In our blog post published in November, we highlighted that preparation in respect of k-factor calculations and reporting may require significant management action. For investment firms with no permission to deal on own account or underwrite / place financial instruments on a firm commitment basis (MiFID activities 3 or 6), the Risk to Firm (‘RTF’) and Risk to Market (‘RTM’) k-factors will not apply. In this note we highlight some further considerations on the Risk to Client k-factors that would apply to class 2 (non-small and interconnected ‘SNI’ firms) under current UK proposals, i.e. assets under management (‘K-AUM’), client money held (‘K-CMH’), assets safeguarded and administered (‘K-ASA’) and client orders handled (‘K-COH’).
The Financial Conduct Authority (‘FCA’) recently announced that UK implementation of the new prudential regime (IFPR) is now targeted for 1 January 2022. The FCA has also issued a survey to some investment firms to facilitate a cost benefit analysis of IFPR implementation. The survey seeks to collect information on firms’ K-AUM, K-COH, K-ASA and K-DTF calculations and remuneration data, with responses required by 4 January 2020. The FCA’s publication of its response to the IFPR discussion paper (DP20/2) and any related guidance is still pending.
Thresholds for determining firms categorisation as SNI/non SNI
Have you considered these on a combined (group) basis where required?
Some of the measures used to determine firms categorisation (e.g. as SNI or non-SNI) are required to be applied on a combined basis for all firms that are part of a group. This includes K-AUM and K-COH measures as well as balance sheet and revenue measures. The calculation of the measures on a combined basis could be seen as a measure of the ‘inter-connectedness’ of firms and is done to avoid arbitrage and discourage firms from splitting their business up in order to remain under the thresholds.
Interplay between K-COH and K-AUM
Have you considered how transactions are aligned to K-COH and K-AUM?
Given that K-COH and K-AUM calculations may potentially cover the same transactions, there are some considerations in respect of exemptions aimed at avoiding ‘double-counting’. For example, some transactions for which a K-AUM capital requirement is calculated do not require calculation of K-COH. Firms will need to consider the adequacy of their internal arrangements to accurately filter and allocate transactions in line with these rules based requirements.
Systems and controls for reporting and disclosure
How will your current processes facilitate accurate updating and reporting under IFPR?
Firms should consider what changes are required in order to update and report on k-factors. For example, the K-AUM calculation requires use of AUM values at the end of each month and the k-factor calculation will require updating the following day (first business day of each month). K-COH uses daily values and measures the reception and transmission of client orders as well as the execution of client orders (in the client’s name). In addition, public disclosures will need to be published at the same time as the annual financial statements and firms should therefore consider whether internal processes may need to chance or to be enhanced to facilitate compliance.
Please feel free to reach out to any of the authors should you wish to discuss the information set out above.