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Today New City Initiative is comprised of 43 leading independent asset management firms from the UK and the Continent, managing approximately £500 billion and employing several thousand people.

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Engage with the FCA on its new funds regime

Published by Charles Gubert

Last month, the UK Financial Conduct Authority (FCA) published a discussion paper outlining its thinking on the new prudential regime for MiFID-regulated investment firms. This comes as the EU plans to introduce further changes to asset management rules from June 2021 under the Investment Firm Directive (IFD) and Investment Firm Regulation (IFR), legislation which the UK had a major role in shaping. In light of Brexit, the UK has said that while it will not adopt the IFD and IFR, it will introduce similar regulation in parallel. This is something NCI members should be closely following.    

The FCA has stated clearly that it largely agrees with the overriding objectives of the IFD and IFR. Key proposals include:

  • Increase in the initial capital required for authorisation
  • Changes in capital calculations
  • Revisions to own funds requirements, namely the introduction of the K-factor methodology
  • Alterations to rules around concentration risk; liquidity; the powers of the FCA to impose additional capital requirements on individual firms; regulatory reporting requirements and public disclosure obligations 
  • New requirements on remuneration policies

Existing remuneration practices could face major structural changes under the new UK framework. Although UK-based UCITS, AIFMs and MiFID-regulated firms will still be subject to their sectoral remuneration codes, the FCA said: “Solo-regulated investment firms are subject to either the IFPRU Remuneration Code in SYSC 19A or the BIPRU Remuneration Code in SYSC 19C. The exception is ‘exempt-CAD firms’, (namely organisations that typically only provide investment advice or arrange deals), which are currently not subject to any remuneration codes. If we were to adopt a similar approach to IFD in a domestic regime, we would delete the IFPRU and BIPRU Remuneration Codes entirely, and create a new remuneration code based on the IFD remuneration provisions.” 

Under these provisions, international law firm Macfarlanes says investment firms could be obliged to adopt a much stricter and more onerous approach to their current remuneration policies, which may result in asset managers being forced to implement deferrals; payments in shares and other non-cash instruments; and performance adjustments. These are obligations, which a number of organisations have been exempted from due to either proportionality or their regulated status. 

“The current remuneration regime allows firms to apply certain rules “to the extent” that is appropriate, with the result that many UK asset management and wealth management firms currently disapply the more onerous remuneration structure rules on grounds of proportionality. Since the IFD removes this wording, the FCA appears to interpret this to mean that EU firms will not be entitled to disapply such rules altogether, solely on the grounds of proportionality, because “instead proportionality is built into the IFD”. This may in due course prove unwelcome news for many firms and their material risk-takers,” reads the Macfarlanes brief. It also adds firms may be obliged to establish a remuneration committee, which hitherto had not been required.

The FCA has asked the industry to provide any comments to this discussion paper by September 25, 2020. The NCI would recommend that its membership share their views with the FCA accordingly.