Investment Firm Prudential Regime (IFPR) — A Practical Overview

The Investment Firm Prudential Regime (IFPR) is the UK's bespoke prudential framework for MiFID investment firms, introduced on 1 January 2022. It replaced the patchwork of previous rules that applied different prudential requirements depending on the type of investment firm and its activities. The IFPR aims to create a more proportionate and risk-sensitive framework that better reflects the specific risks posed by investment firms, as distinct from banks. This guide provides a practical overview of the key requirements.

Firm Classification

The IFPR classifies investment firms into two main categories based on their size and interconnectedness:

Small and non-interconnected (SNI) firms benefit from a simplified prudential regime. A firm qualifies as SNI if it meets all of the following thresholds: assets under management below £1.2 billion; client orders handled below £100 million per day (cash trades) or £1 billion per day (derivatives); assets safeguarded and administered at zero; client money held at zero; daily trading flow at zero; and net position risk or clearing margin given at zero. SNI firms are subject to reduced reporting requirements, simplified capital calculations and certain exemptions from remuneration and disclosure rules.

Non-SNI firms are subject to the full IFPR requirements, including the K-factor capital requirement, more extensive reporting and the full remuneration and disclosure framework.

Capital Requirements

The IFPR introduces a new approach to calculating capital requirements based on three components, with the firm required to hold the highest of:

• Permanent minimum capital requirement (PMR) — A fixed floor depending on the firm's permissions: £75,000 for firms that do not hold client money or assets and do not deal on own account; £150,000 for firms that hold client money or assets but do not deal on own account; and £750,000 for firms that deal on own account or underwrite/place on a firm commitment basis.
• Fixed overheads requirement (FOR) — One-quarter of the firm's annual fixed expenditure, calculated from the most recent audited accounts. This is intended to ensure the firm has sufficient capital to cover its running costs for at least three months.
• K-factor requirement (KFR) — A risk-based capital charge calculated using 'K-factors' that capture three categories of risk: risk-to-client (RtC), including assets under management, client money held and assets safeguarded; risk-to-market (RtM), based on the firm's own trading positions; and risk-to-firm (RtF), based on concentration risk and daily trading flow.

SNI firms are only required to calculate the PMR and FOR. Non-SNI firms must calculate all three and hold capital equal to the highest result.

The ICARA Process

The Internal Capital Adequacy and Risk Assessment (ICARA) is the IFPR's equivalent of the ICAAP for banks. It is a continuous process through which the firm assesses: all material risks and harms that the firm may pose to customers, markets or itself; the capital and liquid assets needed to address those risks; and the adequacy of the firm's risk management, governance and internal controls. The ICARA must cover both business-as-usual conditions and stressed scenarios. It should identify the point at which the firm would need to implement its wind-down plan, and the resources required for an orderly wind-down.

The FCA expects the ICARA to be proportionate to the firm's size and complexity. For SNI firms, a straightforward document covering the key risks, capital calculations and wind-down analysis may be sufficient. For larger non-SNI firms, the FCA expects a more comprehensive assessment including detailed stress testing, scenario analysis and reverse stress testing.

Liquidity Requirements

In addition to capital, the IFPR requires firms to maintain adequate liquid assets. The basic liquid asset requirement is one-third of the fixed overheads requirement, to be held in high-quality liquid assets (cash, short-term government bonds, money market funds). Where the ICARA identifies additional liquidity risks, the firm must hold additional liquid assets above this minimum. The liquid asset requirement ensures that firms can meet their obligations as they fall due, even under stressed conditions, and can fund an orderly wind-down if necessary.

Remuneration

The IFPR introduces specific remuneration requirements for investment firms. Non-SNI firms must apply the full remuneration code, including: a gender-neutral remuneration policy; identification of material risk-takers (MRTs) — staff whose professional activities have a material impact on the firm's risk profile; deferral of variable remuneration for MRTs (at least 40% deferred over 3–5 years); and restrictions on guaranteed variable remuneration. SNI firms are subject to simplified requirements — they must have a remuneration policy that is consistent with sound risk management and does not encourage risk-taking beyond the firm's risk tolerance, but are exempt from the deferral and clawback requirements.

Reporting and Disclosure

IFPR reporting requirements are submitted through the FCA's RegData system. Non-SNI firms submit quarterly returns covering own funds, capital requirements, K-factor calculations and concentration risk. SNI firms submit simplified annual returns. Public disclosure requirements apply primarily to non-SNI firms and cover information about risk management, capital resources and remuneration policies.

Regulatory Counsel advises investment firms on IFPR compliance, ICARA preparation, capital planning and FCA reporting. Contact us for a free initial consultation. See our compliance monitoring page for more.