The Financial Conduct Authority (FCA), Prudential Regulatory Authority (PRA) and HM Treasury are bringing forward new regulations in both areas that are likely to have a significant impact on UK wealth management and large financial advice firms, warns PIMFA.
The trade association for the wealth management, investment services and the investment and financial advice industry, is warning firms regarding the scale and impact of post-Brexit regulations being introduced to ensure they remain financially and operationally resilient.
The Investment Firm Prudential Regime (IFPR) has been designed specifically for MiFID investment firms to ensure they have sufficient strength and flexibility to withstand volatility within the economic cycle.
The IFPR is likely to be comparable in size and complexity to MIFID II in terms of its impact and will require fundamental changes to how firms approach risk, liquidity and capital, says PIMFA.
In the UK firms will not have to implement the IFPR until January 2022, unless they have a European base or subsidiary. If they do have a European subsidiary, they and other European firms will have to implement the IFPR by June 2021. This difference in implementation deadlines has the potential to add additional complexity to what it likely to already be a complex process.
Among the things firms will need to consider are likely increases in regulatory capital requirements beyond what they already hold today, restrictions on how certain staff are paid and restrictions on debt-funded acquisitions. There are three consultations on this, the second of which concerning remuneration, is due later this month.
At the same time, the FCA’s statement on Building Operational Resilience and final rules released on 30 March, have been designed to ensure that enhanced Senior Managers and Certification Regime (SM&CR) firms and dual-regulated designated investment firms maintain operational resilience in the face of unexpected disruption. The final rules were first consulted on in 2019 and firms will now have 12 months’ implementation period before the rules enter into force on 31 March 2022.
In the next 12 months, firms will need to carry out mapping and scenario testing to a level of sophistication necessary to identify their important business services, set impact tolerances and identify any vulnerabilities in their operational resilience.
From 31 March 2022 firms will have a three-year transitional period to see how they operate within the impact tolerances they have identified and must make reasonable efforts to remain in their impact tolerances.
PIMFA head of regulatory policy and compliance Giulia Lupato says: “The IFPR will have a significant impact on MiFID investment firms and involves fundamental changes to the way in which they work. It is vital that firms begin to analyse how these changes will affect them and to begin to make preparations.
“Meanwhile, we are pleased to see the FCA has recognised that achieving operational resilience is a journey personal to each firm, as well as the challenges posed by third parties and supply chains. We hope this will result in a proportionate approach to supervision when it comes to firms’ mapping of complex supply chains.
“We also appreciate the FCA agreeing to soften the initial, proposed deadline of three years from the date the rules come into effect by introducing a 4-year ‘staged’ approach.”