In the case of the UK, these were the BIPRU and IPRU(inv) regimes operated by the FCA. The scope of the new regime is to harmonise the prudential and supervisory requirements that apply to investment firms across the EU.
Of course, the new regime deals with EU regulated firms and, since Brexit, the UK is no longer part of the EU so, under a strict interpretation, firms here could not be affected depending on future negotiations.
However, firms will still need to consider the impact of IFR and IFD because they could still be caught as a result of any transition period under the proposed EU withdrawal agreement.
In addition, it is highly likely the UK will choose to implement virtually all of the IFR and IFD requirements in order to address any deficiencies in the current regime.
Another good reason for implementing the EU proposals is, if the UK does implement IFR and IFD, it could help facilitate a finding by the European Commission that the UK regime governing investment firms is equivalent to EU regime for the purposes of the cross-border access requirements in MiFIR (although this could be challenging).
IFR/IFD creates three categories of firms. A business must apply a range of factors in order to determine which category applies.
In this article, we will be looking at class two and class three firms. These firms will fall within the non-systemic distinction, which is likely to apply to firms providing DIM services. It would be helpful to define these two categories.
A Class 2 firm will satisfy a number of tests, the most pertinent being:
- AUM under management ≥ €1.2bn
- Daily Client Orders handled ≥ €100m (cash trades) or €1bn (derivatives)
- Assets safeguarded and administered ≥ zero
- Client Money held ≥ zero
- On- and off-balance sheet total ≥ €100 million
- Total revenues from investment services and activities (average of the last 2 years) ≥ €30m
A Class 3 firm is simply described as “Other authorised investment firms”.
The main regulatory change will be an increase in the initial capital requirement and, for some companies, the introduction of a new methodology for calculating the ongoing risk-based capital requirement that applies to the business.
Class 2 investment firms will be subject to the higher of the sum of their “K factor” requirements, one quarter of their annual fixed overheads and their initial capital requirement. It is the K-factor which is the new dimension in deciding the initial capital requirement, and it is designed to provide a quantitative indicator for specifically identified risks.
There will be three K-factor groups: risks to customers, risk to markets, and risk to companies. The formula for calculating a company’s fixed overhead requirement is expected to stay the same.
