Automated reconciliations provider AutoRek has warned firms to start preparing their systems for the complex calculations and processes they will need to undertake to be compliant with the UK’s incoming Investment Firms Prudential Regime (IFPR), which go live on January 1 – now less than 100 days away.
IFPR is being introduced by the Financial Conduct Authority (FCA) in a bid to streamline the prudential requirements for MiFID investment firms, with some firms being required to demonstrate they have meaningful capital and liquidity requirements for the first time “adequate with the potential harm they can cause,” according to the FCA.
“From reading the consultation papers, it’s quite staggering to think that this is a simplified approach to prudential regulation,” says Murray Campbell, CASS Business Consultant at AutoRek. “However, that is what the FCA have aimed for, therefore what came before must have been extremely complex. This just highlights how big an issue it is and how challenging it is for the regulator to make sure they are fully aware of the financial stability of the firms that they regulate.”
Campbell says that one of the key changes is how the FCA – and the wider EU – has tried to make the regime more specific to the lines of business that a firm is involved in. “If your firm is quite a simple structure firm involved in one line of business, then your prudential calculations and reporting as a result of that will be more streamlined than if you are a much larger firm involved in multiple lines of business, which will then mean you will need to perform a far more complex capital adequacy calculation,” he adds.
In addition, some firms will find that their minimum capital threshold is going to increase, therefore they need to have ability to have more funds available. According to Campbell, that will prove to be a significant challenge from the outset. He adds that while firms need to understand how they’re going to use their data to perform these calculations to know that end result, that end result could then also tell them they need to have more funds available as a firm in order to meet the new requirements.
Most firms faced with this scenario will probably turn to Excel as a first port of call, Campbell says. “Having worked operationally myself, I know that in most firms Excel is probably going to be the natural starting point for any new calculation. Most firms will likely not already have an automated solution for this,” he adds. Campbell notes that technology will always have a core advantage over Excel in that it has enhanced control around it, it has efficiency savings, which Excel doesn’t have. He adds: “We expect that more and more firms will become aware of the fact that there is automation available for this, which will then allow us to help them to automate the calculations they’re performing despite the various challenges, such as the scale of their data.”
The IFPR also introduces a new system of categorisation for investment firms, with further classifications for those deemed non-systemically important based on a range of factors, which are termed K-factors. For at least the last six months, firms should have been focused on going through the steps to understand their categorisation and learning which new K-factors will apply to them, Campbell says. He explains that the K-factors are designed to be specific to the lines of business that a firm is involved in. “If you’re a firm and you only hold client money, then your K-factor requirement calculation is going to be simpler than if you’re a firm who also handles assets under management and also handles client order, for example.”
In addition, it is not just ongoing reporting to the FCA that’s required, there’s also some warning thresholds that firms have to be aware of, Campbell says. “If, for example, the firm’s own resources drop down to a certain threshold, there’s a warning notice that needs to be provided to the FCA so that the FCA are aware that that firm is reaching a point of prudential risk or prudential challenge,” he adds. “Firms need to be aware of that, they need to make sure that they are therefore monitoring what their capital resources are, so if at any point they breach one of these thresholds they’re able to then notify the FCA.”
Campbell says that at AutoRek, the service provider has already been working closely with clients to prepare and they are ahead of the curve in terms of having a solution ready in time for the IFPR to be introduced. “Firms need to be aware that carrying out these calculations manually will prove very challenging, but we are available to help introduce some automation around this to assist with their reporting on an ongoing basis,” he adds. “The AutoRek tool can be used for a range of processes, it really is a blank database that can be used for developing the automation of any sort of calculation based on any client source data. That’s why it can be used for the new prudential regulations.”
Campbell explains that if a client’s data becomes available on the first day of the month, that data will be loaded directly into the platform and there will be scheduled jobs within the platform that run the various calculations and lookups as required for that client solution. He adds that this allows the client to introduce various levels of control checks, approvals and authorisations, which can be stored within the system with an audit history of exactly the approval processes that that their capital calculations have gone through before being reported on to the FCA.
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