On 5 December 2019, the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR) were published, for implementation across the EU by 26 June 2021.  The UK was heavily involved in the IFR / IFD policy discussions that took place at the EU level and has to date supported the overall goals of the EU’s IFD/IFR.  However, as the UK is no longer an EU member state, it is not obliged to implement EU rules which come into effect after the end of the transition period (which will end on 31 December 2020).

HMT recently confirmed its intention to legislate for an equivalent regime in the UK. In support of this, the FCA published Discussion Paper 20/2 (DP) to consult on its proposed approach to IFD/IFR implementation. 

This blog highlights some of the key elements and changes proposed by the FCA in its DP, including some of the useful clarifications provided on certain aspects of the IFR / IFD. For additional background and supporting details, please refer to the FCA’s DP, the underlying EU IFR / IFD publications and our previous IFR / IFD blog and industry briefing paper. Separately, our blog on post-Brexit regulatory divergence may also be of interest.

Action for Firms

The FCA’s rule-making powers on this subject, as well as the EU’s IFR / IFD level 2 text, standards and guidelines, are still to be finalised.  Consequently, the views presented in the DP may not necessarily reflect the final position.  We would therefore encourage UK investment firms to consider the DP proposals, (alongside FCA’s finalised guidance on assessing adequate financial resources (FG 20/1)Wind-down planning guide (WDPG) and the HMT announcement), and feedback any material concerns or useful suggestions to the FCA prior to the end of its DP consultation period on Friday 25 September 2020.  Firms may also wish to consider responses to the HMT consultation which closes on 19 August 2020 and the EBA’s current IFR / IFD level 2 consultation which closes on 4 September 2020.

Scope and classification

The information in the DP will be of particular interest to FCA solo regulated investment firms that are currently authorised under MiFID. This includes IFPRU and BIPRU firms, ‘local’ investment firms; matched principal dealers; Collective Portfolio Management Investment Firms (CPMIs); specialist commodities derivatives investment firms that benefit from the current exemptions on capital requirements and large exposures; ‘exempt-CAD’ firms; and investment firms that would be exempt from MiFID under Article 3 but have ‘opted-in’ to MiFID.

The FCA has clarified that, under the new proposed UK regime, the range of MiFID prudential categories will be replaced by the following classifications:

  • investment firms that will be authorised under CRD and subject to CRR (‘Class 1’);
  • firms that will be authorised under MiFID and subject to CRR (‘Class 1 minus’);
  • small and non-interconnected firms subject to IFR /IFD (‘SNI’ or ‘Class 3’); and
  • all other investment firms subject to IFR /IFD (‘Non-SNI’ or ‘Class 2’). 

The applicable prudential approaches and associated threshold criteria remain generally in line with those proposed by the EBA.

Own funds and Own funds requirements

In general, the FCA DP does not propose changes to the definition of own funds or own funds requirements as set out in the EBA’s IFR / IFD. 

However, the FCA recognises the existence within the UK of investment firms that are not joint-stock companies (e.g. limited liability partnerships).  In line with the competent authority discretion provided by the IFR / IFD, the FCA is therefore considering an expansion of the instruments or funds that could qualify as CET1 capital for non-joint stock investment firms and is requesting specific feedback to inform their approach.

As part of the DP, the FCA has also asked firms to comment on the level of detail that would be helpful when calculating the Fixed Overhead Requirement (‘FOR’).  Constructive feedback here (e.g. to clarify applicable deductions) could be particularly beneficial as the EBA is also still in the process of developing technical standards (currently open for consultation) on the calculation of the FOR.

K-factor Requirement (KFR)

Non-SNI or Class 2 firms will only need to calculate KFRs that are relevant to their business model.  One of the key clarifications provided by the DP in this regard is that Risk to Market (‘RtM’) and Risk to Firm (‘RtF’) k-factors will only apply to Non-SNI firms that can deal on own account (in own name even if on behalf of clients) or underwrite or place on a firm commitment basis.   Some other notable KFR proposals within the DP include the following:

Risk to Clients (‘RtC’)

K-AUM: The DP provides some further clarification on the definition of AUM, including potential approaches for the valuation of assets and the treatment of negative values.  It also considers the meaning of ‘financial entity’ (which is not defined within the IFR / IFD) and potential measures to avoid double counting of assets.  In particular, the DP proposes that assets delegated from third-country entities that are not subject to an AUM-based capital requirement should be included in the relevant measurement of total AUM.

