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Experts in iXBRL
Key Takeaways From The
FCA Consultation Document
for Investment Firms
This document is designed to act as a summary of the key points covered
in the FCA consultation paper “CRD IV for Investment Firms”, released
July 2013. All comments on this paper have to be submitted to the FCA by
30th September and a full copy of the consultation paper is available here.
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Key Takeaways From The FCA Consultation
Document for Investment Firms
Introduction
Who is this summary for?
Investment firms that are currently subject to the CRD (Capital Requirements Directive) including:
–
–
firms that benefit from the current exemptions on capital requirements and large exposures for
specialist commodities derivatives firms; and
firms that only execute orders and/or manage portfolios, without holding client money or
assets.
Other firms in the investment sector (exempt-CAD (Capital Adequacy Directive)firms, management
companies – as defined under the UCITS Directive, Alternative Investment Fund Managers (AIFMs) –
as defined under the Alternative Investment Fund Managers Directive (AIFMD)), subject to certain
CRD IV provisions (e.g. on ‘initial capital’ in the Directive, etc.).
What will it do for you?



Discover which types of investment firms will be affected by the changes surrounding CRD IV
Find out which FCA category your business fits into and therefore which reporting and
compliance exceptions apply to your business
Decode some of the most significant proposals and understand the key takeaways for your
business
Common sense disclaimer: This guide is supposed to provide support in navigating the content of
the 400+ page consultation paper; whilst it is a helpful entry point to a potentially daunting body of
information, it is not a substitute for reading the paper or taking regulatory and legal advice. We’re
also not in a position to guarantee that any information provided or parts of the paper referenced will
impact on the Policy Statement & final rules released by the FCA later this year, as this document is
based on a consultation paper which is subject to change.
Some common acronyms
We try not to use complex jargon but some terms are unavoidable and come up so often that we’ve
used their accepted acronym to save our typing fingers.
Name
Capital
Requirements
Directive IV
Acronym
CRD IV
Capital
Requirements
Directive
CRD
What is it?
The latest version of the CRD consisting of two parts, the
CRR and the Directive. Europe says a "directive is a
legislative act that sets out a goal that all EU countries must
achieve. However, it is up to the individual countries to decide
how.” In terms of regulation, Europe says that “a regulation is
a binding legislative act. It must be applied in its entirety
across the EU.”
The EU goals that the FCA must decide how to achieve; this
is where most of the consultation paper focus is.
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Key Takeaways From The FCA Consultation
Document for Investment Firms
Capital
Requirements
Regulation
CRR
Prudential
sourcebook
for Banks,
Building
Societies and
Investment
Firms
Prudential
sourcebook
for Banks,
Building
Societies and
Investment
Firms
Markets in
Financial
Instruments
Directive
Capital
Adequacy
Directive
BIPRU
General
Prudential
sourcebook
GAthering
Better
Regulatory
Information
ELectronically
GENPRU
These are rules relating to capital requirements that are being
applied wholesale across the EU, so the only things the FCA
addresses in the consultation paper are national exceptions to
those rules.
The current Prudential standards and sourcebook for Banks,
Building Societies and Investment Firms.
IFPRU
The new Prudential standards and sourcebook for Investment
Firms replacing BIPRU.
MIFID
The 2004 European Union law that provides harmonised
regulation for investment services across the 31 member
states of the European Economic Area
CAD
A European directive to establish uniform capital requirements
for both banking firms and non-bank securities firms first
issued in 1993 and revised in 1998. A CAD firm is an
investment firm that is subject to the requirements imposed by
MiFID (above).
General Prudential Standards & Sourcebook for Banks,
Building Societies, Insurers and Investment Firms
GABRIEL The FCA’s online regulatory reporting system for the
collection, validation and storage of regulatory data.
What’s in the consultation paper?
Proposals on Handbook Rules and Guidance for:
•
•
•
National discretions and derogations in the CRR (Capital Requirements Regulation) and
the Directive
New requirements and changes to existing requirements in the Directive
Existing requirements in the Directive that are ‘carried across’
However, it does not include:
•
•
New, changed and existing requirements now in the CRR (which are directly applicable
unless there is a national derogation, choice or action)
Any other policy changes not essential to meet our legal obligations to transpose CRD IV
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Key Takeaways From The FCA Consultation
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Who is affected by the changes and what
exceptions are made for investment
firms?
Who exactly is affected by the changes?
