A new UK prudential regime for MiFID investment firms

A new UK prudential regime for MiFID investment firms Consultation Paper CP21/7*** April 2021

2 CP21/7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms How to respond We are asking for comments on this Consultation Paper (CP) by 28 May 2021. You can send them to us using the form on our website at: www.fca.org.uk/cp21-07-response-form Or in writing to: Paul Rich or Hillary Neale Financial Conduct Authority 12 Endeavour Square London E20 1JN Telephone: 020 7066 1000 Email: cp21-07@fca.org.uk Sign up for our news and publications alerts See all our latest press releases, consultations and speeches. Contents 1 Summary 3 2 The wider context of this consultation 8 3 How these rules will apply 10 4 Own funds requirements 12 5 Firms acting as clearing members and indirect clearing firms 30 6 Basic liquid assets requirement 32 7 Risk Management, ICARA and SREP 35 8 Governance 58 9 MIFIDPRU Remuneration Code: scope and application 63 10 MIFIDPRU Remuneration Code: basic remuneration requirements 74 11 MIFIDPRU Remuneration Code: standard remuneration requirements 80 12 MIFIDPRU Remuneration Code: extended remuneration requirements 86 13 Regulatory reporting 91 14 Interaction of MIFIDPRU with other prudential sourcebooks 95 15 Applications and notifications 101 16 Our approach to the Financial Services Bill and compatibility with our duties and principles 110 Annex 1 Questions in this paper 128 Annex 2 Cost benefit analysis 132 Annex 3 The own funds threshold requirement and intervention points 152 Annex 4 The liquid assets threshold requirement and intervention points 159 Annex 5 Application of remuneration requirements 163 Annex 6 Compatibility statement 164 Annex 7 Abbreviations used in this paper 165 Appendix 1 Draft Handbook text Appendix 2 General Guidance on the application of ex-post risk adjustment to variable remuneration

3 CP21/7 Chapter 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 1 Summary Why we are consulting 1.1 We are seeking views on the second tranche of our proposed rules to introduce the Investment Firm Prudential Regime (IFPR) The IFPR is a new prudential regime for UK firms authorised under the Markets in Financial Instruments Directive (MiFID). This is the second in a programme of Consultation Papers (CPs) and Policy Statements (PSs) that we will issue to introduce the regime. Our proposals depend on the progress and amendments to the Financial Services Bill (FS Bill). 1.2 As stated in ‘CP20/24: A new UK regime for MiFID investment firms’, the aim of the new regime is to streamline and simplify the prudential requirements for MiFID investment firms that are prudentially regulated by the FCA in the UK (FCA investment firms). In line with our objectives and Mission, it will refocus prudential requirements and expectations away from the risks the firm faces, to also consider and look to manage the potential harm the firm itself can pose to consumers and markets. 1.3 We encourage FCA investment firms and other interested stakeholders to read and provide your views on the proposals in this CP and our subsequent CP, which we will publish later this year. Your feedback will allow us to draft final rules that achieve both our and Parliament’s objectives for the regime, and that are also workable for FCA investment firms. Who this applies to 1.4 The proposed rules will apply to: • Any MiFID investment firm authorised and regulated by the FCA that is currently subject to any part of the Capital Requirements Directive (CRD) and the Capital Requirements Regulation (CRR) including: – investment firms that are currently subject to BIPRU and GENPRU – ‘full scope,’ ‘limited activity’ and ‘limited licence’ investment firms currently subject to IFPRU and CRR – ‘local’ investment firms – matched principal dealers – specialist commodities derivatives investment firms that benefit from the current exemption on capital requirements and large exposures including: – oil market participants (OMPS) – energy market participants (EMPS) – exempt CAD‑firms – investment firms that would be exempt from MiFID under Article 3 but have ‘opted‑in’ to MiFID • Collective Portfolio Management Investment Firms (CPMIs)

4 CP21/7 Chapter 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • regulated and unregulated holding companies of groups that contain an investment firm authorised and regulated by the FCA and that is currently authorised under MiFID and/or a CPMI. 1.5 Our proposals on capital requirements for the activities of trading firms might also be of broader interest to exchanges, central counterparties and clearing members. We would welcome feedback from these entities. What we want to change 1.6 The FCA is the competent authority for the prudential regulation of approximately 3,600 investment firms authorised under MiFID. 1.7 The current prudential regime for FCA investment firms is based on requirements designed for globally active systemically important banks. Its main aim is to protect depositors by ensuring that it is difficult for a bank to fail. 1.8 By contrast, the IFPR is specifically designed for FCA investment firms and represents a significant change to how they will be prudentially regulated. The new requirements seek to capture the potential harm posed by these firms to their clients and the markets in which they operate. It also considers the amount of capital and liquid assets the FCA investment firm should hold so that if it does have to wind‑down or exit the market, it can do so in an orderly way. 1.9 The IFPR means that there will be a single prudential regime for all FCA investment firms, simplifying the current approach. It should reduce barriers to entry and allow for better competition between investment firms. Some FCA investment firms will have meaningful capital and liquidity requirements for the first time, aligned with the potential harm they can cause. Specific changes to the existing prudential regime for FCA investment firms 1.10 This is the second CP setting out our proposals for changing prudential regulation for FCA investment firms. It should be read in conjunction with CP20/24, published in December 2020. The draft legal rules are additional to the draft legal rules we published in CP20/24. Our draft legal rules in this CP also include some non‑material additions, clarifications and amendments to the text from CP20/24, such as updating cross‑references and terminology. 1.11 The remainder of this section only highlights proposals that are included in this CP. Own funds requirements 1.12 We are proposing to introduce a fixed overheads requirement (FOR) that will apply to all FCA investment firms. This will be another of the ‘floors’ below which the own funds of an FCA investment firm must not fall.

5 CP21/7 Chapter 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 1.13 We set out our proposals for the remaining activity‑based capital requirements known as K‑factors (ie those in addition to the K‑factors we proposed in CP20/24). The K‑factors proposed in this CP are those that may apply to any type of FCA investment firm. 1.14 In CP20/24 we asked should there be the option of an adjustment to calculating the coefficients for the daily trading flow K‑factor in periods of extreme market stress and volatility. In this CP we now propose how this should be done. 1.15 We also set out specific proposals on own funds requirements and firm categorisation for FCA investment firms when they provide clearing services as clearing members and indirect clearing firms. 1.16 We consulted on the permanent minimum requirement (PMR) and the K‑factors (eg the daily trading flow) that only apply to FCA investment firms with permission to deal in investments as principal in our first CP, published in December 2020. 1.17 We give more detail in Chapters 4 and 5 of this CP. Basic liquid asset requirement 1.18 We propose that all FCA investment firms now have a basic liquid asset requirement. This would be based on holding an amount of core liquid assets equivalent to at least one third of the amount of their FOR. We explain the concept of core liquid assets and how this provides an appropriate set of assets that can be used to meet the basic liquid asset requirement. 1.19 We provide further detail on the new requirements in Chapter 6 of this CP. Risk management & Governance (ICARA and SREP) 1.20 We propose to introduce an internal capital and risk assessment (ICARA) process for all FCA investment firms. Through this, firms will be expected to meet an Overall Financial Adequacy Rule (OFAR). This establishes the standard we will apply to determine if an FCA investment firm has adequate financial resources. 1.21 We propose how we expect FCA investment firms to determine through the ICARA process any necessary appropriate own funds and liquid assets requirements, in addition to the own funds and basic liquid assets requirements above. This includes that they consider harm to consumers and markets, including risks to their ability to engage in an orderly wind‑down, as well as those from their ongoing activities. 1.22 With the ICARA, we are consolidating our requirements for business model analysis, stress‑testing, recovery planning and actions, and wind‑down planning. We propose new relevant expectations for senior managers and governance arrangements. 1.23 We also set out new guidance on intervention points, actions we expect of firms in certain situations and what they can expect from us. As part of this, we intend to re‑orientate our prudential supervisory approach for FCA investment firms towards being harm-led and in support of sector supervision. We will introduce an ICARA Questionnaire reporting template to support this. 1.24 We give more detail in Chapters 7 and 8 of this CP.

