Any group wishing to apply to the FCA to use the GCT must do so by the end of January 2022.
Confirm IFPR classification
The prudential categories such as IFPRU, BIPRU and exempt CAD will cease to exist. Instead, firms within the scope of the IFPR will be classified within one of two categories.
Firstly, firms that fall below certain thresholds will be classified as a small and non-interconnected investment (SNI) firm. These firms will benefit from some proportionality under the new regime.
Secondly, any firms exceeding the SNI criteria will be classified as a non-small and non-interconnected investment (non-SNI) firm.
Even if a firm is initially classified as SNI, this is something it needs to keep a close eye on, particularly if it is close to one or more of the thresholds.
Where a firm is part of a group structure, the UK parent entity of the group will be responsible for determining the group’s classification as an SNI or non-SNI firm.
Calculate the new own funds requirement and check that capital resources remain valid
The own-funds requirement for a MIFIDPRU investment firm (the new terminology for investment firms under the IFPR) will be the highest of its permanent minimum requirement (PMR); a fixed overheads requirement (FOR) of three months' fixed costs; or, for non-SNI firms only, the sum of the firm’s 'K factors' (these relate to the new concept of the K-factor requirement).
All firms need to review how they will meet the new requirements.
Although many firms will be familiar with the concept of the FOR, there are some changes to the allowable deductions.
One important difference is that there is no deduction for "other variable expenditure". The FOR calculation must include all operational-type expenses, which the firm needs to run the business.
For non-SNI firms, the KFR is a new concept that needs to be considered to determine the minimum own-funds requirements.
It is calculated by adding together a mixture of activity and exposure-based requirements, depending on the Mifid investment services and activities a firm undertakes – for example, assets under management; client money held; assets safeguarded and administered; and client orders handled. Additional K factors apply to firms with permission to deal on their own account.
Each K factor has a specific calculation attributed to it to provide a monetary amount to be included in the firm’s overall financial resources requirement. Firms will need to obtain the necessary data to calculate the relevant K factors.
