Investment Firm Prudential Regime (IFPR). A Practical Overview

The Investment Firm Prudential Regime (IFPR) is the UK's bespoke prudential framework for MiFID investment firms, introduced on 1 January 2022. It replaced the patchwork of previous rules that applied different prudential requirements depending on the type of investment firm and its activities. The IFPR aims to create a more proportionate and risk-sensitive framework that better reflects the specific risks posed by investment firms, as distinct from banks. This guide provides a practical overview of the key requirements.

Firm Classification

The IFPR classifies investment firms into two main categories based on their size and interconnectedness:

Small and non-interconnected (SNI) firms benefit from a simplified prudential regime. A firm qualifies as SNI only if it meets all of the following conditions in MIFIDPRU 1.2:

The AUM, client orders, balance sheet and revenue thresholds are measured across the investment firm group; the others apply to the firm individually. SNI firms have reduced reporting, simplified capital calculations and lighter remuneration and disclosure rules.

Non-SNI firms are subject to the full IFPR requirements, including the K-factor capital requirement, more extensive reporting and the full remuneration and disclosure framework.

Capital Requirements

The IFPR introduces a new approach to calculating capital requirements based on three components, with the firm required to hold the highest of:

• Permanent minimum capital requirement (PMR). A fixed floor set by the firm's permissions in MIFIDPRU 4.4: £75,000 for firms that only receive and transmit orders, execute orders, manage portfolios, give investment advice or place without a firm commitment; £150,000 for firms that hold client money or assets or operate an MTF; and £750,000 for firms that deal on own account, underwrite or place on a firm commitment basis, or operate an OTF without the relevant limitation.
• Fixed overheads requirement (FOR): One-quarter of the firm's annual fixed expenditure, calculated from the most recent audited accounts. This is intended to ensure the firm has sufficient capital to cover its running costs for at least three months.
• K-factor requirement (KFR). A risk-based capital charge calculated using 'K-factors' that capture three categories of risk: risk-to-client (RtC), including assets under management, client money held and assets safeguarded; risk-to-market (RtM), based on the firm's own trading positions; and risk-to-firm (RtF), based on concentration risk and daily trading flow.

SNI firms are only required to calculate the PMR and FOR. Non-SNI firms must calculate all three and hold capital equal to the highest result.

The ICARA Process

The Internal Capital Adequacy and Risk Assessment (ICARA) is the IFPR's equivalent of the ICAAP for banks. It is a continuous process through which the firm assesses: all material risks and harms that the firm may pose to customers, markets or itself; the capital and liquid assets needed to address those risks; and the adequacy of the firm's risk management, governance and internal controls. The ICARA must cover both business-as-usual conditions and stressed scenarios. It should identify the point at which the firm would need to implement its wind-down plan, and the resources required for an orderly wind-down.

The FCA expects the ICARA to be proportionate to the firm's size and complexity. For SNI firms, a straightforward document covering the key risks, capital calculations and wind-down analysis may be sufficient. For larger non-SNI firms, the FCA expects a more comprehensive assessment including detailed stress testing, scenario analysis and reverse stress testing.

Liquidity Requirements

In addition to capital, the IFPR requires firms to maintain adequate liquid assets. The basic liquid assets requirement in MIFIDPRU 6.2.1R is one third of the fixed overheads requirement plus 1.6% of any guarantees provided to clients, held in core liquid assets such as cash and short-term government debt. Where the ICARA identifies additional liquidity risks, the firm must hold additional liquid assets above this minimum. The liquid asset requirement ensures that firms can meet their obligations as they fall due, even under stressed conditions, and can fund an orderly wind-down if necessary.

Remuneration

The IFPR introduces specific remuneration requirements for investment firms. All MIFIDPRU firms need a gender-neutral remuneration policy. Non-SNI firms must also identify material risk takers (MRTs), staff whose work has a material impact on the firm's risk profile, and restrict guaranteed variable remuneration. The extended rules on deferral, pay in instruments and retention apply only to larger non-SNI firms: those with on- and off-balance sheet assets above a rolling average of £100 million (or £300 million where trading book and derivatives exposures are within limits) under SYSC 19G.1.1R. Where they apply, at least 40% of variable pay is deferred over at least three years, rising to 60% for variable pay of £500,000 or more. An MRT whose variable pay is £167,000 or less and not more than one third of total pay is exempt from those extended rules (SYSC 19G.5.9R). SNI firms are subject to simplified requirements: they must have a remuneration policy that is consistent with sound risk management and does not encourage risk-taking beyond the firm's risk tolerance, but are exempt from the deferral and clawback requirements.

Reporting and Disclosure

IFPR returns are submitted through RegData:

Public disclosure under MIFIDPRU 8 applies in full to non-SNI firms, and in part to SNI firms with additional tier 1 instruments in issue. Every MIFIDPRU firm makes the remuneration disclosure in MIFIDPRU 8.6. Disclosures are published at least annually, on the date the firm publishes its annual financial statements. Firms preparing an application should read our page on FCA investment firm authorisation. Groups that also serve US clients should note that IFPR does not replace SEC investment adviser or broker-dealer registration.

Regulatory Counsel advises investment firms on IFPR compliance, ICARA preparation, capital planning and FCA reporting. Contact us for a written proposal. See our compliance monitoring page for more.