6 CP21/7 Chapter 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Remuneration requirements 1.25 We propose that all FCA investment firms must have a clearly documented remuneration policy and comply with at least a small number of basic remuneration rules in respect of all their staff. Non-SNI firms must comply with further requirements, which include identifying material risk takers and setting an appropriate ratio between variable and fixed remuneration. Under our proposals, only the largest non-SNI firms would need to meet the full requirements by also applying rules on deferral and pay-out of variable remuneration in instruments. We explain our proposals in more detail in Chapters 9-12. Regulatory reporting requirements 1.26 We propose to significantly reduce the amount of information that FCA investment firms need to report to us about their remuneration arrangements. 1.27 We intend to simplify the additional reporting form for CPMI firms. We have also amended the MIF002 form for reporting liquid assets that accompanied CP20/24 to take account of our liquidity proposals in this CP and are consulting on the new layout. 1.28 As noted above, we propose to introduce an ICARA reporting form for FCA investment firms. This will replace the existing FSA019 (‘pillar 2’) return for these firms. 1.29 We provide further details of our proposals in Chapter 13 of this CP. Outcomes we are seeking 1.30 Our staged approach to consulting will address different aspects of the regime and our proposed changes. Throughout this process, we are seeking the following outcomes: • The prudential regime for FCA investment firms is more aligned to the way that investment firms run their business. The regime will take account of the different business models of FCA investment firms, and better protect consumers and markets from the harm these may pose. • All FCA investment firms are subject to consistent prudential standards, not just those subject to the current CRR regime. This will help reduce the potential harm to consumers and markets, and ensure a more level playing field between FCA investment firms. • FCA investment firms spend less time on complex capital requirement calculations that do little to help them to manage risk. This will free up management time to focus on running the business and managing and mitigating any harm and risk. We will also be able to focus on how a firm is managing itself. • The relevant prudential standards for FCA investment firms are understandable and accessible, with most rules brought into a new single prudential sourcebook (MIFIDPRU).

7 CP21/7 Chapter 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Next steps 1.31 We want your feedback on our proposed rules and other issues discussed in this CP. Please send your answers to the questions in this CP by Friday 28 May 2021 using one of the methods in the ‘How to respond’ section on page 2. We are particularly interested in any suggestions for making the IFPR work better for different business models. 1.32 We plan to publish a further CP in Q3 2021, as set out in Table 1 in Chapter 2 of this CP. Following each consultation, we will consider your feedback, and publish a PS and near final rules. We will publish the final rules once the Financial Services Bill (FS Bill) has passed through Parliament and all the consultations are complete.

8 CP21/7 Chapter 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 2 The wider context of this consultation 2.1 This is the second of 3 CPs, setting out our proposals to introduce the IFPR. We published CP20/24 in December 2020, and we aim to publish our third CP in Q3 2021. We will also publish our first PS in late spring setting out the feedback we received to CP20/24 and the related near‑final rules. 2.2 When the UK was a member of the European Union (EU), we were heavily involved in policy discussions on creating the regime that took place through the EU and European Banking Authority (EBA) papers and consultations. We support the aims of the EU’s Investment Firm Directive (IFD) and Investment Firm Regulation (IFR) and are proposing that the IFPR will achieve the same overall outcomes. 2.3 However, we are introducing our regime after the UK has exited the EU. So we believe it is right that we also consider the changes that are appropriate to account for the specifics of the UK market and our duties to have regard to certain factors, including those set out in the Government’s recently introduced FS Bill. 2.4 As set out in CP20/24 and in line with our consultation map below (Table 1), we are consulting on the different aspects of the IFPR in stages. This should allow firms to read and respond to our proposals in a more manageable way. Table 1: Our consultation map* CP20/24 – Published December 2020 CP2 – This Publication CP3 – Early Q3 2021 MIFIDPRU1: Application (aspects of) MIFIDPRU1: Application (remainder) MIFIDPRU8 – Disclosure MIFIDPRU2: Prudential consolidation and the group capital test MIFIDPRU4 – Own funds requirements (remainder) OTHER – Consequential amendments to Handbook and CRR technical standards MIFIDPRU3 – Own funds resources MIFIDPRU6 – Liquidity OTHER – Approach to existing BRRD and FICOD provisions MIFIDPRU4 – Own funds requirements (aspects of) MIFIDPRU7 – Risk Mngt & Governance, ICARA and SREP OTHER – Final overall application provisions MIFIDPRU5 – Concentration risk MIFIDPRU9 – Regulatory reporting (remainder) MIFIDPRU9 – Regulatory reporting (aspects of) OTHER – Remuneration requirements MIFIDPRU10 – Clearing members and Indirect clearing Firms – own firm requirements OTHER – Interaction between MIFIDPRU and other prudential sourcebooks OTHER – Permissions and application forms

• Please note that the content of CP3 and its publication date is provisional and subject to change based on feedback received to this CP, progress of the FS Bill, and other factors.

9 CP21/7 Chapter 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 2.5 By the time we publish our second PS this summer, stakeholders will have seen the near‑final rules setting out the key points of the regime. We intend the third CP and the subsequent PS to address final points of the regime, consequential amendments to the Handbook and any gaps or issues our consultation process has identified. 2.6 This means that the cost‑benefit analysis (CBA) in this consultation paper and our approach to our new accountability measures set out in the FS Bill will only cover the draft rules that we are publishing in this consultation. Our third CP will set out our view on the impact of our rules and the basis on which we have drafted them over all 3 consultations. How it links to our objectives Market integrity 2.7 Our proposals are based on requiring FCA investment firms to consider the potential harm they can cause to others, clients and markets, by the type and scale of activities they undertake. This is a change from the previous regime which was based on FCA investment firms mainly considering the risks to their own balance sheet. Competition 2.8 Our proposals mean that there will be one overarching regime for all FCA investment firms. There is proportionality according to their size and the type and scale of activities they undertake. This will be a significant improvement on the 11 regimes that are currently in place for these firms. FCA investment firms with similar business models will now have similar prudential standards, rather than markedly different ones due to historical quirks. This will help to improve competition between existing FCA investment firms as well as simplifying matters for new entrants. Protecting consumers 2.9 Our proposals mean that FCA investment firms will have to consider the potential harm they can cause to their retail customers, as well as their wholesale and financial services clients. Our proposed requirements place more focus upon MiFID investment services provided by FCA investment firms to consumers. Equality and diversity considerations 2.10 We have considered the equality and diversity issues that may arise from the proposals in this Consultation Paper. 2.11 Overall, we do not consider that the proposals materially impact any of the groups with protected characteristics under the Equality Act 2010. But we will continue to consider the equality and diversity implications of the proposals during the consultation period and will revisit them when making the final rules. 2.12 In the meantime, we welcome your input to this consultation on this.

10 CP21/7 Chapter 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 3 How these rules will apply 3.1 This section covers how rules will apply to different types of FCA investment firm. We cover CPMIs, international firms and tied agents. 3.2 The rules relevant to this chapter are in MIFIDPRU 1. Collective Portfolio Management Investment Firms (CPMIs) 3.3 The definition of an FCA investment firm includes a CPMI firm. The requirements in MIFIDPRU will therefore apply to CPMIs. They are currently subject to IFPRU or BIPRU. 3.4 CPMIs will use the method set out in MIFIDPRU 4 to calculate the fixed overheads requirement (FOR) for the whole firm. Chapter 4 of this CP explains how to calculate the FOR and other information relevant to a CPMI’s capital requirements. 3.5 However, many other requirements in MIFIDPRU apply only to the MiFID business of a firm. Where this is the case, a CPMI will only apply them to its MiFID business. It will not apply them to its collective portfolio management business. 3.6 The prudential requirements for the collective portfolio management business of Alternative Investment Fund Managers Directive (AIMFD) and Undertakings in Collective Investments in Transferable Securities (UCITS) managers are currently set out in Chapter 11 of IPRU‑INV. These are essentially unchanged, apart from aligning the calculation of their fixed overheads requirement with the methodology in MIFIDPRU and other consequential changes necessary to ensure that those rules continue to work as a result of the IFPR. Details on the proposed consequential changes necessary to Chapter 11 of IPRU‑INV are set out in Chapter 14 of this CP. International firms 3.7 MIFIDPRU imposes obligations on UK parent entities and responsible UK parents for entities established overseas that form part of the same investment firm group, even though these entities may not be carrying on business in the UK. Firms should refer to our proposals on groups and our draft rules in MIFIDPRU 2 in CP20/24 for further information on this. 3.8 Where an overseas investment firm is applying for authorisation in the UK, we are not proposing that MIFIDPRU should apply directly to that firm. Instead, we need to be satisfied that an investment firm established overseas will be subject to broadly equivalent prudential supervision to MIFIDPRU in its home jurisdiction before giving it a Part 4A permission. If this is not the case, we would generally expect the firm to establish a UK subsidiary, which would be subject to our rules in MIFIDPRU, instead.

