As we discussed in further detail in our earlier Alert, the EU Investment Firms Regulation and Investment Firms Directive (“IFR” and “IFD”, respectively) came into force on 25 December 2019. Most of the requirements under IFR/IFD will apply to investment firms authorized under the European Markets in Financial Instruments Directive II (“MIFID II”) from 26 June 2021.
As a consequence of Brexit, the UK is at liberty to determine when and to what extent it wishes to implement the IFR/IFD. As such, the UK government, the Financial Conduct Authority (“FCA”) and the Prudential Regulation Authority announced on 16 November 2020 that they are delaying the implementation of the prudential rules in the UK to 1 January 2022.
As a reminder, IFR/IFD introduces certain fundamental changes to the prudential framework applicable to MIFID II investment firms falling within its scope. The rules will apply to investment firms differently depending on whether they are classified as large investment firms, which deal on their own account and/or underwrite or place financial instruments (to which an enhanced set of requirements will apply), “small and non-interconnected investment firms” (in which case, a subset of the requirements will apply), and all other investment firms (to which most requirements will apply). The requirements will include changes to the way investment firms calculate their regulatory capital requirement, new liquidity requirements, and increased transparency regarding risk management, remuneration and governance.
The FCA and the UK government confirmed their intentions to implement a prudential regime that broadly mirrors the IFR/IFD — the Investment Firms Prudential Regime (“IFPR”) — after the Brexit transition period ends.
The UK government has stated that to minimise uncertainty during this time, it proposes to implement the IFPR to achieve similar intended outcomes as those in the IFR/IFD, but with targeted deviations from the EU regimes where it deems necessary. The majority of IFPR will be implemented by FCA rules, which will be clarified in a forthcoming FCA consultation paper (following its discussion paper in June 2020).
Against this backdrop, the UK has confirmed the delay of the implementation of IFPR to 1 January 2022. This delay follows feedback from industry where market participants raised concerns about the general volume of regulatory reform in 2021, particularly in light of the impact that the IFPR is likely to have on firms within its scope. The FCA noted in this announcement that it will endeavour to provide industry with as much sight of the final rules as possible ahead of 1 January 2022 to support effective implementation.
To prepare for implementation, firms (including FCA authorised full scope investment firms, exempt CAD firms, and collective portfolio management investment firms (CPMIs)) should assess how they will be classified as classification will impact the application of liquidity, enhanced reporting and disclosure obligations to them and potentially other members of their group. In addition, firms should familiarise themselves with the corresponding requirements under the new rules, and consider at a high level the potential impact to their governance and compliance arrangements.