By Jan Schembri, Senior Compliance Consultant
Following the April 2025 release of the Financial Conduct Authority (FCA)’s consultation paper on the definition of capital (or ‘own funds’) for FCA-regulated investment firms (CP25/10), the UK regulator published Policy Statement PS25/14 on 15 October setting out its final rules to simplify and consolidate this definition. This includes:
- A new, comprehensive chapter that firms can rely on without referring to the UK Capital Requirements Regulation (CRR) or its associated technical standards
- Clearer presentation of the existing three-tier capital structure of Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 capital
- Simplified language tailored to investment firms
- Removal of provisions designed for banks that hold no relevance to investment firms
- Moving from a permission-based to a notification-based approach for interim profits being treated as CET1
- Enhanced disclosure requirements for non-standard capital structures.
The new rules enter into force on 1 April 2026 and will affect:
- MIFIDPRU investment firms
- UK parent entities that are required to comply with MIFIDPRU 3 on the basis of their consolidated situation
- Parent undertakings subject to the Group Capital Test.
The key changes set out in PS25/14 are discussed in more detail below.
1. Own funds consolidation
The FCA has consolidated the definition and composition of own funds directly into MIFIDPRU 3, creating a single, standalone definition of regulatory capital specifically tailored for FCA investment firms. The own funds consolidation will not, however, reduce firms’ capital requirements or alter the fundamental characteristics of eligible capital.
2. Disclosure requirements for firms with non-standard capital structures
The FCA has introduced enhanced disclosure requirements for firms that have non-standard capital structures, particularly where non-CET1 instruments rank equally with CET1 instruments. The regulator expects firms to provide sufficient detail to identify which instruments rank equally with CET1 instruments and explain the basic mechanics of loss absorption.
The FCA’s Policy Statement provides examples to illustrate appropriate disclosure under different scenarios where the following non-CET1 instruments rank equally with CET1 instruments:
- Non-voting ordinary shares
- Shares with mandatory dividend features
- Redeemable shares ranking equally
- Shares with capped distributions.
3. Inclusion of interim profits as CET1
Under the current rules, firms must apply for FCA permission before including verified interim profits in their CET1 capital calculations. This will change to a notification requirement from April 2026, after which firms may include verified interim profits in CET1 capital immediately upon notification.
The requirements for verification of the interim profits (i.e. profits must be verified by a person who is independent of the firm and responsible for auditing the firm’s accounts; the firm must be satisfied that any foreseeable charge or dividend has been deducted from the profit amount on a prudent and conservative basis, etc.) remain largely unchanged.
The FCA has provided guidance to assist firms in their determination of the amount to be deducted for foreseeable dividends or charges. For example, when deducting foreseeable dividends, a firm should consider:
- Any formal decisions about dividends taken by the firm’s management body
- The upper end of any dividend policy
- The ratio of dividends to income paid out in previous years
- Any other factors that might reasonably affect the firm’s approach to distributions for the relevant period.
4. Treatment of partnership profits for regulatory capital purposes
Limited liability partnerships (LLPs) and other partnerships operate on a tax-transparent basis, with profits automatically allocated to partners for tax purposes at each year end. This creates ambiguity about whether such allocated-but-undrawn profits constitute reserves available to absorb losses or are effectively debts owed to partners.
In its Policy Statement, the FCA confirms that for all partnership forms (general partnerships, limited partnerships and LLPs), profits only qualify as CET1 capital if the partnership has an unconditional right to refuse to make them available to partners and can maintain this refusal indefinitely.
MIFIDPRU requires that CET1 capital be both ‘permanent’ and available to absorb losses on a going concern basis. Profits may be allocated to specific partners for tax purposes but still qualify as capital if:
- The partnership retains complete discretion over distributions
- Partners have no enforceable right to demand payment
- The partnership agreement does not create automatic or mandatory distribution.
The FCA has clarified that once profits are ‘divided’, they’re available to partners as an enforceable right. The profits would become liabilities regardless of whether physically distributed. For example, if the partnership agreement states that partners may withdraw their allocated profits upon giving notice, those profits are available as of right and cannot qualify as CET1 capital.
The FCA highlights that the determination of whether partnership profits may qualify as CET1 capital is based on substance over form. Even if an agreement describes division as ‘discretionary’, if established practice within the firm mean partners effectively have access to such profits on demand, then division should be treated as automatic, and the profits cannot qualify as CET1 capital.
Next steps
Firms should consider reviewing the composition of their regulatory capital in the light of the revised regulatory framework. As mentioned above, the new rules will apply from 1 April 2026, so firms submitting their MIF returns for the first quarter of 2026 next April should seek to ensure their reported figures are consistent with the new requirements.
Further, firms with non-standard capital structures should assess whether enhanced disclosure is necessary.
Although the FCA has not issued new guidance on this topic in the Handbook, regulated firms structured as partnerships should carefully examine their partnership agreements to determine the true nature of profit rights and thus whether they can qualify as CET1 capital.
To discuss the specific impact of these new rules on your firm, or to find out more about the support available from IQ-EQ’s experienced UK compliance consulting team, contact us today.
