The Financial Conduct Authority (FCA) today set out its initial thinking about new UK prudential rules for investment firms, with its interim chief executive officer saying the regulator was proposing to introduce a regime that would achieve similar intended outcomes as the EU’s new regime, while taking into consideration the specifics of the UK market.

While the UK was a member of the EU, the FCA was heavily involved in policy discussions about the bloc’s new regime, which will be introduced after the scheduled end of the UK’s transition period to exit the EU.

Commenting on the launch of the FCA’s discussion paper on a UK regime today, Christopher Woolard, the regulator’s interim CEO, said: “A new UK regime would represent a significant improvement in the prudential regulation of investment firms.

“For the first time, it would deliver a regime that has been designed with investment firms in mind, replacing many rules that were largely designed for deposit-taking credit institutions.”

The FCA has said it believed asset managers would benefit from a domestic version of such a regime, for example because of lower ongoing regulatory costs and better alignment of capital requirements to business models.

However, it said it did not want to provide specific numbers on the expected impact of a new UK regime on investment firm-types, because the scope of its rule-making powers was not yet settled and the details of certain requirements in EU “level 2” legislation, to be fleshed out by the European Banking Authority (EBA), had not yet been finalised.

“While we have left the EU and would no longer bound by such future standards and guidance, we consider it might be appropriate to take them into account when designing our UK regime,” said the FCA, noting it would include a cost benefit analysis in a subsequent consultation paper.

“Investment firms should be aware of the scale of the change the IFD/IFR represents”

Financial Conduct Authority

Referring to the new overall EU regime, the Investment Firm Directive and Regulation (IFD/IFR), the FCA said firms “should be aware of the scale of the change” they represented.

Major changes include that liquidity requirements would apply to all investment firms, the levels of initial capital would be required for authorisation would be updated, a brand new methodology – the “K-factor” – would be used for calculating capital requirements, and there would be new remuneration and disclosure requirements.

One of the areas the EBA is due to investigate is in relation to environmental, social and governance (ESG) issues.

According to the FCA, this includes whether any ESG-specific adjustments to the K-factors or their co-efficients should be developed “to ensure the appropriate prudential treatment of ESG-exposed assets”.

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