Post-Brexit prudential regime expected to hinder UK competitiveness
Smaller firms at greatest disadvantage
The Financial Conduct Authority's (FCA) proposed post-Brexit prudential regime for MiFID investment firms is set to negatively impact competitiveness, while impacting the attractiveness of the UK in the eyes of investment groups, a new poll suggests.
In June, the regulator published proposals for new prudential rules for UK investment firms, replacing EU rules, and targeting controls on liquidity, remuneration and capital requirements.
At the time, the regulator said the "large majority of UK investment firms" would prefer a domestic regime as it provides the potential of "lower regulatory costs, better alignment of requirements to business models, strengthened supervisory dialogue, improved competition and better prudential outcomes".
However, while about a third of the UK's 3,844 MiFID investment firms are currently exempt from the EU's Internal Capital Adequacy Assessment, according to regulatory consultancy Bovill, the FCA is proposing to take a harder line with the new prudential regime and force previously exempt firms to undergo an Internal Capital Adequacy and Risk Assessment (ICARA) for the first time once the UK leaves the EU.
Bovill's poll found that 28% of firms expect to require extra resources, including people and systems, to meet the ICARA requirement.
Managing consultant at the firm Harpartap Singh said the FCA's attempt to "gold-plate" its prudential regime "seems unjustified and disproportionate for smaller investment firms".
He explained: "Many of these firms will have never done this kind of assessment before, and so the administrative and resource burden will be a challenge.
"One of the key objectives of the new regime was to be risk-oriented and it doesn't make sense in terms of risk to include smaller firms in the ICARA, when they are already covered by the FCA's guidance on assessing adequate financial resources.
"The ICARA may be an onerous and rigorous process and the FCA did not give much warning. I think some smaller firms will struggle."
Elsewhere, 45% of respondents to Bovill's poll said they expect to be impacted by the FCA's proposed capital requirements, which may force firms to hold capital in the UK, even if their parent company is located elsewhere.
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Singh said: "The group capital requirements affect a large number of firms and could make the UK a less attractive place for investment fund managers looking to set up or expand.
"This combined with ICARA and the more stringent rules around holding capital could put UK firms at a disadvantage on the global stage, at a time where we arguably need to be at our most competitive."
Regulated firms have one month left to respond to the FCA's consultation paper on the new rules, which are expected to come into force in the summer of 2021.
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