objective being to make the subjective assessment of capital requirements more relevant to investment firms in preference to the current regime, which is more skewed towards banks. Firms, such as corporate financiers and other advisor/arrangers, who are currently not subject to the Capital Adequacy Directive, ie CAD Exempt firms, will be subject to ICARA for the first time.
To find out how the new regime will affect your firm, please do get in touch, we’ll be delighted to help.