11 CP21/7 Chapter 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 3.9 We propose to consider the following factors when assessing an application. • whether the requirements of the relevant jurisdiction are likely to achieve similar prudential outcomes to MIFIDPRU • how the relevant overseas regulator supervises and enforces those requirements • the broader legal framework applicable to the firm in the relevant jurisdiction • whether there are adequate arrangements in place between the FCA and the overseas regulator to enable supervisory cooperation 3.10 We consider our proposals in this regard to be consistent with the relevant requirements in the threshold conditions. These are, in particular • the effective supervision condition described in COND 2.3 • the appropriate resources condition described in COND 2.4 • the suitability condition described in COND 2.5 3.11 It is also consistent with ‘Our Approach to International Firms’, approach document published in February 2021. Tied agents 3.12 Certain provisions in MIFIDPRU, including requirements in MIFIDPRU 2 on groups and MIFIDPRU 4 on own funds requirements, apply to business carried on by tied agents. We propose to include guidance in MIFIDPRU 1 that reminds firms of this and explains the concept of a tied agent. 3.13 A tied agent in MIFIDPRU means someone who, on behalf of an FCA investment firm (or, where applicable, a third country investment firm): • promotes investment services and/or ancillary services to clients or prospective clients • receives and transmits instructions or orders from the client in respect of investment services or financial instruments • places financial instruments • and/or provides advice to clients or prospective clients in respect of those financial instruments or investment services 3.14 The references in MIFIDPRU to tied agents do not include appointed representatives that do not meet the definition of a tied agent. This could be because the relevant appointed representative does not carry on its activities for the MiFID business of its principal firm. 3.15 But FCA investment firms should note that they should still consider potential risks from business carried on by appointed representatives (whether or not they are tied agents) as part of their ICARA process (see Chapter 7 of this CP for further information). Q1: Do you agree that CPMIs should apply MIFIDPRU requirements to their MiFID business? If not, please provide details of an appropriate prudential regime for the MiFID business of a CPMI.

12 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 4 Own funds requirements 4.1 In this chapter, we explain our proposals for the remaining own funds requirements, which cover the calculation of: • a fixed overheads requirement (FOR) • the remaining K‑factor requirements (KFR) that may apply to any FCA investment firm, which are based on – assets safeguarded and administered – client money held – assets under management – client orders handled • an adjusted coefficient in stressed market conditions to use when calculating the K‑factor for daily trading flow (K‑DTF) 4.2 These proposals are in addition to the own funds requirements proposals that we consulted on in CP20/24, A new UK prudential regime for MiFID investment firms. This included the following proposals: • permanent minimum requirement (PMR) – Chapter 5 of CP20/24 • calculating the K‑factors that only apply to FCA investment firms that trade in their own name or deal on their own account – Chapter 5 of CP20/24 • prudential consolidation of own funds requirements – Chapter 3 of CP20/24 • the transitional provisions on own funds requirements available to FCA investment firms – Chapter 6 of CP20/24. 4.3 The rules we are now consulting on in this chapter are set out in MIFIDPRU 4. Fixed overheads requirement (FOR) 4.4 We propose that the fixed overheads requirement (FOR) will apply to all FCA investment firms. The proposed rules for the FOR are found in MIFIDPRU 4.5. 4.5 The FOR is intended to calculate a minimum amount of capital that an FCA investment firm would need available to absorb losses if it has cause to wind‑down or exit the market. We also expect that FCA investment firms will consider in more detail the amount needed to wind‑down as part of their internal capital adequacy and risk assessment (ICARA) process. More information about the ICARA process can be found in MIFIDPRU 7 and is described in Chapter 7. 4.6 We propose that an FCA investment firm’s FOR will be an amount equal to one quarter of its relevant expenditure in the previous year. This will result from the accounting framework used by the FCA investment firm. The figures used will be those in its most recent audited annual financial statements. Where these are not available, an FCA investment firm may use unaudited financial statements until audited annual financial statements are available.

13 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Calculating the FOR 4.7 To calculate relevant expenditure for the purposes of the FOR, we propose that an FCA investment firm will first determine its total expenditure after it has made any distribution of profits. It may then deduct certain other expenses (to the extent that those items have been included in expenditure) as follows: • any of the following items if they are fully discretionary and have not already been treated as a distribution of profits – staff bonuses and other variable remuneration – employees’, directors’, and partners’ shares in profits – other appropriations of profits • shared commission and fees payable, subject to meeting all of the following conditions – they are directly related to commission and fees receivable – the commission and fees receivable are included within total revenue – the payment of the commission and fees payable is dependent on the actual receipt of the commission and fees receivable • fees paid to tied agents • non‑recurring expenses from non‑ordinary activities • fees, brokerage and other charges paid to the following, where these are for the purposes of executing, registering and clearing transactions, and are directly passed on and charged to customers: – central counterparties – exchanges – other trading venues – intermediate brokers • interest paid to customers on client money, where there is no obligation to pay interest • expenditures from taxes that are related to the annual profits of the FCA investment firm • losses from trading on own account in financial instruments • payments related to contract‑based profit and loss transfer agreements • payments into a fund for general banking risk • expenses reflecting the amortisation of prudently valued software assets where the FCA investment firm has already deducted these assets from own funds as an intangible asset 4.8 An FCA investment firm cannot deduct fees or other charges necessary to remain a member of, or meet loss‑sharing obligations to, a central counterparty, exchange or other trading venue. Commodity and emission allowance dealers 4.9 We are proposing that FCA investment firms that are commodity and emission allowance dealers may also deduct expenditure on raw materials. This only applies where this commodity underlies the derivatives that the FCA investment firm trades.

14 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Expenses incurred on behalf of the firm by third parties 4.10 An FCA investment firm must add to its total expenses any relevant expenditure incurred on its behalf by third parties, including tied agents. Material change in relevant expenditure during the year 4.11 A significant event, such as changes to business lines, buying or selling a business or investing in a major upgrade or restructuring programme, may cause material change to an FCA investment firm’s relevant expenditure. Where these events are planned, we expect the FCA investment firm to calculate the expected impact on both its FOR and basic liquid assets requirement before making the relevant change. Where the change leads to an increase in its FOR, the FCA investment firm must make sure that its own funds will be enough to cover this increase. An FCA investment firm must also consider any impact upon its ICARA process (see Chapter 7 of this CP for details on that process). 4.12 We propose that where there is a material increase in relevant expenditure during a financial year, the FCA investment firm must immediately recalculate its FOR based on the revised relevant expenditure and apply the new amount of FOR. We also propose that the FCA investment firm immediately recalculate its basic liquid assets requirement, as this is calculated by reference to the FOR (see Chapter 6 of this CP for details on that requirement). 4.13 A material increase is defined in our proposals as either: • a projected increase in relevant expenditure for the current year of 30% or more, or • an increase in the FOR of £2 million or more based on projected relevant expenditure for the current year 4.14 Where there is a material decrease in an FCA investment firm’s relevant expenditure during a financial year, we propose that the firm can recalculate its FOR based on the revised relevant expenditure. It may then substitute the revised FOR in place of its existing FOR as long as it gets our prior permission to do so. 4.15 A material decrease is defined in our proposals as either: • a projected decrease in relevant expenditure for the current year of 30% or more, or • a decrease in the FOR of £2 million or more based on projected relevant expenditure for the current year FCA investment firms that have been providing investment services and activities for less than a year 4.16 Where an FCA investment firm has been in business for less than a year, it should use the relevant expenditure in its projections as included in its application for authorisation.

15 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms K‑factor requirements 4.17 The K‑factor own funds requirements are essentially a mixture of activity‑ and exposure‑based requirements. The K‑factors that apply to an individual FCA investment firm will depend on the MiFID investment services and activities it undertakes. 4.18 In this section we cover the K‑factors that could apply to any FCA investment firm. We have also updated our proposals for the daily trading flow (K‑DTF) own funds requirement to deal with how to adjust the coefficient in periods of market stress. Details are towards the end of this chapter. We covered the remaining K‑factors that only apply to FCA investment firms that have permission to deal on own account in CP20/24. 4.19 The following summarises the K-factors that may apply to the MiFID investment business of any FCA investment firm (whether or not it deals on own account) depending on the services and activities it conducts. K-factor Requirement based on the value of Coefficient K-ASA client assets safeguarded and administered 0.04% K-CMH client money held 0.4% (segregated accounts) 0.5% (non-segregated accounts) K-AUM assets under management 0.02% K-COH the client orders handled 0.1% (cash trades) 0.01% (derivatives trades) 4.20 Where applicable, these K‑factors will also apply to an FCA investment firm group that is subject to prudential consolidation. See Chapter 3 of CP20/24 for more information on prudential consolidation. 4.21 Our proposed rules and guidance (in MIFIDPRU 4.7 to 4.16) explain how an FCA investment firm should calculate each component of its overall K‑factor requirement. The way FCA investment firms carry on activities that are potentially relevant to one or more K‑factor metrics may vary considerably. It is not practical for us to give a complete set of rules and guidance covering every conceivable business arrangement that firms may operate when carrying on such activities. 4.22 If an FCA investment firm is unsure whether an arrangement is within scope of one or more components of the K‑factor requirement, we expect it to interpret the requirement in the light of its purpose, as required by GEN 2.2.1R. We expect an FCA investment firm will be able to explain to us how it applies the K-factor requirement to an activity 4.23 Even if an activity does not contribute towards the K‑factor requirement, an FCA investment firm should still consider under the ICARA process whether that activity may create potential material risks of harm or may be relevant to the firm’s wind‑down analysis. (See Chapter 7 of this CP for details on the ICARA process).

