By Katrina Cockram, Senior Compliance Consultant, UK
The FCA’s Investment Firm Prudential Regime (IFPR) introduced three new prudential categories of firms: small and non-interconnected (SNI), non-SNI, and large non-SNI. Since IFPR came into force on 1 January 2022, we’re seeing more and more firms approach the threshold that separates SNI and non-SNI firms. In this article, we’ll outline the steps a firm should take when they know they’re going to cross the threshold and need to reclassify to ensure continued compliance.
IFPR thresholds: a summary
As set out in the MIFIDPRU 1 rule, to be classified as an SNI a firm must not have permission to deal on its own account, not be appointed as a depositary, and operate below each of the following thresholds, failing which the firm would be classed as a non-SNI firm:
|Assets under management (AUM)||£1.2bn|
|Client orders handled (COH – cash trades)||£100m per day|
|Client orders handled (COH – derivatives)||£1bn per day|
|Assets safeguarded and administered||Zero|
|Client money held||Zero|
|On- and off-balance sheet total||£100m|
|Annual gross revenue from investment services/activities||£30m|
Firms within an ‘Investment Firm Group’ should apply some of the above thresholds on a consolidated basis when determining their IFPR classification. The thresholds to be considered on a consolidated basis are:
- On- and off-balance sheet total
- Annual gross revenue
In addition, a firm will be deemed a ‘large’ non-SNI firm if the value of its balance sheet assets and off-balance sheet items over four years represents a rolling average of more than £300m (for firms without a trading book) – or more than £100m but less than £300m if it has trading book business of over £150m and/or derivatives business of over £100m. This drives additional reporting and disclosure obligations, which we touch on below.
When a firm is aware that they no longer qualify to be classified as non-SNI, a notification should be made to the FCA under MIFIDPRU 1 Annex 4R as soon as possible. This should be submitted though the Connect system.
A firm will cease to be classified as SNI three months after the crossed threshold was first exceeded if the threshold crossed is AUM, COH, balance sheet and/or revenue.
The crossing of any of the other thresholds may mean an immediate transition from SNI to non-SNI classification.
The firm will need to confirm they are aware of the additional requirements they will be subject to as a non-SNI firm, and that, from the date of ceasing, they have 12 months to comply with the conditions of a non-SNI firm.
Additional and ongoing requirements
As stated above, a firm moving classification from SNI to non-SNI has 12 months to meet the additional requirements applied to non-SNI firms. These are summarised below:
Non-SNI firms will be required to maintain an amount of ‘own funds’; the amount being the higher of their permanent minimum requirement (PMR), fixed overhead requirement (FOR) or a K-factor requirement (KFR) that involves a specific methodology and calculation relevant to the firm.
The overall KFR of a non-SNI firm is the sum of each of the K-factors applicable to its MiFID activities. For most non-SNI investment management firms, K-AUM (assets under management) and K-COH (client orders handled) are likely to be the most relevant K-factors. However, it is worth noting the interaction between these two specific K-factors and the FCA guidance to avoid double counting, as explained in MIFIDPRU 4.10.
The K-AUM requirement of a firm is 0.02% of a firm’s average AUM calculated on a prescribed basis, while the K-COH requirement of a firm is equal to the sum of:
- 1% of its average COH attributable to cash trades
- 01% of its average COH attributable to derivatives trades
Regulatory data reporting
The key additional regulatory reporting requirements on becoming non-SNI are as follows:
MIF001 – Capital
A breakdown of K-factor calculations must be reported within the firm’s MIF001 report.
MIF004 – Concentration risk
This return (which is not applicable to SNI firms) determines the concentration risk of the firm. It consists of, on a quarterly basis:
- The value of exposures/positions with each of the top five counterparties
- The location of own cash, client money and client securities
- The percentage of total revenue earned from each of the top five clients
MIF005 – K-CON Concentration risk
Applicable to firms dealing on their own account and relates to their trading book exposure.
MIF007 – ICARA questionnaire
Additional questions for non-SNI firms include a breakdown of additional own funds requirements to address risks from ongoing activities, and a description of those risks that the firm deems to require additional capital.
MIF008 – Remuneration
Part A of the return will now need to be answered in relation to Material Risk Takers (MRTs) and non-MRTs, while Part B will now also be applicable and relates to adjustments to variable remuneration. Part C is only appliable to large non-SNI firms.
MIFIDPRU 8 disclosures
A firm’s published MIFIDPRU 8 disclosures will no longer be restricted to remuneration arrangements. What is currently disclosed as an SNI firm will need to be expanded on. This includes an obligation to disclose:
- The firm’s own funds, its own funds requirements and its approach to assessing the adequacy of its own funds
- How the firm addresses key risks
- Enhanced qualitative and quantitative disclosures covering remuneration, incentivisation, performance criteria and a breakdown of fixed and variable remuneration paid out in the financial year, split across Senior Managers, MRTs and ‘Other’ staff
- The firm’s investment policy where it falls under the large non-SNI firm classification
All non-SNI firms, in addition to the requirements that SNI firms are subject to, will have to:
- Identify MRTs, i.e. staff members whose professional activities have a material impact on the risk profile of the firm or of the assets that the firm manages
- Set ratios between fixed and variable remuneration for each MRT in their policies
- Ensure they have malus and/or clawback arrangements in place in respect of MRTs
- Disclose the types of staff they have identified as MRTs, including any criteria they have used to identify MRTs in addition to those specified in the MIFIDPRU Remuneration Code
- Disclose the framework and criteria used for ex-ante and ex-post risk adjustment of remuneration, including a summary of how malus (where relevant) and clawback are applied
- Disclose the total amount of guaranteed variable remuneration and severance payments awarded during the relevant financial year and the number of Senior Managers and other MRTs receiving those awards
Changing classification will be considered a material change, so the firm’s ICARA will need to be updated, including the K-factor calculations. This may also result in the MIF007 report needing to be brought forward to reflect the date of signing off the updated ICARA.
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With so many firms growing and rapidly approaching the threshold to no longer be classified as SNI, IQ-EQ is helping firms understand and meet their requirements and notify the regulator when the time comes.