K-CMH: The DP confirms that FCA adaptation of IFR equivalent rules would mean that the Client Asset Sourcebook (CASS) rules would continue to apply unchanged and suggests that ‘client money held’ (CMH) be measured in line with the existing CASS approach.  

K-ASA: Similar to CMH, the DP has suggested that ASA should be treated in line with its CASS rules.  It also proposes that ASA be measured based on the market value of the relevant financial instruments, or, in the absence of a market value, on the estimated value on a best efforts basis.

K-COH: The DP provides further clarification on the definition, measurement point and measurement approach for COH. For example, it proposes that measurement occurs after both the reception and transmission of an order received from another investment firm.  It also provides a number of potential approaches for the time at which order prices are measured. 

Risk to Markets (‘RtM’)

K-DTF: Several technical clarifications have been provided in the DP, which also apply to the measurement of K-COH.  These include the definition of ‘cash trade’ and the methodology for calculating the notional amount of a derivative contract for DTF in line with the relevant provisions for K-TCD.

K-NPR and K-CMG: The DP confirms that investment firms with trading books (only) should apply either the K-NPR or K-CMG to relevant activities on a portfolio basis, but use of K-CMG will require prior regulatory approval.  In line with the IFR, both measures should include non-trading book positions that give risk to foreign exchange or commodity risk.   

K-CMG: The DP has suggested that more clarity from the EU is required on the definition of ‘total margin’. Furthermore, the DP has provided the FCA’s view on what the position should be for investment firms that use multiple clearing members. The DP also acknowledges that Article 4 and Article 23 of the IFR give different definitions of ‘clearing margin given’ (CMG), and has invited comments on which definition would be more appropriate for the UK.

K-TCD: The DP provides the FCA’s view on how credits and loans must be treated for the purposes of the K-TCD calculation for investment firms dealing on their own account. The FCA has also provided its view that ‘domestic currency’ should be interpreted as the relevant currency used by the firm to report to its competent authority.

Prudential Consolidation

Prudential consolidation under the IFR operates in a similar way as under the CRR.  Under the IFR, the scope of prudential consolidation introduces, and will only apply to, ‘investment firm groups’ and ‘investment holding companies’ (i.e. that does not include a credit institution).  It treats the group as if it is a standalone investment firm and applies consolidation requirements to the parent undertaking directly, rather than the authorised subsidiary.  We would highlight the following key points:-

  • This implies that parent undertakings, even if otherwise unregulated, will need to meet consolidated regulatory obligations e.g. consolidated own funds, own funds requirements, liquidity, concentration risk, disclosure and reporting
  • The FCA may on a case by case basis permit a parent undertaking of an investment firm group to be exempt from applying consolidated liquidity arrangements.  This regulatory discretion will take into account the nature, scale and complexity of the group and will require all investment firms within the consolidation groups to apply the liquidity requirements on an individual basis
  • To avoid double-counting, groups that contain both an IFR and CRR credit institutions will apply the relevant CRR / CRD provisions

Group Capital Test (GCT)

As a derogation to prudential consolidation, the FCA may instead permit each parent undertaking entity within the group to apply a Group Capital Test (‘GCT’) subject to meeting certain conditions.  This includes having a sufficiently simple group structure and no significant risks to clients or the market that might otherwise trigger the need for consolidated supervision. 

The FCA is not minded to allow the ultimate parent company with the EU to adopt a different GCT calculation approach although such a discretion is available under IFR article 8.

Firms are specifically asked to comment on the specific criteria that should be met to obtain permission to use the GCT.

Concentration Risk

In line with the IFR, the DP confirms that all investment firms will be required to monitor and report on various (non-trading book) sources of potential concentration. 

Investment firms with trading books will be required to monitor and report on all sources of concentration risk as identified in the IFR.  They will additionally be subject to the K-CON requirement, and hold capital for trading book exposures above the IFR prescribed thresholds (i.e. similar to the CRR).  Firms are encouraged to comment on the limits and calculation methodology that should be apply to K-CON.

