BKM402425 - Definition of banking company: an FCA investment firm that meets the conditions in CTA10/S269B(6B)

CTA10/S269B(6A), (6B), (6C), (6D)

A firm will meet the regulatory requirements of the investment banking definition if it is an FCA investment firm that meets the conditions in CTA10/S269B(6B). This applies from 1 January 2022 following the introduction of the Investment Firm Prudential Regime (IFPR) by the FCA.

The conditions are:

That the firm has a permanent minimum capital requirement of £750,000 and it is not

  • a limited activity firm,
  • a limited licence firm,
  • a local firm, or
  • a matched principal trading firm.
Permanent Minimum Capital Requirement

A firm’s permanent minimum capital requirement is part of its own funds requirement as set by the FCA in line with the permissions it has to carry on investment services or activities.

A firm with a permanent minimum capital requirement of £750,000 has the highest own funds minimum requirement.

With the introduction of the IFPR, the FCA provided firms with a transitional period before they must hold the full permanent minimum capital requirement where this is higher than it was before the regime was introduced. These transitional provisions are disregarded in determining whether a firm meets the condition in CTA10/S269B(6B).

Exclusions for firms with a permanent minimum capital requirement of £750,000

Before the introduction of IFPR, the definition of an investment bank referred to a firm that was both an IFPRU 730k firm and a full scope IFPRU investment firm. Some of the firms that did not meet both these criteria now have a permanent minimum capital requirement of £750,000 under IFPR. Without any additional exclusions some firms may have met the definition of an investment bank and may have been subject to the surcharge.

The limited exclusions for some firms are described below.

Limited Activity Firm

The wording for this definition is taken from the text in article 96(1) of the UK’s version of the Capital Requirements Regulation (UK CRR), which was revoked with effect from 1 January 2022, but that had applied previously.

These firms were not full scope IFPRU investment firms.

It applies to an investment firm that:

  • deals on own account only for the purpose of fulfilling or executing a client order or for the purpose of gaining entrance to a clearing and settlement system or a recognised exchange when acting in an agency capacity or executing a client order; or
  • meets all the following conditions—
  1. it does not hold client money or securities;
  2. it undertakes only dealing on own account;
  3. it has no external customers; and
  4. its execution and settlement transactions take place under the responsibility of a clearing institution and are guaranteed by that clearing institution.
Limited Licence Firm

The wording for this definition is taken from the text in article 95(1) of UK CRR, which was revoked with effect from 1 January 2022, but that had applied previously.

These firms were not full scope IFPRU investment firms.

It is an investment firm that is not authorised to provide the investment services and activities of—

  • dealing on own account; or
  • underwriting of financial instruments or placing of financial instruments on a firm commitment basis.
Local Firm

The wording for this definition is taken from the text in article 4(1)(4) of UK CRR, which was revoked with effect from 1 January 2022, but that had applied previously.

These firms were by definition not IFPRU investment firms and were therefore not IFPRU 730k firms.

It is a firm:

  • dealing on own account on markets in financial futures or options or other derivatives and on cash markets for the sole purpose of hedging positions on derivatives markets, or
  • dealing for the accounts of other members of those markets and being guaranteed by clearing members of the same markets, where responsibility for ensuring the performance of contracts entered into by such a firm is assumed by clearing members of the same markets.
Matched Principal Trading Firm

Matched principal trading is a transaction where the facilitator interposes itself between the buyer and the seller to the transaction in such a way that it is itself not exposed to market risk throughout the execution of the transaction, with both sides executed simultaneously, and where the transaction is concluded at a price where the facilitator makes no profit or loss, other than a previously disclosed commission, fee or charge for the transaction.

Firms were previously able to deal on own account without being IFPRU 730k firms or full scope IFPRU investment firms if they only undertook matched principal trading.

The matched principal exemption is based on those investment firms that satisfied the conditions in Article 29 of the Capital Requirements Directive (CRD IV – EU Directive 2013/36/EU) and as provided for in the FCA Handbook at IFPRU 1.12.R prior to 1 January 2022.

It applies to an investment firm that executes investors’ orders for financial instruments and meets the following conditions:

  • the firm only holds financial instruments for its own account as a result of its failure to match investors’ orders precisely;
  • the total market value of all such positions is no more than 15% of the firm’s initial capital;
  • such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question.