Compliance

Compliance Corner: Financial Conduct Authority, Investment Funds Sector

Editorial Staff, 5 August 2021

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The latest compliance news: regulatory developments, punishments, guidance, permissions and new product and service offerings.

FCA, investment fund rules
UK regulators are rolling out a new investment fund regime designed to capture more of the risks that such businesses can attract.

From 1 January 2022, the Financial Conduct Authority is introducing what is called the Investment Fund Prudential Regime (IFPR), a single structure for FCA authorised MiFID investment firms. The IFPR will fit with EU Investment Firms Regulations and the Investment Firms Directive (EU), which had kicked in from 26 June 2021 for EU investment firms. The new system highlights how, even after Brexit, UK regulators are trying to keep domestic rules in line with EU rules.

At the moment, investment firms must comply with a prudential regime which has been designed primarily for credit institutions. 

“The new rules will focus on capturing risks that arise from the investment firm’s activities which could pose threats to their clients and the market in which they operate,” MM&K, the advisory, legal, advisory and accounting firm, said in a recent briefing note. 

The FCA had warned in consultation papers that the present system wasn’t designed to handle potential harms that FCA-regulated investment firms could pose. (The regulator published a paper in June 2020 followed by another report in December last year, and a second consultation in April 2021.)

Explaining the FCA’s regime, MM&K’s note said that new rules require investment firms to maintain “clear organisational structures with well-defined transparent and consistent lines of responsibility, effective process to identify, manage, monitor and report risks that they are or might be exposed to, or pose or might pose to others, and adequate internal control mechanism, including sound administration and accounting procedures.” 

The rules also require firms to establish committees depending on their categorisation in order to support management bodies in their supervisory functions. This responsibility lies with the firms’ senior management who would need to fulfil their senior management functions.

As far as pay is concerned, the rules set out a new single remuneration code. It sets out requirements (basic, standard, and extended) that investment firms must apply based on the risk of harm they pose to customers and the markets.

Another change is that the reporting requirements of investment firms will be “significantly reduced,” MM&K explained. Firms will have to submit a single set of reporting forms.

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