16 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Assets safeguarded and administered K‑factor requirement (K‑ASA) 4.24 The K‑factor requirement for assets safeguarded and administered, K‑ASA, is designed to capture the potential for harm caused by an FCA investment firm holding client assets in connection with MiFID business. It does not matter whether those assets appear on the FCA investment firm’s own balance sheet or whether it has deposited those assets into accounts opened with third parties. 4.25 Where an FCA investment firm cannot determine if a proportion of its assets safeguarded and administered (ASA) should be classified as relating to its MiFID business, we propose that it must include such amounts in its ASA calculations. 4.26 We propose that when it is calculating ASA, an FCA investment firm must include any client assets received by its tied agents for MiFID business conducted on the FCA investment firm’s behalf. The activities of appointed representatives (including UK tied agents) are restricted, which is explained further in SUP 12.2.7G. So we generally expect that this would not be relevant to an FCA investment firm when it calculates ASA on an individual basis. However, CP20/24 gave our proposals for how a UK parent entity should calculate ASA on a consolidated basis when it is subject to prudential consolidation under MIFIDPRU 2.5. When the requirement for client assets received by tied agents applies on a consolidated basis, this will mean that any amounts that tied agents receive in connection with the business of third country investment firms will need to be included in consolidated ASA. 4.27 We propose that an FCA investment firm must exclude from its measurement of ASA any units or shares in a qualifying money market fund (QMMF) that result from the firm depositing client money in accordance with CASS 7.13.2R(4), where that money is received in connection with MiFID business. As noted under K‑CMH below, such amounts must be counted towards measuring CMH instead. Calculating K‑ASA 4.28 We propose that the K‑ASA requirement of an FCA investment firm is calculated as: • 0.04% of average ASA 4.29 An FCA investment firm must calculate its K‑ASA requirement on the first business day of each month. Calculating average ASA 4.30 To calculate its average ASA, we propose that an FCA investment firm must • measure the amount of ASA it had at the end of each business day for the previous 9 months • exclude the values for the 3 most recent months • then calculate the arithmetic mean of the daily values of the remaining 6 months of data 4.31 The FCA investment firm should use the market value of the relevant assets where this is available. Otherwise, it should use an estimated value of an asset calculated on a ‘best efforts’ basis.

17 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 4.32 The values used should be consistent with the information on client assets contained in any relevant regulatory data the FCA investment firm has reported to us, and in any internal or external reconciliations and records maintained in accordance with CASS 6.6. (Except where a rule or relevant guidance expressly requires the firm to take a different approach). 4.33 In both of the following situations, we propose that an FCA investment firm must include these assets when measuring its ASA: • the FCA investment firm has delegated the safeguarding and administration of assets to another entity. • another entity has delegated the safeguarding and administration of assets to the FCA investment firm 4.34 We do not consider this to be a ‘double counting’ of the assets. There is a potential risk of harm from an FCA investment firm’s direct safeguarding responsibilities, including where it is safeguarding assets delegated to it by another entity. It also has responsibilities in its arrangements for delegating safeguarding to another firm. The selection, appointment and periodic review of any third party to which the firm has delegated safeguarding is a separate potential source of harm. It means that an FCA investment firm cannot reduce its level of ASA by delegating the safeguarding of assets to a third party. FCA investment firms that have been safeguarding assets for less than 9 months 4.35 Where an FCA investment firm has been conducting activities giving rise to ASA for less than 9 months we propose that it must: • Use historical data to calculate average ASA as soon as it becomes available, or • Use other amounts that we may specify. These will be based on the business projections that the FCA investment firm supplied to us when obtaining permission to perform MiFID safeguarding activities. Client money held K‑factor requirement (K‑CMH) 4.36 The client money held K‑factor requirement, K‑CMH, is designed to capture the potential for harm caused by an FCA investment firm holding client money in connection with MiFID business. For the purposes of MIFIDPRU, this includes: • where this money has been deposited into a client bank account, including any amounts of the firm’s own money as a result of applying the provisions on prudent segregation • where this money has been placed in a QMMF in accordance with CASS 7.13.3R(4) • any amount of this money which a third party holds in accordance with CASS 7.14 4.37 Where an FCA investment firm cannot determine if a proportion of its client money should be classified as relating to its MiFID business, we propose that it must include the amount in its calculations of client money held (CMH). This does not affect how this proportion should be treated under other sections of the Handbook (such as CASS or COBS) or under any other applicable legislation.

18 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 4.38 We propose that when an FCA investment firm is calculating CMH, it must include any client money received by its tied agents in connection with MiFID business conducted on behalf of the FCA investment firm. Due to the prohibition in SUP 12.6.5R, appointed representatives in the UK are generally prohibited from holding client money. Under SUP 12.6.15R, this prohibition also applies in relation to any FCA registered tied agents. As a result, we expect that the requirement to include client money received by tied agents in CMH would not normally be relevant to an FCA investment firm on an individual basis. However, CP20/24 gave our proposals for how a UK parent entity should calculate CMH on a consolidated basis when it is subject to prudential consolidation under MIFIDPRU 2.5. When the requirement for client money received by tied agents applies on a consolidated basis, this will mean that any amounts received by tied agents for the business of third country investment firms will need to be included in consolidated CMH. 4.39 CMH does not include client money that an FCA investment firm controls using a mandate in accordance with CASS 8 but does not hold. Calculating K‑CMH 4.40 We propose that the K‑CMH requirement of an FCA investment firm is calculated as the sum of: • 0.4% of average CMH held by the firm in segregated accounts, and • 0.5% of average CMH held by the firm in non‑segregated accounts 4.41 An FCA investment firm must calculate its K‑CMH requirement on the first business day of each month. 4.42 Where an FCA investment firm is complying with the applicable requirements of CASS 7 for an amount of client money, there is a presumption that such an amount is being held in a segregated account. 4.43 We consider that the K‑CMH requirement for non‑segregated accounts is most likely to be used where it is applied on a consolidated basis under MIFIDPRU 2.5. For example, this may be relevant where the investment firm group includes an entity to which CASS does not apply, such as a third country investment firm. And that entity holds client money under arrangements that do not meet the general conditions to be a segregated account. General conditions to be a segregated account 4.44 For the purposes of calculating the K‑CMH requirement in MIFIDPRU 4.8, we propose that an arrangement will constitute a segregated account if an FCA investment firm ensures that: • it keeps records and accounts enabling it, at any time and without delay, to distinguish assets held for one client from assets held for any other client and from its own assets • it maintains its records and accounts in a way that ensures their accuracy, that they correspond to the assets held for clients and may be used as an audit trail • it conducts, on a regular basis, reconciliations between its internal accounts and records and those of any third parties by whom those assets are held

19 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • it takes the necessary steps to ensure that deposited client funds are held in an account or accounts identified separately from any accounts used to hold funds belonging to it, and • it operates adequate organisational arrangements to minimise the risk of the loss or diminution of client assets or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record‑keeping or negligence, and • the applicable national law provides that, in the event of its insolvency or entry into resolution or administration, client funds cannot be used to satisfy claims against it, other than claims by the relevant clients 4.45 We propose that compliance by an FCA investment firm with the following CASS requirements (in so far as they apply to a particular amount of client money) would generally be evidence that an arrangement can be classified as a segregated account. • organisational requirements for client money in CASS 7.12 • segregation of client money in CASS 7.13 or client money held by a third party in CASS 7.14 • records, accounts and reconciliations in CASS 7.15, and • acknowledgement letters in CASS 7.18 Calculating average CMH 4.46 To calculate average CMH, we propose that an FCA investment firm must • measure the amount of CMH at the end of each business day for the previous 9 months • exclude the values for the 3 most recent months • calculate the arithmetic mean of the daily values for the remaining 6 months of data 4.47 The FCA investment firm should measure amount of client money held in accordance with the requirements of CASS 7.15. For third country investment firms that are part of an investment firm consolidation group the amount of client money held should, to the extent applicable, be measured in accordance with the values in any relevant accounting records. FCA investment firms that have been holding client money for less than 9 months 4.48 Where an FCA investment firm has been holding client money for MiFID business for less than 9 months it should: • Use historical data to calculate the average CMH as soon as soon as it becomes available, or • Use other amounts that we may specify. These will be based on the business projections that the FCA investment firm gave to us when getting permission to perform the MiFID activities to which the client money relates.

