New Raft of Post-Brexit Regulation
Now that we have left the EU, HM Treasury, the FCA and the Prudential Regulatory Authority are bringing forward new post-Brexit regulations in the areas of both financial and operational resilience, the scale of which are likely to have a significant impact on UK wealth management and large financial advice firms.
Dealing with the issue of financial resilience, the Investment Firm Prudential Regime (IFPR) has been designed specifically for MiFID investment firms to ensure they have sufficient strength and flexibility to withstand volatility within the economic cycle. Comparable in size and complexity to MIFID II in terms of its impact, this will require fundamental changes to how firms approach risk, liquidity and capital.
UK firms will not have to implement the IFPR until January 2022, unless they have a European base or subsidiary but, If they do have one or both of these, they and other European firms will have to implement the IFPR by June 2021. This difference in implementation deadlines has the potential to add additional complexity to what is likely to already be a complex process.
Among the things firms will need to consider are likely increases in regulatory capital requirements beyond what they already hold today, restrictions on how certain staff are paid and restrictions on debt-funded acquisitions. There are three consultations on this, the second of which, concerning remuneration, is due later this month.
Further, the IFPR also supports PIMFA’s argument in favour of reforming the FSCS by forcing all investment firms, including the “bad apples”, to have sufficient capital in order to meet their liabilities and to plan for an orderly wind down should they be unable to do so, reducing reliance on the FSCS and its levy. This capital and liquidity would be used by failing firms upon wind down, so the rest of the market would be less likely to be called upon to bail them out.
At the same time, the FCA’s statement on Building Operational Resilience and final rules, released at the end of March, have been designed to ensure that enhanced Senior Managers and Certification Regime (SM&CR) firms and dual-regulated designated investment firms maintain operational resilience in the face of unexpected disruption. The final rules were first consulted on in 2019 and firms will now have 12 months’ implementation period before the rules enter into force on 31 March 2022.
Here, it is the regulator’s view that business continuity is essential to operational resilience. It’s designed to shake up how firms think about disruption, from cyber security incidents to operational events, and more.
In the next 12 months, firms will need to carry out mapping and scenario testing to a level of sophistication necessary to identify their important business services, set impact tolerances and identify any vulnerabilities in their operational resilience. Then, from 31 March 2022, firms will have a three-year transitional period to see how they operate within the impact tolerances they have identified and must make reasonable efforts to remain within their impact tolerances.
As we transition out of lockdown and into a new future independent from the EU, there will be more changes to come. As these develop, we need to see a progression towards a robust, proportionate regulatory system which is fit for the future. Supervision will be key.
First published in Money Marketing