FCA IFPR September Newsletter
- James Ross
- Sep 2
- 4 min read
Executive Summary
The FCA has published a new IFPR Newsletter. Key points include the mandatory and immediate notification of changes to an Investment Firm Group (IFG) structure via the MIFIDPRU 2 Annex 8R form.
The guidance clarifies that for Limited Liability Partnership (LLP) profits to qualify as Common Equity Tier 1 (CET1) capital, the firm must possess an unconditional right to refuse profit distribution.
The FCA has also standardized the K-factor calculation methodology, requiring a 15-month lookback period, from which the three most recent months are excluded.
Furthermore, the update highlights common deficiencies in prudential reporting, specifically the incorrect calculation of the Own Funds Threshold Requirement (OFTR) and Liquid Assets Threshold Requirement (LATR) in MIF007 submissions.
Finally, firms are reminded that MiFID investment firms are statutorily excluded from the small companies accounting regime and are required to submit audited financial statements.
1. Regulatory Obligation for Investment Firm Group (IFG) Composition Changes
Pursuant to MIFIDPRU 2.4.20R, all MIFIDPRU firms are mandated to provide immediate notification to the FCA upon becoming aware of any change in their Investment Firm Group (IFG) structure. This includes the formation of a new IFG or any modification to an existing one.
Notification Protocol: Submissions must be executed via the FCA Connect portal, utilising the MIFIDPRU 2 Annexe 8R form. This requirement remains applicable after the completion of any change in control transactions.
Supervisory Rationale: Timely and accurate notifications are critical for maintaining the integrity of FCA systems, which facilitates adequate group supervision and oversight.
Verification Trigger: A notification is required when the list of Firm Reference Numbers (FRNs) pre-populated on a consolidated MIF return deviates from the firm's current group membership as reported under question 2 of the return.
2. Classification of LLP Member Profits for CET1 Capital Purposes
The FCA has issued a clarification regarding the regulatory capital treatment of profits within Limited Liability Partnerships (LLPs), noting instances of incorrect classification as Common Equity Tier 1 (CET1) capital.
Governing Principle (UK CRR Article 26(1)): For LLP profits to qualify as CET1 capital, they must be available to the institution for unrestricted and immediate use to cover risks or losses. Where LLP agreements confer upon members an automatic, immediate, and unconditional right to withdraw allocated profits, such amounts function as liabilities and are ineligible for CET1 treatment.
Determinant Factor: The eligibility of profits for CET1 classification is contingent upon the specific provisions of the LLP agreement, rather than a superficial distinction between 'allocated' and 'unallocated' profits. The critical test is whether the partnership retains an unconditional right to refuse the distribution of profits to partners.
Scope: The principles articulated for LLPs are equally applicable to all partnership structures seeking to classify profits as regulatory capital.
3. Standardized Calculation Methodology for K-Factor Requirements
To mitigate ambiguity, the FCA has delineated the prescribed methodology for calculating specific K-factor requirements, with K-AUM serving as the primary example.
Procedural Framework (MIFIDPRU 4.7): The calculation must be performed on the first business day of each month and follows a precise sequence:
Collate the total Assets Under Management (AUM) as measured on the last business day of each of the preceding 15 months.
Exclude the three most recent monthly values from this dataset.
Compute the arithmetic mean of the remaining 12 monthly values.
Temporal Lag: This methodology results in a three-month lag before a monthly AUM value is incorporated into the calculation. For instance, a K-AUM calculation performed in August 2025 will utilise the average of AUM values from May 2024 through April 2025.
Broad Applicability: This standardized calculation logic extends to other K-factors, including Client Money Handled (K-CMH), Assets Safeguarded and Administered (K-ASA), Client Orders Handled (K-COH), and Daily Trading Flow (K-DTF), subject to their respective measurement periods.
4. Identified Deficiencies in ICARA Process and MIF007 Prudential Reporting
Supervisory reviews have revealed recurring inaccuracies in MIF007 prudential reporting submissions and procedural deficiencies related to the Internal Capital Adequacy Assessment (ICA) process.
ICARA Governance (MIFIDPRU 7.8.8R): Firms must ensure a "reasonable" timeframe between the completion of the ICARA documentation and its formal approval by the governing body to prevent the underlying data from becoming obsolete.
Own Funds Threshold Requirement (OFTR) - MIF007, cell 10A: The reported OFTR must be the maximum of: the Permanent Minimum Requirement (PMR), the capital required for ongoing operations, and the capital needed for an orderly wind-down.
Liquid Assets Threshold Requirement (LATR) - MIF007, cell 33A: The reported LATR must be the sum of the Basic Liquid Asset Requirement (BLAR) and the greater of: the liquid assets assessed for ongoing operations or the additional liquid assets required to initiate an orderly wind-down.
5. Compliance Alert: Inapplicability of Small Companies Regime for MiFID Investment Firms
An FCA assessment indicates that a significant number of MiFID investment firms (up to 10%) may have incorrectly availed themselves of the small companies regime exemption for submitting unaudited accounts.
Statutory Exclusion: A firm meeting the definition of a "MiFID investment firm" under the Companies Act is explicitly excluded from the small companies regime, irrespective of whether it satisfies the relevant size-based criteria.
Action Mandated: Senior management must conduct a thorough review of their firm's permissions and accounting practices to ensure full compliance with Companies House reporting standards, which necessitate the submission of audited financial statements for such entities.
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