The Financial Conduct Authority (FCA) published its second Consultation Paper (CP) on the Investment Firm Prudential Regime (IFPR) on 19th April 2021. The IFPR is due to come into force in the UK from January 2022 and represents a wholesale change to risk management and prudential capital rules for investment firms. The new regulation cuts across a broad range of areas, from core areas of capital and liquidity through to governance and remuneration requirements.

At a glance

Overall, the CP demonstrates that the FCA is adopting a proportionate approach in implementing the IFPR. There are a series of variations from the equivalent EU regime on areas such as governance, liquidity, remuneration and reporting requirements. While this means that many firms with UK and EU entities will need to meet two different sets of rules, it has the benefit of simplifying a number of obligations and ensuring that the regime is appropriate for the UK market and particularly for smaller firms. Draft rules for all the minimum financial resource (capital and liquidity) requirements are now available, and we expect firms to analyse the detail of these. The CP outlines more requirements at a regulated entity level, as opposed to a group consolidated level, and this represents a fundamental change to the FCA’s historic approach of steering firms to monitor their Internal Capital Adequacy Process (ICAAP) at a consolidated level. The most significant change in the CP is the transformation of the ICAAP to the Internal Capital and Risk Assessment (ICARA); this will bring additional obligations for many firms, particularly around wind-down planning and the greater accountability of senior management for risk management. Further changes to governance and remuneration will impact the largest firms. Below is a summary of the key headlines across these topics

Capital requirements – K-factors (KFR)

The K-factor regime represents a fundamental shift in the approach to calculating capital requirements for investment firms. The draft rules for the “Risk-to-Client” K-factors have been published in CP21/7. Since the announcement of the new regime, firms have been concerned by the data and interpretation challenges the new rules will post, particularly given the requirements apply to individual regulated entities. While release of the draft rules provides welcome detail and certainty, with eight months to go until implementation, all firms will need to make sure they quickly assess the Risk-To-Client K-factors in terms of scope, methodologies and data requirements.

  • K-AUM (Assets Under Management): the draft rules define AUM as assets that a firm manages under discretionary portfolio management and ongoing non-discretionary investment advisory arrangements. Therefore, all firms need to assess both their portfolio management and advisory client base to identify relationships in scope of K-AUM. Portfolio assets must be measured on a net basis which many firms across the industry will welcome as an indicator of a proportionate approach from the FCA. The K-AUM coefficient remains at two basis points. We expect the broad definition of AUM and requirements to adjust for complex delegated arrangements to result in a range of data availability challenges where firms do not have this data available centrally.
  • K-CMH (Client Money Held) and K-ASA (Assets Safeguarded and Administered): firms will be able to calculate these requirements leveraging existing processes for client money and asset reporting for UK entities. Therefore, this should provide a good source of existing data. The K-CMH and K-ASA coefficients remain at 40 and four basis points respectively and therefore, where applicable, the client money K-factor could have a significant capital impact on firms.
  • K-COH (Client Orders Handled): where a firm receives and transmits client orders or execute orders on behalf of clients, this K-factor will apply. Client orders must be calculated as the sum of the absolute value of buy and sell trades with specific definitions of absolute value for cash and derivative trades. The coefficients for COH continue to be 10 basis points for cash trades and 1 basis point for derivative trades. Since the COH K-factor was announced, many firms have raised questions on the exact nature of order types in scope and how K-COH will interact with K-AUM to avoid double counting. The CP does address some of these issues, but a detailed assessment of transaction types will be needed to see how these will be dealt with in the new regime.

Consolidation: K-factors will also apply at the consolidated basis. We see this as being an area of significant challenge for many firms. Firstly, the consolidated requirement will include activities of non-UK entities, therefore creating additional capital requirements and burdens for UK firms operating in countries which do not have equivalent regimes. Secondly, consolidated requirements will complicate calculations due to adjustments for intra-group activities, the challenge of obtaining data based on applying UK rules to overseas countries (e.g. for Client Money Held) and the wide range of activities in scope of all K-factors.

Capital requirements – the fixed overheads requirement (FOR)

The higher of the permanent minimum capital requirement, the KFR or the FOR will be the new minimum requirement for all investment firms. The FOR is not a new concept for many MiFID investment firms and the draft rules in this area replicate a number of those that currently apply. However, there are changes to eligible deductions which will drive different requirements for different firms depending on their circumstances. Higher requirements could result from changes in client money interest deductions and the treatment of variable remuneration as being fully discretionary. On the other hand, firms will be able to remove software amortisation expenses and contract-based profit transfer expenses. Both of these could have a materially favourable impact on larger firms.

All firms will need to consider the impact these changes have on capital requirements of individual entities and on a group basis to avoid any surprises and trapped capital closer to implementation.

Liquidity requirements

For the first time, all investment firms will be subject to a binding regulatory liquidity requirement, known as the basic liquid assets requirement. These are set at one month of the FOR. We do not expect this to impact the overall amount of liquidity most firms hold immediately. However, it may lead to changes in cash management between legal entities.

  • Liquidity requirements must be met through core liquid assets which include cash on demand, government securities, money market fund holdings and, for some firms, trade receivables. This definition of liquid assets is a simpler approach than that under the EU equivalent regime to the IFPR.
  • Firms with liquidity waivers under existing regimes will need to re-apply for these under the new regime. While a new application is needed, continuation of the use of such waivers is good news for firms which current rely on them.