20 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Assets under management – K‑AUM 4.49 Our proposed rules for the assets under management K‑factor requirement, K‑AUM, are set out in MIFIDPRU 4.7. K‑AUM is designed to capture the potential for harm when an FCA investment firm manages assets for its clients in connection with MiFID business. This includes: • assets managed on a discretionary portfolio management basis, and • assets managed under non‑discretionary advisory arrangements of an ongoing nature 4.50 We propose that a MIFIDPRU investment firm must include within assets under management (AUM) any amounts from its MiFID business that is carried on by any tied agents acting on its behalf. 4.51 Under our proposals, the definition of AUM does not include amounts related to • the provision of advice to undertakings on capital structure, industrial strategy and related matters • advice and services relating to mergers and the purchase of undertakings Calculating K‑AUM 4.52 Our proposal is that the K‑AUM requirement for an FCA investment firm will be 0.02% of its average AUM. 4.53 An FCA investment firm must calculate its K‑AUM on the first business day of each month. Calculating average AUM 4.54 We propose that, to calculate average AUM, an FCA investment firm should • measure the amount of AUM it had on the last business day of each of the previous 15 months • exclude the 3 most recent monthly values • calculate the arithmetic mean of the remaining 12 monthly values 4.55 We propose that when measuring the value of its AUM on the last business day of each month, an FCA investment firm must convert any amounts in foreign currencies on that date into its functional currency. The FCA investment firm must apply a conversion rate for that date by reference to an appropriate market rate and record that rate. Once the AUM for a given month is in the FCA investment firm’s functional currency, it should always use the same value each time that particular month’s data appears as part of the 12 monthly values used to calculate the average AUM. It should not be revalued if the exchange rate varies over time. 4.56 When measuring its AUM, we propose that an FCA investment firm must • use the market value of the relevant assets, where available • use an alternative measure of the fair value of an asset, where a market value is not available, which may include an estimated value calculated on a ‘best efforts’ basis • exclude any amounts that are included in its calculation of its CMH

21 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 4.57 When measuring its AUM, our proposals allow an FCA investment firm to use the net total value of the relevant assets. So it may choose to offset any negative values or liabilities attributable to positions within the relevant portfolios. Formal delegation of portfolio management 4.58 We propose that an FCA investment firm must include in the measurement of its AUM any assets where it has delegated the management to another entity. 4.59 In order to avoid ‘double counting’, we propose an FCA investment firm may exclude from its AUM the value of any assets that have been formally delegated to it (to manage) by a financial entity, which we define as: • an FCA investment firm, including a CPMI firm • a collective portfolio management (CPM) firm • a third country entity that is subject to an AUM‑based financial resources requirement that is similar to the K‑AUM requirement 4.60 However, we also propose that an FCA investment firm must include in its AUM the value of any assets that have been delegated to it if the financial entity that has delegated this asset management to it: • is also acting as a delegated manager and • has excluded these assets from the calculation of its own capital requirements 4.61 This means that where there is sub‑delegation of the management of assets, the FCA investment firm can only apply relief from ‘double counting’ to one of the delegated levels. 4.62 We propose that formal delegation will occur where there is a legally binding agreement in place between the financial entity and the FCA investment firm that sets out the rights and obligations of each party for the relevant delegation activities. 4.63 A financial entity may be providing investment advice of an ongoing nature to an FCA investment firm that undertakes discretionary portfolio management. However, such an arrangement is not a formal delegation of the management of assets. It involves 2 distinct activities: ongoing investment advice provided by the financial entity and discretionary portfolio management by the FCA investment firm. In this situation, if the financial entity is also an FCA investment firm, we propose that it must include any assets for which it is providing such advice in its measurement of AUM. The FCA investment firm that is undertaking discretionary portfolio management for the same assets must also include those assets in its own measurement of AUM. FCA investment firms that have been required to calculate K‑AUM for less than 15 months 4.64 Where an FCA investment firm has been managing assets for its clients under discretionary portfolio management or non‑discretionary arrangements constituting investment advice of an ongoing nature: • for less than 15 months, or • for 15 months or longer, but has been classified as a non‑SNI investment firm for less than 15 months

22 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms we propose that for the purposes of calculating its average AUM the FCA investment firm must use: • Historical data as soon as soon as it becomes available, or • Other amounts that we may specify. These will be based on the business projections that the FCA investment firm gave us when getting permission to perform the relevant activities Client orders handled – K‑COH 4.65 Our proposed rules for the client orders handled K‑factor requirement, K‑COH, are set out in MIFIDPRU 4.10. K‑COH is designed to capture the potential for harm from an FCA investment firm handling client orders. This includes the execution of orders on behalf of the client and the reception and transmission of client orders. This also includes where this is happening as part of a chain. 4.66 An FCA investment firm must include within its client orders handled (COH) any amounts for MiFID business carried out by tied agents acting on its behalf. 4.67 It is not practical for us to give a complete set of rules and guidance covering every conceivable business arrangement that firms may operate when handling client orders. However, in MIFIDPRU 4.10.6 G to MIFIDPRU 4.10.17G we propose guidance on whether particular arrangements are included within the measurement of COH. Given their very detailed nature, we do not describe such arrangements in this chapter. 4.68 As noted earlier in this chapter, if an FCA investment firm is unsure whether an arrangement is within scope of one or more components of the K‑factor requirement, we expect it to interpret the requirement in the light of its purpose, as required by GEN 2.2.1R. Calculating K‑COH 4.69 We propose that the K‑COH requirement for an FCA investment firm is the sum of: • 0.1% of the average COH for cash trades, and • 0.01% of the average COH for derivatives trades 4.70 An FCA investment firm must calculate its K-COH on the first business day of each month. 4.71 In CP20/24 we consulted on the definition of a cash trade, which includes an exchange traded option. We also proposed that any order for the buying or selling of a financial instrument that is not a cash trade will be a derivatives trade. Transactions that can be excluded from COH 4.72 We propose that an FCA investment firm is not required to include the following in its measurement of COH: • orders executed in its own name (including where executing an order in its own name on behalf of a client)

23 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • orders that a firm handles when acting in the capacity as the operator of a multilateral trading facility or organised trading facility • transactions that are caught within the definition of reception and transmission of client orders only as a result of the situation described in recital 44 of MiFID • orders that are not ultimately executed 4.73 Instead, the FCA investment firm must include orders executed in its own name, even if on behalf of a client, in the FCA investment firm’s measurement of its daily trading flow (DTF) when calculating its K‑DTF requirement. (See CP 20/24 for details on K‑DTF). 4.74 An FCA investment firm which is operating a multilateral trading facility or an organised trading facility does not need to include any orders it handles solely in that capacity in its measurement of COH. Nonetheless, it should consider as part of its ICARA process whether that activity creates the risk of material potential harm which might require it to hold additional own funds or liquid assets under MIFIDPRU 7. However, if the operator of an organised trading facility is undertaking matched principal trading, as permitted by MAR 5A.3.5R, any matched principal trades are included in its measurement of DTF under MIFIDPRU 4.15. 4.75 Where an FCA investment firm executes client orders on a multilateral trading facility or an organised trading facility when it is not acting in the capacity of the trading venue operator, it must include these orders in its measurement of COH. However, if the FCA investment firm executes these orders in its own name, it must include them in its measurement of DTF. 4.76 The same FCA investment firm may both act as the operator of a multilateral trading facility or an organised trading facility and be submitting an order on that trading venue on behalf of a client. In this case it is not required to measure COH in relation to its role as the operator of the trading venue. But it must still measure COH, or DTF if it is possible to enter into transactions in its own name on the trading venue, for the order that it is executing for the client. 4.77 Transactions that are described in recital 44 of MiFID are, in summary, transactions that result from a firm bringing together 2 or more investors (such as introducing an issuer to a potential source of funding). And where the firm does not otherwise interpose itself within the chain of execution of any resulting order. An example of this would be corporate finance or venture capital business. However, the FCA investment firm must be sure that its role does not go beyond the ‘extended’ definition of reception and transmission as described in recital 44 of MiFID. Further guidance is available in PERG 13.3. 4.78 We propose that where an FCA investment firm receives a client order, but that order is not ultimately executed, it does not have to include the value of that order in its measurement of COH. However, as part of its ICARA process, an FCA investment firm should consider whether the fact that an order has not been executed creates any material risks to the firm or to its clients. This may depend upon the reasons why client orders have not been executed.

