On 31 July 2013, the FCA published its consultation paper on proposed changes to the FCA Handbook that are required to implement the package of measures in the Capital Requirements Directive IV. Whilst the FCA is not consulting yet on the CRD IV remuneration requirements, including how it intends to apply national discretions and the possible use of proportionality in relation to bonus caps at this stage, how regulated firms are actually categorised for prudential purposes in the post-CRD IV world will determine whether and how CRD IV (including the bonus caps) will apply to their business.
The FCA intends to create a new prudential sourcebook (IFPRU) which will apply to certain sole regulated FCA investment firms who are subject to the full requirements in CRD IV (including capital, counterparty credit risk, buffers, liquidity reporting, bonus caps and other remuneration restrictions). The consultation paper contains a broad outline of how the FCA intends to apply some of these requirements to such firms, including the use of certain national discretions. IFPRU will also have some limited application to certain collective portfolio management investment companies such as UCITS management companies and alternative investment fund managers. Firms subject to the requirements in IFPRU will be known as "IFPRU investment firms".
The term IFPRU investment firm is intended to broadly mirror the narrower definition of an investment firm as defined in CRD IV. It excludes firms that are only authorised to carry on one or more of the following MiFID investment activities/services: (a) reception and transmission of orders, (b) execution of orders on behalf of clients, (c) discretionary portfolio management, and (d) investment advice provided that they do not safeguard and administer assets or hold client money or assets and place themselves in debt with clients.
Whilst this narrower definition is likely to exclude discretionary portfolio managers and agency brokers who would typically only be authorised to carry on the narrower range of MiFID activities, there is a risk that such firms will fall within the scope of CRD IV if their FCA permissions include 'arranging' or 'dealing' as these regulated activities could include the MiFID investment activity of 'placing on a non-firm commitment basis'.
Even if agency brokers and discretionary portfolio managers are outside the scope of the definition of an investment firm for CRD IV purposes they will not escape the CRD framework entirely. The FCA intends to categorise these firms as 'BIPRU firms' and will broadly apply the current CRD rules relating to such matters as own funds (which is less onerous than the requirements in CRD IV), the calculating of credit risk, reporting under Gabriel, certain systems and controls, including the remuneration code to them pending the outcome of the European Commission's review of an appropriate prudential regime in the non-banking sector. A further 'benefit' of being categorised as a BIPRU firm is that the FCA does not intend to apply the CRD IV bonus cap rules to such firms.
Whilst it is possible that the FCA may allow certain investment firms to disapply the more onerous CRD IV remuneration requirements, including the bonus cap rules under principles of proportionality, it is unclear at this stage whether and how such principles will be applied by the FCA as it has not consulted on this issue as yet. So agency brokers and discretionary portfolio managers may wish to review the current scope of their FCA authorisation to consider whether any limitations or amendments need to be made in order to minimise the potential impact of CRD IV, which is intended to be phased in from 1 January 2014 onwards.
Existing exempt-CAD firms will remain outside the scope of the CRD framework unless they have permission to safeguard and administer assets (including custodianship and related services such as cash/collateral management), in which case they will be categorised by the FCA as an IFPRU investment firm and will be subject to CRD IV, including possibly the bonus caps. MiFID commodity derivative traders will be exempt from the CRD IV own funds and large exposure requirements until 31 December 2017.
Interested parties will have until 30 September 2013 to respond to this consultation paper. Final rules are expected to be published later in 2013 so that firms have the final rules before 1 January 2014 implementation date. The FCA may consult further on, amongst other things, the CRD IV remuneration requirements, including its approach and use of national discretions and proportionality following discussions with HM Treasury.
Banks and firms regulated by the Prudential Regulation Authority should review the consultation paper published by the PRA on its approach to implementing CRD IV into its Handbook.