Firms with on and off-balance sheet assets of £300 million (the Total Assets Threshold) are required to have Risk, Remuneration and Nomination Committees, replicating the existing requirements for Significant IFPRU firms. This will also apply to some smaller firms that operate trading book business of over £150 million , or derivatives book business of over £100 million (the Trading Book and Derivative Business Threshold). The committees must operate at each regulated entity that crosses the threshold and the majority of members must be non-executives. Therefore, firms who don’t have these committees in place or who rely on group committees will have to implement significant changes to their governance structures or obtain a waiver to use group committees. It will also be important for firms to assess their status against the thresholds for the purposes of disapplying certain remuneration rules (see below).

Again, there are small differences compared to the proposed EU regime where Nomination Committees are not required, but Risk and Remuneration Committees must fully comprise non-executives and Risk Committee requirements cannot be waived at the legal entity level. This reiterates the intention of the FCA to adopt an approach to the IFPR that is suitable for the UK market.

The Internal Capital Adequacy and Risk Assessment (ICARA)

The ICARA, which is replacing the ICAAP, is a fundamental change to existing requirements and represents a shift in the FCA’s approach to investment firms. In its previous discussion paper, the FCA had indicated this would apply on an individual regulated entity basis, which would have been a significant change for large firms with multiple entities currently producing a consolidated ICAAP. However, the CP sets out a hybrid approach for these firms; the ICARA may be done on a consolidated basis, but wind-down planning is required at an individual regulated entity basis.

The ICARA is the risk management process through which the FCA expects firms to have appropriate systems, controls and, where relevant, financial resources to:

  • mitigate the harms it may cause on an ongoing basis to clients, markets and the firm itself.
  • facilitate a wind-down of the business in an orderly manner through wind-down planning

We expect firms who already perform an ICAAP to be able to leverage and adapt many aspects of their existing process for the ICARA. However, there is a fundamental change in terms of demonstrating assessment of risk: a broad range of risks must be assessed with firms required to consider risks to clients, markets and the firm itself. While many might reflect some of these risks in their current framework, the FCA expects all firms to formally assess these risks. There are also additional requirements for firms to monitor and notify the FCA of “intervention point notifications” which are a range of pre-defined thresholds of capital and liquidity, with the FCA expecting firms to start a wind-down where the “wind-down trigger” is breached.

The CP is clear that the FCA will hold senior management to account for any weaknesses in governance and risk management, including the ICARA.

Individual Capital Guidance (ICG) and the Supervisory Review and Evaluation Process (SREP)

Where firms have an existing ICG, they are expected to contact the FCA to discuss transferring this to the new regime. This provides significant uncertainty in terms of the regulator’s approach for transition of historical ICGs. It is unclear what scope there will be for changing the size or nature of the ICG and this will lead to continued frustrations for some firms who have been subject to ICGs for significant periods of time without any FCA review.

In terms of regulatory oversight, the FCA will continue to apply a board scope to their Supervisory Review and Evaluation Process (SREP) reviews and will ultimately use a range of tools, including capital and liquidity add-ons, where it disagrees with a firm’s approach


The UK will diverge from the EU’s regime (the Investment Firm Regulation and Directive) on remuneration rules in certain key areas; for example, the proportionality thresholds and approach to third country subsidiaries. The FCA proposes to create a new remuneration code to replace the current IFPRU and BIPRU remuneration codes. MiFID, AIFM and UCITS remuneration requirements will continue to apply to all relevant firms as they do now.

Small and non-interconnected investment firms only need to comply with basic principles-based requirements. Other firms not exceeding the Total Assets Threshold or Trading Book and Derivative Business Threshold (which are set out in the Governance section above) can disapply the provisions on pay-out, deferral and holding/retention periods for pensions benefits; again demonstrating the FCA’s proportionate approach. The rules apply to performance years beginning on or after 1 January 2022.

The new rules must be applied on an individual and consolidated group basis, unless the FCA has allowed an investment firm to apply the Group Capital Test meaning that no prudential consolidation is required. In order to reduce the compliance burden but without increasing prudential or conduct risks, the FCA has limited the extra-territorial application of the new remuneration rules to material risk takers responsible for UK business who are employed by third country subsidiaries.

This represents a significant divergence from the existing UK regime with some firms needing to apply more stringent rules on pay-out and deferral. When identifying material risk takers, investment firms will need to consider broader categories of roles that may have a material impact on the firm’s risk profile or on the assets it manages. There is a new requirement for remuneration policies and practices to be gender neutral and new guidance on non-financial criteria for assessing an individual’s performance. Firms with activities in the UK and EU will need to consider how this impacts their business models.

Regulatory Reporting

From the outset, one of the FCA’s stated aims for the IFPR has been to simplify the regulatory reporting obligations for all firms; the provisions set out in the CP are consistent with that aim. The FCA has proposed that a firm’s remuneration reporting requirements will be tailored depending on their remuneration requirement approach. Additionally, the FCA has proposed an annual ICARA questionnaire, which will include both quantitative and qualitative elements, so as to provide a snapshot of the firm’s wider ongoing Pillar 2 assessment process. The draft requirements set out will therefore be welcome relief from overly burdensome requirements under the current COREP regime.