The Investment Firms’ Prudential Regime, or IFPR for short, aims to simplify and streamline the regulatory framework for UK MIFID investment firms. It requires firms to take greater accountability for the risks they present and face and also asks that they deploy financial and non-financial mitigation to those risks in a way that is appropriate and proportionate. One of the key financial mitigants to such risk is the setting of formulaic minimum capital requirements, and the definition of capital resources, to ensure investment firms hold sufficient levels of appropriate capital at all times. The IFPR’s capital resources rules are supposed to ensure that all firms calculate their capital resources consistently, and include eligibility criteria, appropriate deductions and different tier weightings according to the quality of the capital. Capital resources are split into three Tiers, or classes of capital resources, which are
Common Equity Tier 1 (or CET1) capital
Additional Tier 1 (or AT1) capital; and
Tier 2 (T2) capital
CET1 capital typically includes items of the equity section of the balance sheet, such as LLP capital, share capital, share premium, reserves and audited retained profits. AT1 capital would include hybrid instruments such as debt that could be convertible to equity. T2 capital is were debt can be included, provided it is subordinated and has a minimum original maturity of at least five years. The tier weightings, or gearing ratios, ensure there is an appropriate mix of equity and debt making up the total of an investment firm’s capital resources. Check our website for the full list of items that can be included and deductions that must be made. The IFPR also sets out capital requirements rules, detailing minimum thresholds above which firms should maintain capital resources. All investment firms are subject to capital requirements based on the higher of a permanent minimum requirement a calculation called the fixed overheads requirement, or FOR for short, which is a quarter of adjusted annual expenditure. Non-SNI firms also have to calculate K Factor requirements, again subject to the ‘higher of’ test. These are the new calculations based on the type and volume of regulated activity an investment firm conducts. Watch our video on K-Factors for more detail or visit our website for a full explanation of the permanent minimum requirements and fixed overheads requirement.