Capital, capital

On 23 June, FCA published a Discussion Paper setting out its proposals for implementing a new prudential regime for investment firms. (We anticipated these in our January Newsletter “New Prudential Regime”.)

These have been built on the back of the EU Investment Firms Directive and Regulation, due to be implemented by 26 June 2021. In the interests of equivalence, and a long overdue review of non-bank prudential supervision, FCA look in DP 20/2 at what this might look like for UK firms.

Whilst there are no detailed draft rules yet and much remains unclear, certain things can be said:

  • you’ll be better off out of MiFID that in MiFID. These proposals apply to MiFID firms and business. If your firm carries out minimal MiFID business, has unused MiFID permissions or only became a MiFID firm for passporting, now is the time to review that position;
  • if you can’t get out of MiFID, you’re better off as a Small, Non-Interconnected Investment Firm (“SNI”) than anything else. An SNI is a subject to a far lighter touch regime than other firms. It will be vital to look at the qualification criteria for SNIs to make sure that you can meet them, if possible.
  • and if none of that works, you may want to consider applying for a waiver. But if these are available at all they’ll only be available for specific parts of the regime. And FCA has said that it expects there to be less need for waivers.

All of the above might seem a little alarmist, but consider this:

  • all firms will be subject to a new increased level of additional capital, of at least £75,000;
  • there will be no “matched principal exemption”. Firms who currently take advantage of this will be treated just as other principal dealers;
  • firms holding any amount of client money or assets will not qualify for the lighter SNI regime;
  • the new regime will require firms to calculate their capital requirement based a number of “K factors”. These are new metrics designed to capture the risk of having assets under management, holding client money or processing client orders. And that’s only some of them;
    all firms will be subject to a liquidity requirement (but perhaps not a large one) and have to meet a Fixed Overhead Requirement amounting to 25% of running costs.

So – better out than in.

Fulcrum Compliance will be working with clients to assess the potential impact of these changes and how best to comply.

Just when you thought it was safe…

So – you’ve identified your Senior Managers. They’ve (finally) signed off on their Statements of Responsibility. You’ve briefed the Certification Staff on the Conduct Rules.

And given that it’s post year end, you’ve carried out an appraisal on them, covering the required headings of honesty and integrity, capacity and capability and financial soundness and issued them with a Certicifate. SMCR job done.

Not quite. There’s still the task of entering the details of those certified folk into the new “FCA Directory”. This is what replaces the public disclosure of formerly approved persons on the FCA Register. (It’s so like the old FCA Register, the Directory is actually part of the Register.) The form to do this is available now in FCA Connect. Choose the third line down “Directory Persons”, then “Add Directory Person”, then enter the required details. Be sure to have handy the relevant IRN, NI number or passport number.

If that’s inducing a mild panic, don’t worry. The original deadline for updating the Directory was 9 December 2020, and that has now been relaxed to 31 March 2021. FCA has set out the details you’ll need to enter on their web site.

Fulcrum Compliance will in the coming months be working with clients to get these details uploaded.

Don’t go there…

This may sound like a Covid-19 travel advisory, but it’s potentially more important than that. You might (in normal circumstances) be happy to go to some of these places for a holiday, but think more than twice before accepting business from these areas.

That’s because on 9 July, the EU designated new high-risk countries for money laundering risk. Enhanced due diligence must be undertaken from 1 October when dealing with any of these jurisdictions:

Bahamas, Barbados, Botswana, Cambodia, Ghana, Jamaica, Mauritius, Mongolia, Myanmar/ Burma, Nicaragua, Panama and Zimbabwe.

The good news is that the following countries are no longer high risk:

Bosnia-Herzegovina, Ethiopia, Guyana, Lao People’s Democratic Republic, Sri Lanka and Tunisia.

Fulcrum Compliance retained clients will receive this information again in an update to s.5 of their Compliance Manuals. With FCA recently dishing out a £37m fine for inadequate money laundering procedures, these counties should be in everyone’s hot list – and not as travel destinations.


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