CRD IV was designed for banks but it is also applied to investment firms in the EU to some extent; the
FCA paper for investment firms provides detail on the proposals for how this would work. This means
that the overall outcome of CRD IV places more requirements on investment firms. However, this is
mitigated through a combination of provisions – referred to as derogations or national discretions –
that effectively dis-apply certain requirements in the CRR and/or in the Directive for different types of
investment firms.
The definition of ‘investment firms’ in the CRR has been amended, so that there will be specific
prudential requirements for different types of investment firms that carry out MIFID (Directive
2004/39/EC or Markets in Financial Instruments Directive) investment activities.
Key takeaway: There are different rules for different types of company, knowing where you fit
is the vital first step in understanding what you need to do.
BIPRU vs. IFPRU
Under CRD IV the FCA are creating a new ‘Prudential Sourcebook for Investment Firms’ (IFPRU), but
they have minimised as much as possible changes to the prudential categories (e.g. they have kept
the structure replacing ‘BIPRU’ with ‘IFPRU’) in line with our overall approach. See the diagram
below:
Full scope
BIPRU
investment
firm
Full scope
IFPRU
investment
firm
BIPRU limited
activity firm
IFPRU limited
activity firm
BIPRU limited
licence firm
IFPRU limited
licence firm
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Key Takeaways From The FCA Consultation
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They have also created a new prudential category called ‘BIPRU firms’ for certain firms that only
execute orders and/or manage portfolios, without holding client money or assets.
Where do I fit?
The below table is reproduced from table 3 at 2.10 in the consultation paper:
Category name
Full scope IFPRU firm
Category definition
A CAD full scope firm with its head office is
in the United Kingdom and it is not otherwise
excluded from the definition of BIPRU firm exclusions are:
(1) an incoming EEA firm;
(2) an incoming Treaty firm;
(3) any other overseas firm;
(4) an ELMI;
(5) an insurer; and
(6) an ICVC.
IFPRU limited activity firm
A limited activity firm means a CAD
investment firm that satisfies all the following
conditions:
(1) it meets the criteria in (a) or the criteria in
(b):
(a) it deals on own account only:
(i) for the purpose of fulfilling or executing a
client order; or
(ii) for the purpose of gaining entrance to a
clearing and settlement system or a
recognised investment exchange or
designated investment exchange when
acting in an agency capacity or executing a
client order; or
(b) it satisfies the following conditions:
(i) it does not hold client money or securities
in relation to investment services that it
provides and is not authorised to do so;
(ii) the only 3 investment service 3 it
undertakes is dealing on own account;
(iii) it has no external customers in relation
to investment services it provides; and
(iv) the execution and settlement of its
transactions in relation to investment
services it provides takes place under the
responsibility of a clearing institution and are
guaranteed by that clearing institution;
(2) (in the case of a CAD investment firm
that is a BIPRU investment firm) its base
capital resources requirement is €730,000;
(3) (in the case of a CAD investment firm
that is an EEA firm) it is subject to the CRD
implementation measures of its Home State
for Article 9 of the Capital Adequacy
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IFPRU limited licence firm
Exempt IFPRU commodities firm
Exempt CAD firm
BIPRU Firms (new category)
Directive (Initial capital requirement of
€730,000); and
(4) (in the case of any other CAD investment
firm) its base capital resources requirement
would be €730,000 if it had been a BIPRU
investment firm on the basis of the
assumptions in BIPRU 1.1.14 R (3)(a) and
BIPRU 1.1.14 R (3)(b).
A limited licence firm means (as specified by
Article 20(2) of the Capital Adequacy
Directive (Exemptions from operational risk))
a CAD investment firm that is not authorised
to:
(1) deal on own account; or
(2) provide the investment services of
underwriting or placing financial instruments
(as referred to in point 3 63 of Section A of
Annex I of 3 MiFID3) on a firm commitment
basis.
A firm to which the exemption in BIPRU TP
15.6R (Exemption for a BIPRU firm whose
main business relates to commodities)
applies.
(1) it would have been a CAD investment
firm if exempt CAD firms were not excluded
from the definition; and
(2) it is only authorised to provide the
service of investment advice and/or receive
and transmit orders from investors (as
referred to in Section A of Annex I of MiFID)
without in both cases, holding money or
securities belonging to its clients and which
for that reason may not at any time place
itself in debit with its clients.
Only executes orders and/or manages
portfolios, without holding client money or
assets.
