Welcome clarity for Small AIFMs on FCA prudential rules

The FCA are currently consulting on IFPR, the new prudential regime for MiFID firms and the proposals include a ‘tidy up’ of the Handbook rules in IPRU-INV 5.

Small (sub-threshold) AIFMs will welcome proposed amendments to the FCA Handbook which clarify exceptions from the liquid capital requirement in the Interim Prudential Sourcebook (IPRU-INV) chapter 5.

Most Small AIFM’s under IPRU-INV 5 assume they simply have a capital requirement of £5k. Application of the liquid capital requirement can greatly increase this however as a firm can be required to hold 13/52 as a fraction of annual expenditure (similar to the fixed overhead requirement).

Small AIFMs authorised to conduct other regulated activities other than just ‘Managing an unauthorised AIF’ are likely subject to MiFID prudential rules (Exempt CAD or BIPRU, if not IFPRU) unless they have appropriate requirements on their ‘Scope of Permission’. This can be checked on the FCA Register. Such firms should certainly consider their position given the impact of the upcoming IFPR (the UK Investment Firm Prudential Regime). And review their regulatory permissions to ensure they are up to date and in line with their current business model.

Where necessary, firms should have unused regulated activities removed from their permissions, in order to prevent any unnecessary increases to their capital requirements under IFPR. This exercise to remove unnecessary permissions was requested by the FCA in January and should be conducted at least annually.

The new IFPR rules will have a seismic impact on the prudential (and other) requirements on smaller MiFID firms when they come into force on 1 January 2022. If you can fall outside this regime by removing unused regulated activities, it is likely to be highly beneficial saving thousands in costs and extra capital.

See our articles on IFPR for further guidance. Small MiFID firms should consider alternatives to IFPR where it is possible to do so.

Changes to IPRU-INV chapter 5

As part of the proposed amendments as a result of IFPR in CP21/7, the FCA outline the need to remove references to MiFID firms (exempt CAD firms) in IPRU-INV 5.4.2R (see page 197 of the PDF).

Given the current ‘awkward’ wording and references to being and not being ‘an exempt CAD firm’ in IPRU-INV 5.4.2R(i) and (ii) the removal and deletion of this wording will improve understanding of the rules. Including at the regulator, where the incorrect return can sometimes be added to a firm’s schedule on REGDATA (GABRIEL), effectively increasing capital requirements.

Small AIFMs should ensure they are submitting the appropriate regulatory return (FSA035) where they can rely on the exemption from the liquid capital requirement. Otherwise they may be holding additional capital based on an incorrect application of the Handbook and reporting rules.

What should Small AIFMs be doing?

As well as checking the submission of FSA034/035 is correct, Small AIFMs should review the FCA's most recent guidance on assessing adequate financial resources.

We have seen many interactions with the regulator (following Covid surveys or other) in the last year ending with a request to provide a comprehensive wind-down plan. All firms should therefore review current wind down planning documentation, and review the recent FCA guidance in FG20/1:

 https://www.fca.org.uk/publication/finalised-guidance/fg20-1.pdf

This guidance (released last year) can be seen to raise the bar, particularly for firms authorised several years ago who may not have experienced the FCA’s recent change of approach.

Firms will be familiar with managing risks and considering the financial impact of decisions to their own balance sheet based on their own risk appetite. Not all firms have developed the practice of reviewing potential ‘causes of harm’ to consumers (i.e., not just risks to the firm itself), as requested by the FCA.

Many firms will also not yet have a robust, detailed wind-down plan based on their business model, circumstances and contractual situation. Such documents should have an appropriate methodology identifying wind down-triggers and setting out individual responsibilities for winding down the firm in an orderly fashion.

This should include revised financial projections, based on incoming and outgoings during a wind-down situation (i.e., potentially reduced fees and increase costs such a legal/accounting) showing that the FCA capital requirements can still be met in this scenario.

Do speak to us if you have any questions on this.

Or you would like to discuss whether you could potentially fall outside the new UK Investment Firm Prudential Regime.