It is important to bear in mind that Initial Capital Requirements will be set according to their authorised activities, and therefore a Class 3 firm could have capital requirement as a Class 1 firm. The IFD sets the capital requirements out on this basis as follows:
- €750,000: dealing on own account or underwriting or placing on a firm commitment basis (including for operators of organised trading facilities authorised to deal on their own account);
- €75,000: reception and transmission of orders, execution of orders on behalf of clients, portfolio management, investment advice, placing on not a firm commitment basis;
- €150,000: operation of a multilateral or organised trading facility.
From this, it can be gleaned that it is important to look at the scope of a firm’s permissions and conduct a strategic review to ensure that these permissions are absolutely necessary for the conduct of its business. Unnecessary permissions could trigger a higher level of capital adequacy with all that entails.
It can be seen from these categories that most DIMs will fall within the second category.
This means that a firm that is currently a BIPRU €50,000 (£46,200) limited licence firm will see their initial capital requirement increase to €75,000 from 26 June 2021 onwards, subject to a potential transition period.
This initial capital requirement will continue to represent the absolute minimum a company must hold to meet its capital requirements.
Most DIMs will also be Class 3 investment firms. The capital requirement required will be one quarter of their annual fixed overheads and their initial capital requirement.
Unlike Class 2 firms, they will not have to assess their capital based on the K-factors, but they will have to monitor them in order to assess whether they become Class 2 firms.
In addition, Class 2 and Class 3 investment firms will be subject to concentration risk monitoring and reporting.
At the moment, BIPRU firms in the UK fall outside the scope of the CRR regime which means they are not subject to group supervision.
However, this could change with the introduction of the new regime because investment firms will be dragged into the IFR/IFD prudential scheme. In many instances this will trigger group-wide prudential regulatory requirements for the first time.
And there is more; the new regime will require Class 2 and 3 investment firms to be subject to a basic liquidity requirement which will be calibrated at one third of annual overheads.
These requirements must be met with cash and other high-quality liquid assets, though it is expected that Class 3 firms will be able to use a wider range of assets for this purpose.