24 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Calculating average COH 4.79 To calculate its average COH we propose that an FCA investment firm must: • calculate the total COH measured throughout each business day over the previous 6 months • exclude the 3 most recent months, and • then take the arithmetic mean of the remaining 3 months Measuring the value of orders for COH 4.80 In measuring its COH, we propose that an FCA investment firm must use the total of the absolute value of each buy and sell order, determined as follows: • for cash trades this is the amount paid or received on the trade at the time it is executed (unless the FCA investment firm has chosen to apply the alternative approach set out below) • For derivatives trades (other than interest rate derivatives) this is the notional amount of the contract. We propose that the notional amount of the contract be arrived at using the same approach as for the trading counterparty default requirement (K‑TCD) set out in MIFIDPRU 4.14.20R (2) in CP20/24 • For interest rate derivatives, this is the notional amount of the contract (determined as above) multiplied by the duration, where the duration is the time to maturity in years divided by 10 • For cash trades relating to exchange‑traded options, the amount paid or received is the premium paid for the option. 4.81 We propose that FCA investment firms can exclude transaction costs from the value of an order to reflect the amount received or paid by the client for the relevant instruments. This is provided that the client does not pay these costs separately to the FCA investment firm but they are reflected in the amount paid for the order itself. Alternative approach for calculating the value of cash trades 4.82 Where an FCA investment firm is receiving and transmitting an order that is a cash trade, we also propose that it may choose to use an alternative approach to valuation (than the amount paid or received at the time the order is executed). Under the alternative approach the value of the order is determined by: • the price specified in that order where this is a fixed price or a limit price at which the order should be executed, or • the market price of the relevant instrument at the end of the day on which the order is transmitted by the FCA investment firm 4.83 We propose that where an FCA investment firm chooses to use this approach, it should • use it for all cash trades it is receiving and transmitting, or • use it only for cash trades received and transmitted for which it has not received timely information about the terms on which the order was executed and must document the basis on which it has chosen to do so.

25 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Firms with less than 6 months data on COH 4.84 Where an FCA investment firm has been handling client orders for less than 6 months we propose that it must • Use historical data to calculate average COH as soon as soon as it becomes available, or • Use other amounts that we may specify. These will be based on the business projections that the FCA investment firm gave us when getting permission to perform the relevant MiFID activities Interaction between K‑AUM and K‑COH requirements 4.85 In Table 2 we set out different scenarios to help explain the outcome of our proposals for when an FCA investment firm must calculate K‑AUM and/or K‑COH in different situations. 4.86 It should be remembered that K‑AUM captures both discretionary portfolio management and non‑discretionary arrangements constituting investment advice of an ongoing nature. And that K‑COH captures both execution of, and reception and transmission of, client orders. 4.87 For example, as in row 2 of the table, we propose that an FCA investment firm may exclude from its calculation of COH any orders that it generates as part of providing portfolio management or investment advice of an on‑going nature. But this exclusion is only permitted where the relevant portfolio is included in the FCA investment firm’s calculation of its K‑AUM requirement. This is designed to reflect the fact that, for example, the FCA investment firm providing the relevant service to the client needs to execute or place any client orders in order to re‑balance the portfolio accordingly. 4.88 However, we also propose that excluding these orders from its measurement of COH does not apply to any orders that the FCA investment firm executes in the course of providing portfolio management for a delegated portfolio where the firm does not calculate K‑AUM in respect of that portfolio. 4.89 Table 2 is only a summary and no substitute for reading the detailed provisions, which are set out in MIFIDPRU 4.10.26 to 4.10.32. The table shows the activities carried on by an FCA investment firm (IF1) and the relevant K‑factors that apply. Where applicable, it also shows how the arrangements between IF1 and another FCA investment firm (IF2) may affect which K‑factors are applicable to each firm.

26 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Table 2: interaction between K‑AUM and K‑COH requirements IF 1 K‑AUM K‑COH IF 2 K‑AUM K‑COH 1 DPM, executes those orders Yes No – – – 2 DPM, delegates DPM to IF2 Yes No Undertakes delegated DPM, and executes those orders No Yes 3 DPM, delegates DPM to IF2. Receives orders back from IF2 to execute Yes No Undertakes delegated DPM, and passes orders back to IF1 to execute No No 4 DPM, delegates DPM to IF2 Yes No Undertakes delegated DPM, orders passed onto IF3 to execute No No 5 DPM, delegates DPM to IF2. Receives orders back from IF2 and passes on to IF3 to execute Yes No Undertakes delegated DPM, does not execute, passes orders back to IF1 No No 6 DPM, orders passed to IF2 for execution Yes No Executes orders on behalf of IF1 No Yes 7 DPM, receives on‑going advice from IF2 Yes No Ongoing advice on assets managed by IF1 Yes No 8 Assets under on‑going advice and executes those orders. Yes No – – – 9 Assets under on‑going advice, orders executed by IF2 Yes No Executes the orders received from IF1 for execution No Yes 10 Provides ‘one‑off’ advice to a client. Any orders passed to IF2 for execution. No Yes Executes the orders received from IF1 for execution No Yes 11 Provides ‘one‑off’ advice to a client. Executes any resulting orders. No Yes – – – 12 Execution only of client orders No Yes – – – 13 Client orders received are passed to IF2 for execution No Yes Executes orders received from IF1 for execution No Yes Key: DPM = discretionary portfolio management IF1 = FCA investment firm 1 IF2 = FC investment firm 2 IF3 = a third FCA investment firm A dash indicates that there is no second FCA investment firm involved in the activity 4.90 FCA investment firms will still need to consider any additional potential harm that could be caused by these activities when considering their ICARA. This is especially the case where there may be no K‑factors associated with the activity – for example, see Investment Firm 2 under scenarios 3, 4 and 5.

27 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Daily trading flow K‑factor requirement (K‑DTF) 4.91 In Chapter 5 of CP 20/24 we set out our proposals for the transactions that FCA investment firms should include when calculating the daily trading flow own funds requirement (K‑DTF) as well as how to calculate K‑DTF for cash and derivatives trades. 4.92 In CP20/24 we asked should there be the possibility of an adjustment to calculating the coefficients for K‑DTF in periods of extreme market stress and volatility? We now propose to add a section to MIFIDPRU 4 setting out how FCA investment firms should calculate an adjusted coefficient for use in times of stressed market conditions. For these purposes, stressed market conditions are as defined in Article 6 of the on‑shored UK version of Regulation (EU) 2017/578, the Market Making Regulatory Technical Standard (RTS). 4.93 The aim of this proposed adjustment to the coefficient is that when market circumstances are stressed, market‑making is incentivised, reducing the potential risk of lower market liquidity and potential harm to financial stability. 4.94 An FCA investment firm should only use the adjusted coefficient where a proportion of its average daily trading flow (DTF) used in the K‑DTF calculation occurred under stressed market conditions. It must calculate the relevant coefficient separately for cash trades and derivatives trades. 4.95 The adjusted coefficient proposed for cash trades is CadjCash = C where C = the original coefficient for cash trades (0.1%) DTFexcl = the average DTF of cash trades, excluding the value of any cash trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that: – stressed market conditions began to apply, and – stressed market conditions ceased to apply DTFincl = the average DTF of all cash trades 4.96 The adjusted coefficient for derivative trades is CadjDer = C where C = the original coefficient for derivative trades (0.01%) DTFexcl = the average DTF of derivative trades, excluding the value of any derivative trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that: – stressed market conditions began to apply, and – stressed market conditions ceased to apply DTFincl = the average DTF of all derivative trades 4.97 We propose that an FCA investment firm may choose to apply the adjusted coefficient approach when calculating its K‑DTF requirement, but it is not required to use this. Instead it may continue to apply the original coefficient, as this is both simpler and more prudent. ( DTFexl DTFincl * ) ( DTFexl DTFincl * )

28 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example of how to calculate the adjusted co‑efficient, using cash trades An FCA investment firm executes total cash trades in its own name worth £9,600m during the 6‑month calculation period for determining average DTF. That 6‑month period includes 128 business days. The total £9,600m of cash trades includes £375m of cash trades that were executed on trading venues during stressed market conditions (as defined in article 6 of the Market Making RTS). In this example DTFincl = £9,600m / 128 days = £75m DTFexcl = (£9600m – £375m) / 128 days = £9,225m / 128 days = £72.07m C = 0.1% CadjCash = 0.1% x (72.07 / 75) = 0.1% x 0.961 = 0.0961% To calculate its K‑DTF requirement for this calculation period, the firm would therefore multiply the full amount of its average DTF for the period by the adjusted coefficient (CadjCash). Therefore: K‑DTF requirement for cash trades = £75m x 0.0961% = £72,075. Other minor amendments to K‑DTF 4.98 We have also proposed some minor amendments to the terminology used in the rules for calculating the K‑DTF requirement in MIFIDPRU 4.15. These amendments do not change the calculation we proposed in CP20/24. They are designed to make the methodology clearer and to clarify its interaction with the new provisions for the adjusted coefficient. Q2: Do you have any specific comments on our proposed approach to the calculation of the FOR and the specific items of expenditure that may be deducted from total expenses? If yes, what items would you suggest are/are not deducted, and why? Q3: Do you agree with our proposals for calculating K‑ASA and that this should address the potential risk of harm from an FCA investment firm’s direct safeguarding responsibilities, including where it is safeguarding assets delegated to it by another entity ASA? If you disagree, please explain why. Q4: Are our proposals on the calculation of K‑CMH, especially when amounts of CMH should be treated as being in a segregated account, sufficiently clear? If not, what specific suggestions do you have for improvement? Q5: Do you agree with our proposals on how the value of assets should be calculated, and for when formal delegation takes place, when calculating K‑AUM? If not, please explain any alternative suggestions you may have.