Important note - Firms that are authorised to carry out:
•
•
MIFID investment services and activities (1) (reception and transmission of orders) and/or
(5) (investment advice); and
MIFID ancillary service (1) safekeeping and administration of financial instruments for the
account of clients, including custodianship and related services such as cash/collateral
management;
Will no longer be exempt from the definition of ‘investment firm’ and will instead become subject to the
CRD IV.
Key Takeaway: If you were previously exempt from the definition of “investment firm” you
must check as certain companies are now included that weren’t previously.
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What exemption rules apply to my category?
The consultation paper provides a detailed list of exemptions and conditions per category. If you are
interested in what allowances are being made for your category or wish to comment on the proposals
before they are finalised you can explore them in the paper; however for those who are not everyone
will need to read these once the proposals are finalised into rules.
Exemption highlights:
Full scope IFPRU investment firm
•
The firm must comply with liquidity regime, but the FCA may exempt it pending the
outcome of the Commission’s review by the end of 2015.
•
Pending the Commission’s review and if the group comprises only investment firms, the
FCA may exempt them from compliance with the obligations on liquidity on a consolidated
basis, taking into account the nature, scale and complexity of the investment firm’s
activities.
•
The FCA may exempt small and medium sized (SME) investment firms from the Capital
Conservation buffer (CCoB) and the Countercyclical capital buffer (CCyB).
IFPRU limited activity firm
•
As per the full scope IFPRU investment firm and in addition:
•
This type of firm is excluded from the leverage requirements on an individual basis.
•
FCA may waive application of own funds requirements on a consolidated basis.
•
If all entities in a group of investment firms are exempt from leverage ratio on an individual
basis, the parent investment firm may choose not to apply leverage provisions on a
consolidated basis.
•
Large exposures do not apply to limited activity firms.
IFPRU limited licence firm
•
As IFPRU limited activity firm and in addition:
•
Excluded from the liquidity provisions.
•
Exempt from the capital buffers.
•
Excluded from the regime for designation of significant branches.
IFPRU Exempt IFPRU commodities firm
•
Excluded from the provisions on own funds requirements until 31 December 2017 or the
date of entry into force of any modifications, as a result of the Commission’s review by the
end of 2015.
•
Exempt from large exposure provisions until 31 December 2017 or the date of entry into
force of any modifications as a result of the Commission’s review.
BIPRU firm
•
CRD IV requires them to apply the ‘higher of’ requirements in the CRR article 92(3) except
for operational risk or the Fixed Overhead Requirement (FOR) and to meet the
requirements in the CRR articles 92(1) on own funds and (2) on calculation of capital
ratios.
•
The FCA may keep such firms on the current CRD, as it stood under national law (i.e.
BIPRU and GENPRU) on 31 December 2013. This would include the current (less
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onerous) definition of own funds, the FCA simplified approach to calculating credit risk and
reporting under GABRIEL (not COREP).
Exempt CAD firm
•
Exempt-CAD firms that find they still conform to the new definition of the category i.e. they
are not additionally authorised to provide the ancillary service which is safekeeping and
administration of financial instruments for the account of clients, including custodianship
and related services such as cash/collateral management will not be affected by the
current reporting changes resulting from CRD IV.
Key takeaway: In many cases these exceptions lighten the compliance burden and so should
come as welcome news to most businesses.
Significant Firms
Some of the reporting requirements apply only to firms that are deemed “significant” i.e. their failure
would have significant impact. The definition of significant firms is detailed in chapter 5 of the
consultation paper and will be calculated from:
•
•
•
•
•
Total balance sheet assets
Total balance sheet liabilities
Annual fees and commission income
Client money
Client assets
The indicator threshold that defines “significant” in each case is:
•
•
•
•
•
Total assets - £530 million
Total liabilities - £380 million
Annual fees and commission income - £120 million
Client money - £425 million
Client assets - £7.8 billion
Section 7 of the consultation paper sets out the FCA’s proposals in relation to the treatment under the
CRR of rule waivers and modifications granted to firms in accordance with section 138A of FSMA.
Rule waivers and modifications are jointly referred to in this Chapter as ‘waivers’.
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What does the FCA actually want?
Another Common Sense Disclaimer: As with the rest of the paper, this summary has been
produced as the author’s interpretation of the highlights from the proposals in the consultation paper,
this is not intended as a substitute for legal advice or reading the consultation in full; it should also be
noted that these are still proposals and up for discussion and change before the rules are finalised.
That said, they should provide an insight into where the FCA is going.
