Fri, Aug 20, 2021
Peter Ray and Jane Stoakes
As we have discussed in previous Regulatory Focus newsletters, the financial rules for investment firms are undergoing substantial revision to move away from a banking approach and to better align capital requirements with the risks that investment firms face.
The FCA’s domestic implementation of the EU’s Investment Firm Prudential Regime (IFPR) is coming into force from 1 January 2022. The FCA is implementing the IFPR through a new sourcebook called “MIFIDPRU.” This change in the prudential rules directly impacts UK firms authorized under UK MiFID and groups that they are part of as well as Collective Portfolio Management Investment Firms (CPMIs) that undertake MiFID business.
The proposed new financial rules will require MiFID investment firms and CPMIs operating in the UK to overhaul the way they measure and report their Own Funds Requirement and Liquid Asset Requirement. MIFIDPRU represents a major change for investment firms, so it is critical that firms act now to adequately prepare for the new regime.
The following firms will be caught by the new IFPR:
The FCA has already published one discussion paper, three consultation papers (the most recent of which was issued on 6th August) and two policy statements on IFPR. These are to be followed by a final policy statement to be issued later in the year.
Depending on the size of the firm and its activities, there will be two types of firm—a small, non-interconnected (SNI) firm and a non-small non-interconnected (non-SNI) firm. New capital requirements known as K-factors will apply to non-SNI firms, and firms will need procedures in place to be able to calculate these.
Another major change in the rules will be that the Individual Capital Adequacy Assessment Process (ICAAP) will be changed to a new regime called the Individual Capital and Risk Assessment (ICARA) process.
Firms will need to document this new ICARA process, and regulatory reporting formats will also be changed. In addition, revised remuneration policies, plus supporting compliance and monitoring collateral, will need to be put in place.
Firms have just over four months until 1 January 2022 when these new rules will be implemented. If the IFPR applies to your firm, we strongly recommend that you focus on the following key areas now:
If you have questions concerning the new regime, contact your usual Kroll consultant for assistance.
ESG remains a hot topic for the government, firms, investors, clients and regulators. Over the coming weeks and months, we will keep our readers informed of arising ESG matters and will plan to run some events on ESG after the summer holidays. A summary of recent ESG activity from the FCA can be found below:
New FCA proposals published on climate-related disclosure rules
Peter Timson and Peter Ray
22 June 2021
Following the recommendations of the Taskforce on Climate-related Financial Disclosures (TCFD), the FCA has proposed to extend the application of its TCFD-aligned listing rule to issuers of standard listed equity shares and to introduce TCFD-aligned disclosure requirements for asset managers, life insurers and FCA-regulated pension providers.
These new proposals represent the first substantive policy proposals by the FCA for the UK asset management/owner sectors since the end of the EU withdrawal period and are designed to ensure that each part of the investment chain is fully informed about climate-related risks and opportunities.
The purpose of this will be to encourage firms to invest in more sustainable ventures in keeping with the FCA’s commitment to the UK government’s target of a net-zero economy by 2050.
The FCA is also inviting views on other ESG issues in capital markets. The FCA intends to confirm its final policy on climate-related disclosures before the end of 2021 and is seeking feedback on both consultations by 10 September 2021. Stakeholder views on ESG-related issues will be considered separately, with a view to publish a feedback statement in the first half of 2022.
The full press release can be found here.
High-level summary of the FCA’s consultation for asset managers, life insurers and FCA-regulated pension providers
Jane Stoakes
22 June 2021
The key aim of FCA’s consultation paper (CP 21/17) is to increase transparency and enable clients and consumers to make considered choices while remaining proportionate for firms.
The FCA proposals do not apply to firms with less than £5 billion in assets under management on a three-year rolling average to be assessed annually. The FCA said that its proposals will cover 98% of assets under management in the UK.
In our view, even if firms are not in scope of these proposed rules, we envisage that they may wish to opt in to maintain competitive advantage and therefore may wish to make themselves familiar with the proposals and any further regulatory developments.
The FCA designed the proposed regime with international consistency in mind and recognizes that some firms will already be subject to the EU’s Sustainable Finance Disclosure Regulation (SFDR). Where firms have to comply with both regimes, the FCA proposes that firms make disclosures under each regime.
The FCA is seeking to achieve three outcomes:
The key elements of the FCA’s proposals are:
A phased implementation of the new FCA rules is proposed as follows:
Phase 1—effective from 1 January 2022
Phase 2—effective from 1 January 2023
Feedback on this consultation paper, which can be found here, is invited from firms by 10 September 2021.
Please contact us if you would like to discuss this further.
The FCA writes to Authorized Fund Managers (AFMs) about its concerns and expectations in relation to ESG
Laura Febbrari, Darragh Finn and Jane Stoakes
19 July 2021
The FCA wrote to AFM Chairs about its concerns regarding poorly drafted and, in some cases, misleading fund applications in relation to ESG strategies and about its expectations for improvement.
The FCA has reviewed numerous applications for authorization of investment funds with an ESG focus that have not met expectations.
Therefore, the FCA expects to see material improvements in this area and has set out its expectations for firms within a set of guiding principles on making clear and not misleading claims.
The guidance sits under three principles, with the overarching principle that a fund’s ESG/sustainability focus should be reflected consistently in its design, delivery and disclosure. The three guiding principles are as follows:
The FCA provides guidance and key considerations for firms under each principle.
Firms can find the FCA’s letter and guiding principles here.
Although this letter is aimed at AFMs, the guidance from the FCA could be applied to any fund that has, or claims to have, an ESG strategy or focus. We therefore recommend that all relevant asset managers work through the FCA’s guidelines to assess whether any improvements could be made.
Discussion paper 21/2: Diversity and inclusion in the financial sector—working together to drive change
Amelie Snape and Jane Stoakes
7 July 2021
The FCA and Prudential Regulatory Authority (PRA) have published a discussion paper (DP 21/2) seeking views on their regulatory plans to improve diversity and inclusion within the financial services industry. DP 21/2 highlights the importance of reducing the risk of groupthink to improve decision-making in firms and promote diversity of thought. Diversity and inclusion are important elements of ESG.
In addition to seeking feedback on how diversity, inclusion and other relevant terms are defined and used in a regulatory context, the discussion paper also invites views on:
DP 21/2 sets out policy options for driving progress on diversity and inclusion and at the same time recognizes the critical role of culture to support such initiatives within firms. Policy options include the use of targets for representation, measures to make senior leaders directly accountable for diversity and inclusion within firms, linking remuneration to diversity and inclusion metrics and how regulators might consider diversity and inclusion in non-financial misconduct.
Within this context, the FCA and PRA are also seeking wider views on how to best achieve diversity at the board level, whether there should be mandated allocation of diversity and inclusion responsibilities to Senior Managers and, critically, whether firms should have and publish a diversity and inclusion policy and be subject to mandatory public disclosures on diversity data.
Feedback is welcomed by 30 September 2021. The full discussion paper can be found here.
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