Guidance

The Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order 2021: Explanatory information

Published 28 June 2021

1. Context

Investment firms provide a range of services related to securities and derivatives markets.

Investment firms differ from credit institutions in that they do not typically accept deposits or grant traditional loans; instead, investment firms provide investment services and perform investment activities. This means that, whilst there is some overlap, the risks posed and faced by investment firms, and the impact of those risks, are different from those of credit institutions.

The Financial Services Act 2021 requires the Financial Conduct Authority (FCA) to introduce a bespoke Investment Firms Prudential Regime (IFPR), within an accountability framework set out in the Financial Services Act 2021. The Financial Services Act 2021 also allows HM Treasury to make consequential amendments to legislation to ensure the IFPR works effectively.

This Statutory Instrument (SI) will enact consequential amendments to the Financial Services and Markets Act 2000 (PRA-regulated Activities) (Amendment) Order (the ‘PRA RAO’) as a result of the introduction of the IFPR, as well as other minor technical amendments.

2. Notice

The attached draft SI provides Parliament and stakeholders with further details on our approach to making consequential changes as a result of the Financial Services Act 2021. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

Among other things, the PRA RAO sets the regulatory perimeter by identifying those investment firms that the PRA is permitted to designate for their supervision. The PRA designates those firms it considers to be systemic, based on their statutory objectives as well as the considerations set out in their Statement of Policy on designation.

Currently, the PRA RAO allows the PRA to choose to designate any investment firm that fulfils two criteria: (1) dealing in investments as principal, and (2) being subject to the initial capital requirement of EUR 730,000. The IFPR will make the initial capital requirement of EUR 730,000 obsolete, as it will create new initial capital requirements for investment firms. Therefore, the reference to the initial capital requirement of EUR 730,000 is removed by this SI.

It is important that the PRA continues to be able to designate, for its supervision, investment firms it considers to be systemic after the introduction of the IFPR. Any such firms would move from being regulated by the FCA (and subject to prudential rules under the IFPR) to being regulated by the PRA (and subject to prudential rules under the Capital Requirements Regulation (CRR) and PRA rules).

This SI makes changes to the PRA RAO which will allow the PRA to continue to designate systemic investment firms after the IFPR is introduced. Article 2(3) of the SI makes changes which allow for all investment firms that deal in investments as principal to be eligible for designation by the PRA. This does not mean the PRA will necessarily designate all of these investment firms. When designating investment firms, the PRA will continue to have regard to its statutory objectives, the assets of the person or group, and its Statement of Policy on designation.

The other changes made by this SI are minor technical changes. Article 2(2) clarifies the meaning of ‘FCA controlled function’ and ‘PRA controlled function’.

Article 2(4) removes the requirement for the PRA to consult the Bank of England (BoE) before issuing a new designation statement of policy. The PRA and BoE consider this requirement can be deleted as it does not reflect their current structures, because the PRA is now a part of the BoE.

Articles 2(5) and 2(6) relate to transitional provisions for authorised persons in a firm that is designated by the PRA. The amendments clarify that, where the FCA has given its approval in relation to a particular function, such an approval should be deemed to be given by the PRA. This means authorised persons don’t need to re-apply for approval when a firm they work for becomes designated by the PRA.

3.1 Stakeholders

This SI may affect those investment firms which deal in investments as principal which were previously not captured by the EUR 730,000 initial capital requirement. This is because these firms will now be eligible for designation by the PRA. HM Treasury has consulted on this policy intention in its consultation titled Implementation of the Investment Firms Prudential Regime and Basel 3 standards: Consultation.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before the end of 2021.

5. Further Information

Please read the consultation and consultation response.

6. Enquiries

If you have queries regarding this instrument, email PrudentialConsultation@hmtreasury.gov.uk.