Investment firms: the perfect regulatory storm?

21 August 2018

The landscape for investment firms is changing fast through a number of concurrent reforms including the FCA’s extension of the Senior Managers and Certification Regime (SMCR), its increased focus on the quality of prudential regulatory returns, and the EU’s overhaul of the prudential regulations for investment firms (Investment Firms Review – ‘IFR’). This blog focuses on the IFR and FCA changes.

The new proposed IFR framework, published in December 2017 and planned to be implemented in 2020, is intended to remedy the fact that current prudential requirements are not necessarily proportionate and do not take into account the specific prudential risks faced by different types of investment firms. In addition to changes related to capital and liquidity, IFR has also introduced new regulatory reporting and public disclosure requirements for Class 2 investment firms. This will require a new level of granularity and quality of data, which coincides with the FCA’s increased focus on the quality of prudential regulatory returns.

In its February 2018 Dear CEO letter to the investment firms subject to the Prudential Sourcebook for Investment Firms (‘IFPRU investment firms’) and the firms subject to to the Prudential Sourcebook for Banks, Building Societies and Investment Firms (‘BIPRU firms’), the FCA expressed its expectation that investment firms ensure the completeness and accuracy of their regulatory returns. It explicitly expects the CEOs of IFPRU investment firms and BIPRU firms to inspect the appropriateness of their firms’ FINREP and COREP practices, and plans to undertake a review of a sample of firms’ returns in October 2018, potentially with further action to remedy any remaining data quality issues.

With the IFR and the FCA’s concurrent focus on regulatory reporting, public disclosures and data quality issues of investment firms, it is not unreasonable to anticipate the FCA stepping up its oversight and supervision. Firms should not underestimate the time and effort that would be required to ensure timely and full compliance. As a result of increased expectations around data quality, firms using disparate systems and processes will face multiple challenges in order to meet the new requirements. In the long run, improved internal processes and controls will help with their ongoing monitoring of risk and regulatory compliance.

The same goes for governance requirements in the wake of the concurrent changes being introduced by the FCA and through IFR. While the FCA announced in July 2017 that it would be extending the SMCR to all firms which are subject to the Financial Services and Markets Act 2000 (FSMA) from December 2019, IFR has also introduced new rules regarding investment firms’ internal governance and remuneration, requiring them to have appropriate remuneration practices commensurate with the risks they are exposed to.

All the changes currently in the works indicate a clear step change in investment firms’ regulation. Meeting the new requirements will require focus from firms on all aspects of their risk management, accountability and reporting. But firms should not be looking at these as simply new regulatory deadlines to hit. Improved risk management, governance and reporting can act as a differentiator from competitors and increase resilience overall. So firms would be well advised to look now at starting their impact assessment on IFR changes and furthering their data quality and governance arrangements.

Hortense Huez

Hortense Huez | Director
Profile | Email | +44 (0)20 7213 3869

Mete Feridun

Mete Feridun | Manager, Financial Services Risk and Regulation
Profile | Email | +44 (0) 7483 362070

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