The FCA will consider pending EBA technical standards to inform their development of an appropriate policy to support the monitoring and controlling of concentration risk. 


The DP confirms support for the introduction of a minimum quantitative liquidity requirement for all investment firms, including SNIs i.e. hold eligible liquid assets equivalent to at least one-third of their FOR.

The FCA noted that this minimum requirement was designed to be an appropriate baseline for all investment firms and to serve as a replacement for the existing BIPRU 12 requirements.  However, as part of the internal capital and risk assessment (ICARA) process, firms should consider whether additional liquidity should be maintained above the FOR. 

The FCA will publish guidance on their proposed approach to the issuance of specific (SREP) liquidity requirements to firms.  The FCA also proposes applicable haircuts and a range of eligible liquid assets for which industry feedback is specifically requested

Risk management, governance and review process 

While most of the IFR / IFD risk management and governance principles are confirmed in the DP, the FCA provides helpful additional detail on the ICARA arrangements that will apply to investment firms in the UK.

The IFD/IFR recognises the need for a more risk-based approach in the form of ICARA i.e. in addition to the formulaic Pillar 1 own funds requirement.  The ICARA is expected to serve as a continuous process by which investment firms can maintain adequate financial resources and ensure effective decision making, oversight and control. 

While the IFD/IFR prioritises the ICARA process for non-SNI firms (leaving it as optional for SNI firms), the FCA will expect all UK investment firms to assess the adequacy of their financial resources (proportionate to their business complexity and risk of harm).  This principle is consistent with the expectations set out in their recent FG20/1 guidance on adequate financial resources

The FCA may undertake a Supervisory Review and Evaluation Process (SREP) assessment of any UK investment firm to assess the adequacy of governance and risk management arrangements relative to a firm’s strategy, business model and activities.

While similar to the existing ICAAP process, the ICARA will introduce a number of material changes that firms will need to consider and incorporate as part of their current preparations for the new regime:

  • Similar to the FCA’s outcomes based approach, the ICARA will require firms to identify and assess the potential risks to consumers and markets that could arise from their business model and activities and assess the appropriate level of financial resources required to mitigate such risks.   This implicit validation of the own funds (k-factor) requirements represents a significant change from the causal risk-based approaches that currently drive the risk management and ICAAP framework arrangements in most firms.
  • The FCA expects the ICARA process to apply (to both SNI and non-SNI firms) on an individual basis, even where a firm is part of a larger group.  In contrast to the existing ICAAP approach, the production of a consolidated ICARA may be required only where FCA considers it to be appropriate. Individual investment firms within an investment firm group will, however, need to consider any potential group risks as part of their individual ICARA processes. 
  • As previously observed in the design of the EBA’s SREP framework, the ICARA will require an assessment of both capital and liquidity requirements.
  • Following an SREP, individual capital guidance (ICG) will be replaced by a new Pillar 2 legal minimum requirement (Pillar 2R / P2R) covering both capital and liquidity.  Firms will be expected to publish their aggregate P2R as part of their public disclosure requirement.
  • Where appropriate, the FCA may also set an additional buffer (‘P2G’) to sit on top of the new minimum legal requirement.  The P2G may be imposed to mitigate the impact of economic cyclical fluctuations or support a firm’s wind-down assessment but can be temporarily breached if agreed with the FCA.
  • All investment firms will need to consider wind-down as part of the ICARA process
  • When the new regime takes effect any firms with an existing ICGs will need to calculate and apply to the FCA for a rebased capital requirement (via a Voluntary Requirement (VREQ) request). 

Future FCA publications will provide further details on their expected approach to wind-down planning as well as the expected process and documentation arrangements for the ICARA.

Regulatory reporting requirements 

Several details of what investment firms will be required to report on are still to be agreed through EU’s level 2 legislation.  However, the future arrangements will seek to limit the requirements to data points that are specifically relevant to investment firms’ businesses and are not expected to be as complex or detailed as the current common reporting (COREP) forms under the CRR.

The FCA will monitor the EU’s pending technical standards on report formats, reporting dates and other relevant instructions and has requested industry feedback on the level of detail required to meet regulatory reporting requirements.


