Policy Statement PS21/9 July 2021

1 Implementation of Investment Firms Prudential regime Policy Statement PS21/9 . July 2021. PS21/9 Financial Conduct Authority Implementation of Investment Firms Prudential regime This relates to Contents Consultation Paper 21/7 1 Summary 3. which is available on our website at 2 How these rules will apply 12. 3 Own funds requirements 16. Telephone: 4 Firms acting as clearing members and 020 7066 1000. indirect clearing firms 42. Email: 5 Basic liquid assets requirement 45. 6 Risk management, ICARA and SREP 60. 7 MIFIDPRU Remuneration Code: scope and application 76. 8 MIFIDPRU Remuneration Code: basic remuneration requirements 90.

2 9 MIFIDPRU Remuneration Code: standard remuneration requirements 96. 10 MIFIDPRU Remuneration Code: extended remuneration requirements 104. 11 Governance 112. 12 Regulatory reporting 119. 13 Interaction of MIFIDPRU with other prudential sourcebooks 126. 14 Applications and notifications 128. 15 Summary of amendments to Handbook text 134. Annex 1. List of non-confidential respondents 163. Annex 2. Abbreviations used in this paper 165. Moving around this document Use your browser's bookmarks Appendix 1. and tools to navigate. Made rules (legal instrument). To search on a PC use Ctrl+F or Command+F on MACs. Sign up for our news and publications alerts See all our latest press releases, consultations and speeches.

3 2. PS21/9 Financial Conduct Authority Chapter 1 Implementation of Investment Firms Prudential regime 1 Summary Introduction This Policy Statement (PS) is about the UK Investment Firm Prudential regime (IFPR), a single prudential regime for all FCA investment firms that simplifies our current approach. The IFPR will shift the focus of prudential requirements and expectations away from the risks that firms face, to address the harm that firms can pose to consumers and markets. This is our second PS on the IFPR and it aims to streamline the prudential requirements for solo-regulated investment firms in the UK (FCA. investment firms).

4 In April 2021 we consulted, in CP21/7, on the second set of our proposals to introduce the IFPR. This is a new prudential regime for UK investment firms authorised under the UK Markets in Financial Instruments Directive (MiFID). This is the second Policy Statement (PS) we are issuing to introduce the IFPR. It summarises the feedback we received to CP21/7, our response and sets out near-final rules. The new regime represents a major change for FCA investment firms and it is critical that they adequately prepare for the regime . We expect the IFPR to take effect in January 2022. Who this applies to The rules will apply to: Any MiFID investment firm authorised and regulated by the FCA that is currently subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) including: investment firms that are currently subject to BIPRU and GENPRU.

5 Full scope,' limited activity' and limited licence' investment firms currently subject to IFPRU and CRR. local' investment firms matched principal dealers specialist commodities derivatives investment firms that use the current exemption on capital requirements and large exposures including: oil market participants (OMPS). energy market participants (EMPS). exempt CAD-firms investment firms that would be exempt from MiFID under Article 3 but have opted-in' to MiFID. Collective Portfolio Management Investment firms (CPMIs). regulated and unregulated holding companies of groups that contain an investment firm authorised and regulated by the FCA and that is currently authorised under MiFID and/or a CPMI.

6 3. PS21/9 Financial Conduct Authority Chapter 1 Implementation of Investment Firms Prudential regime The rules on capital requirements for trading firms' activities might also be of broader interest to exchanges, central counterparties and clearing members. The wider context of this Policy Statement Our consultation This is the second in a series of PSs that will set out our rules to introduce the IFPR. It summarises the feedback we received to CP21/7. We published the first CP (CP20/24) in December 2020 and the accompanying PS. (PS21/6) in June 2021. We intend to publish a further CP and PS this year. The third PS will bring together all our final rules.

7 Table 1, in this chapter, lays out our IFPR. consultation roadmap. When the UK was a member of the EU, we were heavily involved in the Policy discussions to create the Investment Firm Directive (IFD) and Investment Firm Regulation (IFR). We support the aims of the EU's IFD and IFR. The IFPR will achieve the same overall outcomes. However, we are introducing our regime after the UK has exited the EU. We believe it is right that we consider any appropriate changes to account for the specifics of the UK. market and our duties to have regard to certain factors, including those set out in the Financial Services Act 2021 (FS Act). Given this context, our baseline approach is for consistency with the EU regime unless we have specific reasons for diverging to reflect the nature of the UK market or otherwise to comply with our duties under Part 9C of FSMA (as inserted by the FS Act).

8 We note that when CP21/7 was published the FS Bill was still going through the parliamentary process. Our proposals were based on the draft legislation in the form in which it stood at that time. In April 2021, Royal Assent was obtained and the FS Act is now on the statute book. In most cases, the finalised provisions of the Act have not changed since CP20/24 was published. However, where applicable, we have updated our near-final rules to take account of any amendments made to the legislation during its passage through Parliament. We expect that the Treasury will publish secondary legislation in connection with the exercise of its delegated powers under Part 9C of FSMA in due course.

9 How it links to our objectives Market integrity Our near-final rules require FCA investment firms to consider the potential harm they can cause to clients, markets and others, by the type and scale of activities they undertake. This is a change from the previous regime which was based on these firms mainly considering the risks to their own balance sheet. 4. PS21/9 Financial Conduct Authority Chapter 1 Implementation of Investment Firms Prudential regime Competition Our near-final rules will ensure there is 1 overarching regime for all FCA investment firms. They are proportionate according to the firm's size and the type and scale of their activities.

10 This is a significant improvement on the 11 regimes that currently exist for these firms. FCA investment firms with similar business models will now have similar prudential standards, rather than very different standards due to historical quirks. This will help to improve competition between existing firms and simplify matters for new entrants. Protecting consumers Our near-final rules require FCA investment firms to consider the potential harm they can cause to their retail customers, as well as their wholesale and financial services clients. Our requirements place more focus on the MiFID investment services that these firms provide to consumers, although certain requirements will apply in relation to all activities undertaken by a firm.