Investment Firm Prudential Regime (IFPR): Ongoing Obligations and Common Compliance Gaps

The Investment Firm Prudential Regime (IFPR), implemented through MIFIDPRU, replaced the previous BIPRU and IFPRU frameworks with a tailored prudential regime for FCA-regulated investment firms. In force since 1 January 2022, the IFPR imposes ongoing obligations that require continuous attention. This article examines the key ongoing requirements and identifies the most common compliance gaps identified through supervisory activity.

IFPR Classification

Investment firms are classified into three categories under IFPR:

Small and Non-Interconnected (SNI) firms. Firms meeting all SNI thresholds, including assets under management below £1.2 billion, client orders handled below £100 million per day, and other metrics. SNI firms face simplified requirements.

Non-SNI firms. Firms exceeding any SNI threshold face enhanced requirements including additional K-factor calculations, concentration risk obligations and more detailed reporting.

Class 1 firms. The largest investment firms that are re-authorised as credit institutions: subject to banking prudential requirements.

Own Funds Requirements

Own funds requirements under IFPR are the highest of: the permanent minimum requirement (PMR), the fixed overheads requirement (FOR) and, for non-SNI firms, the K-factor requirement (KFR). The FOR is one quarter of the firm's annual fixed overheads.

Firms must also hold liquid assets of at least one third of the FOR, plus 1.6% of any client guarantees (the basic liquid assets requirement).

K-factors are risk-based metrics that capture the specific risks of the firm's activities: - K-AUM: risk from assets under management - K-CMH: risk from client money held - K-ASA: risk from assets safeguarded and administered - K-COH: risk from client orders handled - K-NPR: net position risk from trading activities - K-CMG: risk from clearing margin given - K-TCD: trading counterparty default risk - K-DTF: daily trading flow risk - K-CON: concentration risk

Firms must calculate their K-factor requirements on an ongoing basis and maintain own funds comfortably above the minimum at all times.

ICARA Process

The Internal Capital Adequacy and Risk Assessment (ICARA) is the IFPR equivalent of the banking sector's ICAAP. The ICARA requires firms to:

1. Identify and assess all material risks to the firm and the harms it could pose to customers and markets.
2. Assess whether the firm's own funds and liquid assets are adequate to cover those risks.
3. Conduct stress testing under adverse scenarios to evaluate financial resilience.
4. Document the assessment, conclusions and any remedial actions.
5. Submit the ICARA questionnaire (MIF007) to the FCA through RegData. The ICARA document itself is kept by the firm and provided on request.

The ICARA should be a meaningful exercise, not a compliance tick-box. The FCA expects firms to genuinely engage with the risk assessment, use realistic stress scenarios and draw actionable conclusions.

Concentration Risk

Non-SNI firms are subject to concentration risk limits under MIFIDPRU 5. These limits restrict the firm's exposure to individual counterparties and groups of connected counterparties, expressed as a percentage of the firm's own funds. Firms must monitor concentrations on an ongoing basis and report breaches to the FCA.

Regulatory Reporting

Investment firms submit MIFIDPRU returns through RegData, which replaced GABRIEL:

Quarterly returns are due 20 business days after the reference date.

Reporting deadlines are strict: late or inaccurate submissions may result in supervisory action.

Common Compliance Gaps

Under-calculation of K-factors. Firms that fail to correctly identify all relevant K-factors or that use incorrect calculation methodologies, resulting in understated own funds requirements.

Superficial ICARA. ICARA documents that read as compliance exercises rather than genuine risk assessments: with generic stress scenarios and formulaic conclusions.

Concentration risk monitoring gaps. Failure to monitor concentrations on an ongoing basis, particularly for firms with significant trading counterparty exposures.

Reporting errors. Inaccurate MIF001 submissions due to calculation errors, data quality issues or inadequate reporting systems.

Remuneration policy deficiencies. Failure to implement MIFIDPRU remuneration requirements, including variable remuneration deferrals and risk adjustment.

What Firms Should Do Now

Firms still applying should build these obligations into their FCA investment firm authorisation application, because the FCA assesses capital, liquidity and the ICARA at the gateway.

1. Review your K-factor calculations for accuracy and completeness.
2. Assess the quality of your ICARA: does it reflect a genuine risk assessment with realistic stress scenarios?
3. Verify that concentration risk monitoring is operational and producing timely alerts.
4. Check regulatory reporting processes for accuracy and timeliness.
5. Review remuneration policies against MIFIDPRU requirements.

Regulatory Counsel advises investment firms on IFPR compliance, ICARA preparation, regulatory reporting and prudential risk management. Contact us for a written proposal.