29 CP21/7 Chapter 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Q6: Do you agree with our proposals for calculating K‑COH? Especially for measuring the value of cash trades, and for when certain transactions may be excluded from the measurement of COH? If not, please explain why and provide evidence to support any alternative suggested treatments. Q7: Are our proposals that cover the interaction between K‑AUM and K‑COH clear and prudent? If not, what specific suggestions do you have to improve this? Q8: Do you foresee any issues with our proposals for how to calculate an adjusted coefficient for use in times of stressed market conditions? If so, how might we address them, or what alternative practical suggestions do you have for achieving the desired outcome without unnecessary complexity?

30 CP21/7 Chapter 5 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 5 Firms acting as clearing members and indirect clearing firms 5.1 In this chapter we set out the specific requirements, including firm categorisation, we are proposing for FCA investment firms that are clearing members and indirect clearing firms. By an ’indirect clearing firm’, we mean a firm that is a client (including an indirect client) of a clearing member and that also provides indirect clearing services to other recipients. 5.2 We explain how we are proposing to apply K‑DTF to clearing activities, and the own funds requirement of K‑TCD to central counterparty (CCP) default fund exposures. 5.3 The rules relevant to this chapter are in MIFIDPRU 10. 5.4 Our discussions with stakeholders since CP20/24 have shown that FCA investment firms play a part in the overall provision of clearing services to other FCA investment firms. We will therefore be addressing this further as part of our subsequent Policy Statement in response to CP20/24, in terms of the users of such services. Categorisation 5.5 We are proposing that all FCA investment firms that are clearing members or indirect clearing firms should be non‑SNI investment firms. This will be the case even if they meet all the other requirements for being an SNI firm. 5.6 We consider that these FCA investment firms are, by the very nature of their activities, interconnected to other financial institutions in a way that precludes them from being SNI firms. 5.7 This also means that where an FCA investment firm group that is subject to prudential consolidation contains either a clearing member or an indirect clearing firm it cannot be an SNI group. The UK parent entity must therefore comply with the obligations of MIFIDPRU 2 as if it were a non‑SNI firm on a consolidated basis. 5.8 FCA investment firms that are self‑clearing firms will also be non‑SNI firms. Application of K‑DTF to clearing activities 5.9 We are proposing to apply the own funds requirement for the daily trading flow (K‑DTF) to the transactions where an FCA investment firm provides clearing services as a clearing member or an indirect clearing firm. These transactions should be included in the calculation of daily trading flow (DTF) in the following way: • where the order is a cash trade, the clearing transaction will also be treated as if it were a cash trade • where the order is a derivatives trade, the clearing transaction will also be treated as if it were a derivatives trade

31 CP21/7 Chapter 5 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 5.10 Please refer to MIFIDPRU 4.15 as set out in CP20/24 for our proposed rules on calculating K‑DTF. Avoiding of double counting 5.11 An FCA investment firm may both execute an order and provide clearing services for the resulting transaction. In this situation, it does not need to include the clearing transaction in its DTF calculation provided the value of the executed order is already included in its calculation of: • COH in line with MIFIDPRU 4.10, or • DTF in line with MIFIDPRU 4.15 5.12 This is to avoid the transaction being double counted where the FCA investment firm is providing both execution and clearing services for the same trade. Own funds requirements for CCP default fund exposures 5.13 CCPs will typically have default funds that are pre‑funded by contributions from their clearing members. The UK CRR includes an own funds requirement for counterparty risk on such exposures. We are proposing that FCA investment firms that are clearing members should include these contributions as part of their trading counterparty default (K‑TCD) calculations. This will also apply to investment firm groups subject to prudential consolidation that have one or more clearing members that have made pre‑funded contributions to a CCP. 5.14 The default fund is set up by the CCP to cover losses for when a clearing member defaults, where those losses are not covered by that clearing member’s various margin requirements and default fund contributions. This means that the clearing member has a counterparty credit risk type exposure to the CCP. 5.15 We consider that it is appropriate for this risk to the FCA investment firm to be captured on a consistent basis as part of the K‑factor framework, rather than solely as part of its ICARA process. Calculating K‑TCD for CCP default fund exposures 5.16 For the K‑TCD calculation on pre‑funded default fund contributions using MIFIDPRU 4.14, we are proposing that: • the replacement cost of the contribution will be the book value of the asset, • the risk factor will be 8%, and • the credit valuation adjustment will be 1 Q9: Do you agree with our proposed treatment of FCA investment firms when acting as clearing members and indirect clearing firms? If not, what alternatives could be used to calculate the own funds requirements for such activity? Are there any other circumstances in which FCA investment firms may have exposures to a CCP that should be captured by K-TCD?

32 CP21/7 Chapter 6 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 6 Basic liquid assets requirement 6.1 In this chapter we set our proposals for the basic liquid assets requirement for FCA investment firms and the type of assets that can be used to meet this requirement. We explain the following concepts: • basic liquid assets requirement • core liquid assets 6.2 The basic liquid assets requirement can apply on both an individual and consolidated basis. In CP20/24 we also consulted on allowing firms to apply for an exemption from this requirement on either an individual or consolidated basis, where certain conditions are met. 6.3 Where the basic liquid assets requirement applies on an individual basis, we generally expect an FCA investment firm to meet the requirement using assets it holds itself. However, we do recognise that there are circumstances in which it may be appropriate for an FCA investment firm to rely on liquidity support provided by other entities within its group. That is why we proposed that firms subject to prudential consolidation could apply for an exemption from this requirement on an individual basis as proposed in section 2.3 of MIFIDPRU in CP20/24. 6.4 The basic liquid assets requirement is based on a proportion of an FCA investment firm’s fixed overheads requirement and any guarantees provided to clients. The rules relating to this chapter can be found in MIFIDPRU 6. Our proposals on the fixed overheads requirement are described in Chapter 4 of this CP and set out in MIFIDPRU 4.5. 6.5 We propose to give commodities and emissions allowance dealers 5 years to meet these requirements. See TP 8 for further details. This is to reflect the specialised nature of those markets. 6.6 We also propose to amend the information that we wish to collect from FCA investment firms about the liquid assets they hold to reflect these new concepts. This is a change from the reporting that we consulted on in CP20/24. More information about this is set out in Chapter 13 on regulatory reporting of this CP. Basic liquid assets requirement 6.7 We propose to require FCA investment firms to hold an amount of liquid assets that is at least equal to the sum of: • one third of the amount of its fixed overheads requirement, and • 1.6% of the total amount of any guarantees provided to clients 6.8 This will be the first time that all FCA investment firms have a quantified liquid assets requirement. The purpose is to ensure that FCA investment firms always have a minimum stock of liquid assets to fund the initial stages of a wind‑down process, if wind‑down becomes necessary. The basic liquid assets requirement will help to build

33 CP21/7 Chapter 6 Financial Conduct Authority A new UK prudential regime for MiFID investment firms upon the existing requirement that FCA investment firms have adequate financial resources to be able to meet their liabilities as they fall due. 6.9 Our view is that the basic liquid asset requirement is a proportionate minimum requirement that FCA investment firms should be able to meet. Calculating guarantees 6.10 When calculating the total amount of any guarantees provided to clients, we propose to give FCA investment firms the option of • using the total value of guarantees outstanding at the end of each business day, or • calculating a historic average to smooth out fluctuations in the daily amount 6.11 We have illustrated the second option using the example of a firm that guarantees the settlement of orders it executes between a client and a third party. We suggest that such a firm could use the principles for calculating the value of the client orders it handles (COH) to calculate its liquid assets requirement for guarantees. This is set out in MIFIDPRU 6.2. Core liquid assets 6.12 We propose a list of core liquid assets that FCA investment firms can use to meet the basic liquid assets requirement. These are the straightforward liquid assets that they are likely to hold and do not require any reduction (or ‘haircut’) given their certainty of value. Any amount of the following may be used: • coins and banknotes, • short‑term deposits at a UK bank • assets representing claims on or guaranteed by the UK government or the Bank of England (for example UK gilts and Treasury bonds) • units or shares in a short‑term regulated money market fund, or in a comparable third country fund. Trade receivables 6.13 We also propose to allow the following firms to include trade receivables (including fees and commissions) as core liquid assets: • SNI investment firms, or • non‑SNI investment firms that do not have permission to deal on own account, or underwrite/place financial instruments on a firm commitment basis 6.14 However, we are proposing that FCA investment firms can only use trade receivables to meet up to one third of the liquid assets requirement based on the fixed overheads requirement. They cannot be used to meet any liquid assets requirement based on guarantees.

