We now know that the implementation date for the new investment firms prudential regime (IFPR) will be 26 June 2021. For many types of firm, the new regime will increase required levels of regulatory capital significantly.
In certain circumstances, there may be a silver lining. Indeed, for some firms planning to launch next year, there is – for a limited period – a significant funding advantage available. Now that the implementation date has been settled, we expect (based on the AIFMD precedent) that the FCA will require applications submitted after a cut-off date close to Christmas 2020 to reflect capital requirements calculated in accordance with the new regime, with the FCA's rationale being its statutory obligation to assess completed applications for authorisation within 6 months.
The cut-off point will be most pertinent to investment professionals and UK-inbound firms considering setting up an "advisor-arranger" – such businesses have a regulatory capital requirement of only €50,000 under the current regime, which will increase under the IFPR to the higher of the value of one quarter of annual overheads or 0.02% of assets advised, subject to a floor of €75,000. Other firm types, even those intending to run lean business models, face a similar incentive to apply for authorisation before the cut-off date if they conduct significant volumes of MiFID business, for example managing segregated accounts or managing funds on a delegated basis.
Advisor-arrangers applying for authorisation before the cut-off will benefit from a 5-year window to increase their regulatory capital to the level required by the IFPR. For similar firms missing the cut-off, the applicable regulatory capital requirement from day one of being authorised will be the full IFPR amount.
Taking an example of a typical start-up structured as an LLP with three partners and a small team at authorisation, and assuming some growth in the first five years of authorisation – starting with annual fixed overheads typical of such a size team setting up in an office in Mayfair, with growth over the five-year period to headcount, floorspace costs and other administrative expenses – the difference in capital requirement, depending on whether the cut-off is missed or not, is stark.
For businesses in the start-up phase, the lower funding costs implied for the business in that scenario will be an extremely valuable saving, and businesses considering becoming FCA-authorised as an advisor-arranger in 2021 are encouraged to submit their application early.
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