The IFD sets out a remuneration regime that seeks to ensure all investment firms in its scope have remuneration policies that are consistent with, and promote, effective risk management. The FCA has confirmed that if an equivalent regime were adopted in the UK, it would delete the IFPRU and BIPRU Remuneration Codes entirely and create a new remuneration code based on the IFD remuneration provisions.

In terms of key headlines:

Material Risk Taker identification – The FCA expects to base its approach for identifying Material Risk Takers subject to the pay rules on the EBA’s draft Regulatory Technical Standards under the IFD. The FCA does, however, expect to make adjustments for the UK market and would encourage firms to consider broader categories of roles i.e. such as those which represent a material conduct risk.

Ratio between variable and fixed remuneration – There is no bonus cap requirement under the IFD but firms are required to ‘set an appropriate ratio between variable and fixed remuneration,’ taking into consideration the firm’s business activities, and associated risks as well as the impact that different categories of staff have on the firm’s risk profile. The FCA considers that different ratios may be appropriate for different categories of staff and are likely to be reflective of a firm’s business activities and associated risks. It does not think it would be appropriate to provide further guidance on what constitutes an ‘appropriate ratio’.

Firm-wide proportionality – The FCA notes that the IFD allows Member States to increase the EUR 100 million balance sheet threshold for individual investment firms to EUR 300 million which exempts them from the provisions on pay-out in shares or other instruments, deferral and discretionary pension benefit holding/retention periods (but clawback cannot be dis-applied), and considers that, given the nature of the UK market, at least EUR 300 million may be appropriate. The FCA also recognises that lowering the EUR 100 million threshold may be appropriate for certain firms, and specifically mentions the wholesale brokers sector in this context. The FCA intends to consult on any future proposals on firm-wide proportionality thresholds.

Individual proportionality – The FCA notes that the IFD provides for individual exemptions from the pay-out rules which allow individual risk takers earning annual variable remuneration of EUR 50,000 or less, where this represents 25% or less of the individual’s total annual remuneration, to dis-apply the provisions on pay-out in shares or other instruments, deferral and discretionary pension benefit holding/retention periods rules (but not clawback). The regulator recognises that this is substantially lower than existing UK thresholds under CRD IV, and welcomes feedback from firms on the likely number and types of individuals that would be impacted if it were to apply these IFD thresholds in the UK.

Timing – The FCA confirmed that the issue of which performance year the rules will apply to will be addressed in its Consultation Paper later this year.

Environmental, social & governance (ESG) issues

The IFD/IFR currently imposes ESG risk related disclosure requirements only on larger non-SNI firms. However the EU may recommend further requirements in this area.  The EBA will also consider whether ESG specific k-factor adjustments should be introduced and where appropriate may develop guidelines to incorporate ESG related risks within SREPs.

The FCA has stated that for markets to work well in the UK, firms should integrate consideration of ESG-related risks and opportunities into their business.  It believes this would support the long term transition to a net-zero emissions economy. The FCA has also encouraged all investment firms in the UK to consider material ESG-related risks when calculating capital and liquidity requirements. Based on the EBA’s expected publications, the FCA may introduce its own guidelines for integration into the SREP.

Public Disclosure 

The FCA considers that the public disclosure regime, as set out by the IFR, provides better support to mitigate the potential risk of harm by investment firms than the CRR regime.  The DP is therefore essentially aligned to the IFR and confirms, amongst other measures, that firms will be required to publish their disclosures on the same date as they publish their annual financial statements.  However ESG disclosures will increase to every six months after the first year.

IFR transitional provisions

In recognition of the scale of the new prudential regime, the IFR gives investment firms up to five years to comply after IFR implementation. The FCA has confirmed that it is supportive of the purpose and design of the IFR’s transitional provisions and will therefore seek to adopt a similar approach within the UK.

Future Support from Deloitte

We will continue to host CRO / CFO prudential round tables to explore the new regime’s potential implications, challenges and industry (best) practices for investment firms’ risk management and other prudential arrangements.  Please feel free to contact us should you wish to discuss the text above (Brian Thornhill – IFR lead, Patricia Bradley – IFR remuneration lead) and if you wish to participate in any future sessions.