Investment Firm Regulation Update: Agreement Reached on Next Steps for New Prudential Regime for Investment Firms

Last week, the European Parliament and Member States struck an agreement on how to move forward with the implementation of the new prudential framework. This marks a significant milestone in finalising “more proportionate and effective” prudential rules for investment firms across the European Economic Area (EEA).

The new prudential framework has been developed by the European Commission (EC) and will soon come into force for MiFID investment firms. For some, this will be the first time any onerous capital, liquidity and reporting regime has applied to them. The ‘prudential holiday’ that many commodity trading firms have enjoyed will soon be coming to an end.

While Brexit impacts all existing and developing EU legislation, it is highly unlikely that the UK will end up with a regime that is materially dissimilar to that adopted by the EU regardless of how or when the UK’s departure from the EU ultimately transpires.

The new prudential framework is intended to be simpler and more proportionate to an investment firm’s operations. The framework requires the vast majority of investment firms to adapt to a new set of capital and liquidity requirements as well as a new reporting regime.

When it comes into force, some firms may be hit very hard with requirements to maintain significantly greater levels of capital, for example commodity trading firms and FCA-authorised firms currently classified as exempt from the Capital Adequacy Directive.  The need to conduct an internal capital adequacy assessment process and document this at least annually in a formal ICAAP report will also present a new challenge for these firms. Such firms in particular will be eager to see the final rules so they can develop their plan to meet the new requirements.

Some of the areas which require more technical development from the authorities, such as the specifications of regulatory reporting under the new regime, will be those which create the most operational upheaval, so firms need to monitor these developments too.

It is important that compliance teams at MiFID investment firms take some time to consider the potential impact of this new prudential capital regime. While the required changes to capital levels could be modest for some firms, others could potentially see a significant swing in their required capital figure – careful analysis and planning is a must to avoid being caught out.

How ACA Can Help

ACA’s specialist Financial & Regulatory Reporting division provides a range of services to help firms address the effects of the new prudential regime - including impact analysis and training -as well as support with the ongoing compliance burden of regulatory reporting, prudential monitoring and ICAAP report preparation.

Contact us to learn more or to speak to one of our prudential experts, call 020 7040 0560.

Connect with ACA to learn how our expertise can deliver a comprehensive and integrated approach to governance, risk and compliance across your firm.