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Event Recap: New Prudential Regime for Investment Managers

15 December 2020
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IFPR: Lessons from the early adopters on the new Prudential Regime for Investment Firms

I was delighted to chair this recent full day event, which featured a knowledgeable set of speakers and panellists, drawn mainly from larger firms – typically with an EU as well as a UK presence, and hence with a shorter implementation timetable than UK-only firms. The day represented a timely opportunity for firms at an earlier stage in their readiness programme to get early insight into the key challenges they will face during 2021, noting that budgets and annual compliance calendars are being finalised currently by many in the run up to the new year.


  • Allow sufficient time and resource: emerging experience shows that the impact for many firms is wider than initially thought and budgets and annual Compliance calendars need to reflect this
  • Capital arbitrage possibilities: Optionality over R2M K-factor choices can result in vastly different capital requirement outcomes; but upfront (and ongoing data challenges are significant) and the initial data-gathering and side-by-side comparison of the options is no small task
  • Advisor-arrangers: Current exempt-CAD firms face the steepest prudential capital increases, and first-time application of Pillar 2 requirements
  • Solo vs consolidated: Groups face particular challenges in relation to solo ICARAs should these be required in place of group-level ICAAPs
  • X-border aspects: Complexity is exacerbated for groups with UK and EU components, due to different implementation timetables and the potential for pre-/post-implementation divergence
  • The Devil in the detail: Much of the finer detail of UK and EU application is yet to be resolved; firms can still influence the regulators where there are aspects that can be improved and the FCA in particular is open to discussion


UK and EU interpretations

Duarte Delgado kicked things off with an insightful overview of the key differences expected between the UK and EU applications of new proposed regime, noting that significant detail remains to be finalised and that the UK and EU interpretations may diverge both in the implementation period and thereafter as practice develops.

Pillar 1: K-factors

Larger firms and those which are part of a group (so-called “non-SNIs” in the vernacular of the new regimes) will need to consider K-factors as part of their Pillar 1 calculations going forward, and Laurence Blakemore discussed these in depth, focusing on the risks to markets (R2M) and risks to the firm itself (R2F).

Such firms face a choice at portfolio level between applying to their trading book K-NPR or K-CMG, and within K-NPR there are 3 alternative approaches. Once a determination is made, it must be consistently applied to that portfolio – including across trading desks – for a minimum of 24 months.

Under K-NPR, the current standardised approach may be used, as may a new standardised approach under FRTB, or there is an internal model option, which is likely to be of relevance to only the very largest of firms required to apply K-factors. As with the choice between K-NPR and K-CMG, once an approach under K-NPR has been adopted it must be consistently applied across a portfolio for at least 2 years.

K-CMG is a completely new approach to assessing R2M, and there remain significant questions around exactly what constitutes ‘margin’ in this context and how the calculation will work across multiple clearers.

It seems one thing we are not going to short of over the next few years is acronyms!

Risk categorisation under the new regime

Wheelhouse Advisors’ Head of Prudential, Mike Chambers then chaired a panel considering all 3 of the new risk headings: risks to customers (R2C), R2M and R2F. The panel agreed that calculating AUM using NAV would be preferable to any other measure taking account of absolute values and/or derivative notionals, and that data-gathering systems will be absolutely critical to meeting the requirements of the new regime. The panel further debated the merits of commencing with data collection and impact analysis, despite the potential for the rules to be amended in the coming months, agreeing that sooner rather than later is preferable, as choice of method can significantly impact capital requirements, and that the approach to data collection and recording should be smart and sustainable given the volumes involved.

Pillar 2

Moving from Pillar 1 to Pillar 2, David Harper explained the key considerations firms should be mindful of when transitioning from ICAAP to the new ‘ICARA’. Involving the Board early was unsurprisingly a strong recommendation, and a cautionary note was struck on the potential impact on processes for risk identification. Where consolidated ICAAPs are prepared at present, risk identification is generally performed on a group-wide basis currently – this may not be tenable, or will at least be significantly more complex to unravel findings and assign them to discrete entities, should the final rules require groups to complete solo ICARAs for each entity. This practical point was picked up again in the subsequent panel discussion, which noted that beside this material impact on process, firms with effective risk management should not otherwise find the Pillar 2 move from ICAAP to ICARA too onerous, and it may largely be a case of re-badging already-identified risks under the new R2C, R2F and (where applicable) R2M headings required under the new regime.

In some sense, today’s advisor-arrangers, who will become subject to Pillar 2 for the first time under the new regime, may have things easier than the larger groups already subject to these requirements, as the former can implement risk identification process designed specifically for ICARA purposes, rather than retro-fitting existing practices for the new world.

Pillar 3, reporting, remunerations and governance

Anthony Ma covered remuneration and governance requirements, outlining the expectations on firms to have a clear organisational structure, effective risk management processes, adequate internal control mechanisms and sound remuneration policies, before Ian Kelly presented on the final agenda item of the day, detailing changes to the reporting regime, noting that new systems are likely to be put in place, and Pillar 3 disclosures, where it is expected that content may become less granular and that new topics will be introduced as mandatory.

Wheelhouse Advisors’ prudential specialists have been following the development of the new regime since it was first mooted in 2015. Follow us on LinkedIn to stay up-to-date with the latest developments and insightful findings from our work preparing EU and UK investment firms with their readiness programmes and transition to the new regime.