At the start of January 2022, the IFPR came into effect, with the goal to simplify and streamline the prudential requirements for MiFID investment firms that are FCA regulated in the UK. Part of this process includes the 'Group Capital Test’ (GCT). Investment firms which are in groups subject to prudential consolidation but 1 February January 2022, along with their rationale for applying, in order to benefit from the transitional provisions.
In this article, Wheelhouse Advisors sets out to explain what the GCT is, and how firms can apply for it. What is the GCT?
Under the IFPR, consolidated supervision will apply where there is an “investment firm group,” unless the FCA has granted permission to that group to use the GCT. The group consolidation rules apply to a corporate group structure in a number of circumstances, including an investment firms shares a corporate structure another one or more investment firm, financial holding company, relevant connected undertaking, financial institution, etc. Where the FCA permits an investment firm group to use the GCT, the UK parent entity will be exempted from applying the IFPR on a consolidated basis. For the GCT to be accepted, the FCA requires the relevant UK parent entity to hold own funds instruments sufficient to cover:
- the sum of the full book value of its holdings, subordinated claims, and certain other specified instruments, in relevant entities in the investment firm group; and
- the total amount of its contingent liabilities in favour of the relevant entities in the investment firm group
If an investment firm is successful in their GCT application, it will allow relief from some prudential capital requirements. This allows a more straightforward capital treatment where, as mentioned above, the parent simply needs to hold enough regulatory capital to support its capital investment in its subsidiaries. What are the transitional provisions?
Applications submitted after 1 February 2022 will be subject to the usual review, challenge and approval process with the FCA, which can naturally take time and will preclude an investment firm group from using the GCT until it is approved. Conversely, firms which have submitted their application on or before 1 February 2022 can apply the GCT, as though it has been approved, until further notice from the FCA. The FCA has provided for a period of 2 years to review, challenge and opine on all the initial applications it receives before 1 February 2022. Can your firm apply for the GCT?
Firstly, you must determine whether your firm is part of an “investment firm group.” This would entail identifying a UK parent entity and of its relevant subsidiaries and “connected undertakings,” including those established outside the UK. The scope of the concept of “connected undertaking” might not be entirely clear and Wheelhouse Advisors can support your considerations around this point. A connected undertaking is a group of two or more entities where there is no parent, but the entities either share common majority management or common ownership, one entity exercises significant influence over the others, or one entity holds a participation in the others. The GCT would be available to groups which have a sufficiently simple structure and there is no significant risk of harm if the group is not supervised on a consolidated basis. It is also worth noting that each GCT parent undertaking in the investment firm group must satisfy the GCT. The GCT can therefore apply at each level within your group structure. This mitigates the risk of leverage or capital gearing being introduced at levels underneath the UK parent entity. The new consolidated requirements will need the support of systems, controls of internal processes to ensure your firm is adhering to the new rules. Wheelhouse Advisors can assist you with this process. The FCA’s gateway for GCT applications will close at the end of January. If your investment firm intends to apply for the GCT and would like assistance in doing so or you would like to know more about the requirements to apply, contact us at firstname.lastname@example.org.