FCA’s prudential regime to disadvantage UK investment firms

Over a thousand investment firms in the UK will be adversely impacted by the FCA’s new prudential regime for MiFID firms, according to research from Bovill.

The financial consultancy suggested the new capital requirements could make UK firms less competitive and the UK less attractive for investors, just as the economy receives a double blow from Brexit and COVID-19.

Regulated firms have one month left to respond to the FCA’s consultation paper on the new rules.
Bovill estimated that just over a third of the UK’s 3,844 MiFID investment firms are currently exempt from the EU’s Internal Capital Adequacy Assessment. The FCA is proposing to take a harder line with the new prudential regime, meaning all firms who were previously exempt will have to undergo an Internal Capital Adequacy and Risk Assessment (ICARA) for the first time, once the UK leaves the EU.

In Bovill’s study, 28% of firms said they would require extra resources, including people and systems, to meet the ICARA requirements.
The FCA’s new Investment Firm Prudential Regime will replace the EU’s Investment Firms Directive and Investment Firms Regulation, and is expected to come into effect in the summer next year.
“This is a clear move by the FCA to gold-plate prudential regulations, and it seems unjustified and disproportionate for smaller investment firms,” Bovill managing consultant, Harpartap Singh, commented.

“Many of these firms will have never done this kind of assessment before, and so the administrative and resource burden will be a challenge. One of the key objectives of the new regime was to be risk-oriented and it doesn’t make sense in terms of risk to include smaller firms in the ICARA, when they are already covered by the FCA’s guidance on assessing adequate financial resources.

“The ICARA may be an onerous and rigorous process and the FCA didn’t give much warning. I think some smaller firms will struggle.”
The organisations polled by Bovill also indicated that one of the areas they were most concerned about was the new regime’s group capital requirements, with almost half of respondents (45%) saying they would be impacted.

“The group capital requirements affect a large number of firms and could make the UK a less attractive place for investment fund managers looking to set up or expand,” Singh added. “This combined with ICARA and the more stringent rules around holding capital could put UK firms at a disadvantage on the global stage, at a time where we arguably need to be at our most competitive.”

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