The CRD (Capital Requirements Directive)
Pillar 2
The consultation paper provides a good overview, “The Directive requires a firm to assess and to
maintain on an on-going basis the amounts, types and distribution of internal capital that it considers
adequate to cover the nature and level of the risks to which it is or might be exposed. The FCA is then
required to review and evaluate this assessment by the firm. If necessary, additional own funds may
be needed on top of the minimum level of own funds set by the CRR. Together, these are known as
‘Pillar 2’.”
•
•
Pillar 2 remains very much the same as the current CRD (see mapping table below)
Any Individual Capital Guidance (ICG) given to firms will therefore continue to be the sum
of the minimum own funds requirements (‘Pillar 1’) and the additional own funds
requirement under Pillar 2 (previously named ‘Pillar 2A’).
Implementation of current CRD in the
FCA Handbook
Adequacy of financial resources requirement
(GENPRU 1.2)
Internal capital adequacy standards (BIPRU
2.2)
Internal capital adequacy standards (BIPRU
2.2)
The Directive
Internal capital (Articles 73, 79 - 87)
Level of application of internal capital
adequacy assessment process (Article 108)
Supervisory review and evaluation (Article
97)
Key takeaway: Pillar 2 remains very much the same as the current CRD
The 5 Capital Buffers
There are 5 different possible capital buffers that will be accumulated and reported on by firms during
positive economic conditions to provide a greater ‘cushion’ to absorb losses during less favourable
times and to help address the pro-cyclical mechanisms that contributed to the origins of the financial
crisis and aggravated its effect.
The Capital Conservation Buffer (CCoB), which is a fixed amount to provide a ‘cushion’, and (ii) the
Countercyclical Buffer (CCyB), which is variable (and can be zero where no specific amount is set).
These two buffers apply on an institution, sub-consolidated and consolidated level to all investment
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firms that have permission to deal on their own account, and/or underwrite financial instruments
and/or placing of financial instruments on a firm commitment basis. There is an exemption from both
the CCoB and CCyB for limited licence firms caught by the CRD IV.5
The CCoB rate is fixed. It will eventually be 2.5% multiplied by total risk exposures, subject to a five
year transition period:
2014
2015
2016
2017
0%
0%
0.625% 1.25%
2018
2019
1.875% 2.5%
The CCyB captures excess credit growth and is calibrated using measures such as the deviation from
long term trends in the ratio of credit to GDP and other relevant factors for addressing cyclical
systemic risk. It will be set by an authority yet to be appointed by the Treasury (likely Bank of
England) and will be subject to the same 5 year roll out capped rates as detailed above for CCoB.
NB: Even though they are worked out in the same way and subject to the same capped roll out
percentage figures, these are two separate buffers and will need to be differentiated in reporting.
The other three buffers that make up the Combined Buffer (CB) are designed to address systemic
risks. These are the:
•
•
•
Globally Systemically Important Institutions Buffer (G-SIIB)
Other Systemically Important Institutions Buffer (O-SIIB)
Systemic Risk Buffer (SRB)
As before these three buffers also only apply to investment firms that have permission to deal on their
own account, and/or underwrite financial instruments and/or placing of financial instruments on a firm
commitment basis.
With the first two, they will be decided on a per firm basis and the FCA expect only PRA regulated
firms or groups to be deemed systemic on a global basis and hence subject to the G-SIIB, and
probably the same on a domestic level as regards the O-SIIB. The SRB is not decided on an
individual firm basis, but rather is to be applied either to the whole financial sector, or one or more
sub-sets of it.
Key takeaway: Where a firm fails to meet the required amount for the Combined Buffer, there
are restrictions on the amount of distributions (i.e. dividends, repayment of capital etc.) it will
be able to make.
Recovery and resolution plans
Under the directive “firms must prepare, maintain and update recovery plans for the restoration of
their financial situation following a significant deterioration; and must cooperate closely with the
resolution authorities providing them with all the necessary information, so the resolution authorities
can prepare and draft the resolution plans setting out options for the orderly resolution of the firms in
the case of failure.”
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In real terms the application of this will be reduced by the FCA if it considers that the failure of a
specific institution ‘due to its size, to its business model, to its interconnectedness to other institutions,
or to the financial system in general, will not have a negative effect on financial markets, on other
institutions or on funding conditions’.
Further guidance on how this will work will be supplied after the FCA has decided its proposed
approach with the Bank of England but it is highly likely to be based on proportionality.
Stress testing
Firms will be expected to carry out stress tests at least annually to facilitate the review and evaluation
process under Article 97. It is expected that the EBA will issue guidelines in this area setting up
common methodologies to be used when conducting annual supervisory stress tests.
