The Investment Firms Prudential Regime – areas to consider when getting started

Yesterday morning the Financial Conduct Authority (FCA) confirmed that, considering the scale of regulatory reform due in 2021, the UK’s Investment Firms Prudential Regime (IFPR) will now be targeting an implementation date of 1 January 2022. With the clock now ticking and just over a year to go, FourthLine looks at how firms can get started with preparing for implementation, cutting across five key areas.

1. Getting started

Understanding the impact of the new regulations: Whilst the Consultation Paper is still awaiting publication (due December 2020), the FCA has been clear in that they do not expect to deviate too far from the rules set out in the EU’s Investment Firms Regulation (IFR). 

Accordingly, we recommend firms conduct a high-level impact assessment across the 12 core themes (read our Insights Deck on this here>) to identify those areas where the most significant effort is required, identifying whether changes are small scale or root-and-branch.

Project structure: Due to the cross-cutting nature of the proposed regulation, firms should identify an appropriate project structure for this, ringfencing engagement from Compliance, Risk, Finance, Company Secretariat, People and any associated Environmental, Sustainability & Governance (ESG) function. We recommend this aligns with where future accountability for compliance with the Regime will eventually fall in BAU.

Committee updates: The pan-firm nature of the project means that reporting could go to several committees depending on the size of your firm. Delineating what goes where will be a key part of keeping senior stakeholders and non-executive directors informed as to progress as decision making. Decision making may tie in to existing reporting lines – for example Risk Committees receiving ICAAP updates and providing oversight will likely naturally be updated on the new ICARA process – however, decisions may be required over who receives newer elements to the IFPR.

2. People

Whilst some firms will already be performing large equivalent parts of the Regime, others may be required to uplift their capabilities and capacity. Due to the technical considerations of some parts of the IFPR, we would also expect short-term resource will also be required around implementation. With over 3,200 firms currently on the FCA’s Investment Firm Register, finding capable talent may end up being a challenging exercise for firms.

Accordingly, we recommend that as part of the impact assessment of the Regime mentioned in Consideration 1, firms also perform a capacity and capability exercise around existing staff. This should consider both the resourcing requirements for short term tactical implementation and longer term strategic BAU operations.

3. Process

Understanding the impact the Regime will have on current processes is a significant exercise. With uplifts to data collection, categorisation, capital calculation, reporting requirements, and risk management, firms will need to consider ownership for delivery of these aspects and what needs changing or adding in their existing frameworks.

With operational resilience also a current hot-topic requiring attention, firms may find that they can leverage efficiencies in developing understanding of the new processes required with identification of Important Business Services as part of operational resilience exercises. Any firm currently in-scope of the Extended scope of the Senior Managers & Certification Regime (SM&CR) should be seeking to drive these efficiencies as part of greater business understanding.

4. Technology

Systems and data across areas such as the K-Factors and fixed overheads, intra group consolidation and capital, liquidity, concentration risk, regulatory reporting, and ESG will be critical in successful implementation of the IFPR.

Given the long lead times from scoping out requirements to vendor selection and then implementation, we recommend firms prioritise understanding the data needs arising from the Regime and, where required, seek solutions as early as possible. With the crowded marketplace for firms seeking data transformation and support, this could become a serious headache if not managed early.

5. Governance

Firms will need clear evidence of accountability for each of the different components of the IFPR. This may mean updating and refreshing SM&CR cardinal documents and underlying documentation.

Throughout the development process, firms should be considering what evidence their SMF holders will require to evidence their ongoing oversight of the IFPR and how this is recorded and maintained for any future requests from the Regulators.

Next steps

For further insights on getting started on implementing the IFRP in your firm, please download our insights deck HERE.

For any questions or to set up a no-obligations call with either our Risk Consulting Director, Ross Molyneux, or our Talent Director, Daniel Waltham, please  book time in their diaries below:

Ross Molyneux: book a meeting here.

Daniel Waltham: book a meeting here.

 

Topics: Featured, Risk Management, Investment Management, Prudential regime

November 17, 2020
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Ross Molyneux
Written by Ross Molyneux

Ross leads our Risk Consulting proposition and specialises in risk management and regulation. He has worked extensively across non-financial and financial risk management engagements in his time in consulting in both the UK and New Zealand. After starting his early career in industry working across different financial services institutions, Ross moved into consulting in 2011 with Deloitte, primarily leading and performing financial risk engagements including capital adequacy, liquidity, credit risk, and recovery and resolution planning. Following time in Aviva’s Internal Audit function, Ross moved to help build EY’s North of the UK extended assurance practice, leading and performing a range of engagements across both financial and non-financial risk, including extensive engagement with large banks, asset managers and investment firms as they continued to face into the challenges of revisions to existing regulation and new requirements, such as the Senior Manager & Certification Regime (SMCR). In 2017 Ross made the decision to spend time overseas, joining KPMG New Zealand’s Auckland Consulting practice. Joining as an Associate Director, Ross was quickly promoted to Director and co-led the firm’s response to emerging conduct and culture challenges arising from the Australian Royal Commission (ARC) and new operational resilience requirements arising from the Reserve Bank of New Zealand’s (RBNZ) Outsourcing Policy. Working with a range of entities since being in New Zealand, Ross has led engagements ranging from internal audit co-source support to preparing entities for acquisition through ensuring they meet licensing conditions via uplifts of frameworks and policies. Choosing to return home in 2020, Ross is looking forward to supporting FourthLine’s clients as they face into current and future risk and regulatory challenges.