The FCA are advising that tests be made using methods appropriate to the nature, size and
complexity of the firm’s business and of the risks it bears. They also say that only firms described as
“significant” need report on this.
Key takeaway: Both stress testing and recovery and restitution plan requirements will be
adjusted to a level considered appropriate to the size and complexity of the business.
Remuneration
The principle of proportionality continues to be an important part of the remuneration framework in the
Directive which means the application of certain remuneration requirements may vary in relation to
certain types of investment firms based on ‘their size, internal organisation and the nature, the scope
and the complexity of their activities’. There are new restrictions on bonuses as part of the regulation
but how these will be reported has yet to be decided.
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The CRR (Capital Requirements Regulation)
The FCA will not be making rules to implement the Regulation as most of it passes directly into EU
law without any need for National Authorities to intervene; the exception to this is where permitted as
a national discretion, or required as a national implementing measure. Here are the highlights from
those exceptions:
A quick reference guide to proposed liquidity requirements:
IFPRU
Chapter
7
FSA0xx
liquidity
templates
COREP
liquidity
reporting
(2014)
Binding
minimum
requirements
(2015)
A full scope
IFPRU
investment
firm
that is
identified as
significant
and is an
ILAS firm


A full scope
IFPRU
investment
firm that is
not
covered in
the
first column
An IFPRU
limited
activity firm
An IFPRU
limited
licence firm







x
x
x

x
x
x
Key takeaway: All businesses must report FSA0xx liquidity templates, COREP only applies to
full scope IFPRU investment firms that are identified as significant and are an ILAS (Individual
Liquidity Adequacy Standards) firm.
Changes to the definition of capital and transitional provisions on capital
There have been huge changes to the definition of capital under CRD IV and as such transitional
provisions on capital have had to come into place. It is not practical to try and summarise these and
readers would be advised to read sections 4.19-4.29 of the consultation paper for detail on how this
will work.
National Discretions
There are a number of items that are subject to small national discretions (i.e. changes the FCA can
make that are not part of the CRR) that may be of limited application to the majority of investment
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firms that are covered in this section of the paper (chapter 4.30 onwards). Firms to whom these are of
interest are encouraged to read the relevant section:
•
•
•
•
Internal models
Large exposures
Recognised exchanges, regulated markets and third-country stock exchanges
Exposures secured by mortgages on commercial real estate property
Financial reporting: FINREP
The CRR allows the FCA to consider extending the definition of which IFPRU investment firms are
subject to FINREP (beyond those firms mandated to submit FINREP templates under Article 99(2)) if
the FCA believes that this is necessary to obtain a comprehensive view of the risk profile of the
activities of, and a view of the systemic risks to the financial sector or the real economy posed by
these firms.
This does not imply that the FCA intends to automatically implement this discretion. The nature of this
discretion is such that by adopting it we are retaining an option to determine if we need to extend the
scope of FINREP in the future. In practice, for the FCA to introduce this discretion, we would first have
to consult with the EBA on extending the scope of IFPRU investment firms subject to FINREP.
Key takeaway: Watch this space; there’s no guarantee that your firm might not end up being
subject to FINREP even if it’s not currently mandatory for you under the CRR. This won’t
happen immediately but is worth bearing in mind.
Simplified credit risk calculation
The CRR does not permit the simplified method of calculating credit risk weights in relation to credit
risk which is currently permitted in BIPRU. Accordingly, IFPRU firms should note that they will no
longer be able to use this method.
The New Sourcebook for IFPRU
The FCA will make a new sourcebook IFPRU that transposes the relevant directive provisions and
implements the discretions afforded to competent authorities in the CRR. It will apply to the
investment firms subject to CRD IV that are presently subject to GENPRU and BIPRU with the effect
that GENPRU and BIPRU will no longer apply to these firms.
COREP and FINREP must be reported in XBRL format to the EBA, the FCA have also
announced they will require firms to submit in this format. If you are subject to COREP
and/or FINREP then you should give us a call as we can make the reporting so much easier
for you, Arkk Solutions has produced the industry’s simplest XBRL reporting tool for
COREP and FINREP that enables you to work as normal in the EBA’s Excel reporting
templates with no need for any XBRL tagging, complicated or expensive new software! To
find out more please email or call UK +44 (0)207 036 2758 or Eire:+353 (0)1 525 5409.
Our Contacts
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