34 CP21/7 Chapter 6 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 6.15 Trade receivables will also have to be: • receivable within 30 days • subject to a ‘haircut’ of at least 50% Sterling and non‑sterling currencies 6.16 We are generally proposing that any core liquid assets used to meet the basic liquid assets requirement must be denominated in pound sterling, because we generally expect FCA investment firms’ liquidity needs to be in pound sterling. 6.17 However, we recognise that some FCA investment firms and consolidation groups may incur relevant expenditure or guarantees in other currencies. Where a different currency is involved, we propose to allow an FCA investment firm to use comparable core liquid assets denominated in a foreign currency. This includes deposits held at overseas banks and assets issued or guaranteed by overseas governments or central banks. 6.18 These assets can be included in the same proportion as the relevant expenditure or guarantees that the FCA investment firm incurs in that currency. Not a liquid asset 6.19 We are proposing to exclude from the definition of a core liquid asset any asset that: • belongs to a client (eg client money or client assets under our client assets sourcebook (CASS)), even if the asset is held in the firm’s own name • is encumbered or subject to some restriction that prevents it being realised. Overall liquidity needs 6.20 The basic liquid assets requirement forms part of the overall framework that an FCA investment firm must adopt for assessing its individual liquidity needs. This overall framework is called the ICARA process and is set out in MIFIDPRU 7. Where the ICARA process results in the need to hold additional liquid assets (above the basic liquid asset requirement), our proposals allow an FCA investment firm to use a wider range of ‘non‑core’ liquid assets to meet this additional requirement. (See Chapter 7 of this CP for details). Q10: Do you agree with our proposals for a basic liquid asset requirement, to be met by holding core liquid assets? If not, please explain what alternative proposal you would suggest and why.

35 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7 Risk Management, ICARA and SREP Overview 7.1 In this chapter, we set out how we propose FCA investment firms should manage their risks. This includes the Internal Capital Adequacy and Risk Assessment (ICARA) process and how we will assess this. 7.2 We view the introduction of the IFPR as an opportunity to re‑establish our expectations for FCA investment firms’ internal governance and risk management. Our proposals reflect and build upon the framework established last year in our guidance ‘FG20/1 Assessing Adequate Financial Resources’ (June 2020). We recommend that FCA investment firms should use that guidance as a starting point for our proposals in this chapter. 7.3 The rules relevant to this chapter are in MIFIDPRU 7. There is additional material in the annexes to MIFIDPRU 7. Key principles 7.4 Our proposed approach is underpinned by several key principles: • FCA investment firms must consider and account for the risk of harm they pose to consumers and markets. Our expectation is that FCA investment firms consider the potential harm they could cause to consumers and markets, as well as risks to their own safety and soundness. They must assess the degree to which the activities they undertake pose harm to others, and account for this appropriately. This includes credible and accountable wind‑down planning, which we consider a critical feature of FCA investment firms’ internal risk assessment process under our new framework. • The ICARA process is the centrepiece of firms’ risk management processes. Under our proposals it will cover: – identification, monitoring and mitigation of harms – business model planning and forecasting; recovery and wind‑down planning – assessing the adequacy of financial resources Our expectation is that the assumptions used by FCA investment firms to underpin these elements are consistent and holistic. • Senior management is responsible for ensuring the appropriateness of their firm’s governance and risk management. Our expectation is that it is the responsibility of a firm to recognise, monitor, control and mitigate the risks to which they are exposed, and potential for harm their activities pose to consumers and markets. We will hold senior management and governing bodies responsible for this. Our proposed rules clarify FCA investment firms’ risk management responsibilities for the IFPR under the Senior Manager and Certification Regime (SM&CR).

36 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • We will intervene at given intervention points if FCA investment firms fail to act appropriately or their actions prove unsuccessful. We propose that FCA investment firms must notify us where their level of own funds and/or liquid assets fall below these intervention points. This reflects feedback that firms are not always clear on our expectations and how we expect them to respond in certain situations. • Our expectations on firms are proportionate to the risk of harm posed. Our proposals contain core requirements for all firms. They also set out additional guidance and expectations for larger or more complex firms. Summary of our proposed rules 7.5 The remainder of this chapter sets out our proposals, and what this means in practice. In summary, we propose to: • Introduce an Overall Financial Adequacy Rule (OFAR), establishing the standard we will apply to determine if an FCA investment firm has adequate financial resources. • Place specific emphasis on FCA investment firms’ own risk management practices and governance responsibilities to determine the non‑financial and financial resources necessary on an ongoing basis, and to wind‑down. This will include holding additional own funds and liquid assets, where necessary. • Establish the ICARA process as the central means through which this is monitored and delivered by FCA investment firms. Our proposals include guidance for our expectations of the ICARA and management accountability to deliver this. • Provide specific guidance on what we expect of FCA investment firms at certain intervention points when they run into difficulties, and what they can expect from us. • Introduce an ICARA Questionnaire reporting template. • Establish how we will set FCA requirements following our review of an FCA investment firm’s ICARA, if this is necessary. Terminology 7.6 Our proposals in this chapter are commonly referred to under Basel Committee of Banking Supervisors (BCBS) terminology as ‘Pillar 2’. This is also a term used in our existing IFPRU rules (‘The overall Pillar 2 rule’). With the introduction of the IFPR and the move away from a deposit‑taker focused prudential regime, we are taking the opportunity to move away from BCBS terminology. 7.7 The firm’s responsibilities for risk management under ‘Pillar 2’ will be the ‘ICARA process’. Any further amounts that need to be held on top of the PMR, FOR or KFR from MIFIDPRU 4 will be an ‘additional own funds’ requirement. And any further liquid assets needed on top of the basic liquid asset requirement will be an ‘additional liquid assets’ requirement. The total own funds or liquid assets that the firm needs to hold to meet threshold conditions will be its ‘threshold requirement’. Introduction of the Overall Financial Adequacy Rule 7.8 Every FCA‑authorised firm must meet threshold conditions, requiring firms to have appropriate resources (see COND 2.4 Appropriate resources in the FCA handbook).

37 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms This means an authorised firm’s financial and non‑financial resources must be appropriate to the regulated activities it carries on or seeks to carry on. 7.9 We propose to introduce the Overall Financial Adequacy Rule (OFAR). This establishes the standard we will apply to determine if an FCA investment firm has adequate financial resources. OFAR will require an FCA investment firm, at all times, to hold adequate own funds and liquid assets to: a. to ensure it can remain viable throughout the economic cycle, with the ability to address any potential harm from its ongoing activities; and, b. to allow its business to wind‑down in an orderly way 7.10 Our proposals therefore provide an objective link between the financial resources an FCA investment firm holds under its IFPR requirements, and its threshold conditions. 7.11 We propose to monitor this by introducing the ‘own funds threshold requirement’ and ‘liquid assets threshold requirement’. FCA investment firms will determine these requirements through their ICARA process. These will represent the FCA investment firm’s view of what is required to meet the OFAR, unless we advise it otherwise. Not meeting these requirements would be evidence that the FCA investment firm had breached our threshold conditions. 7.12 We will expect the FCA investment firm to take action to address any breach. We may also make specific interventions. If these prove ineffective, we will expect the FCA investment firm’s governing body to determine it is unable to meet its threshold conditions and should begin winding down. ICARA process: Overview 7.13 We are proposing to introduce a requirement for all FCA investment firms to undertake an ICARA. The ICARA will be the centrepiece of an FCA investment firm’s risk management and will be a continuous process through which it should: • Identify and monitor harms: Operate systems and controls to identify and monitor all material potential harm. • Undertake harm mitigation: Consider and put in place appropriate financial and non‑financial mitigants to minimise the likelihood of crystallisation and/or impact of the material harm. • Undertake business model assessment, planning and forecasting: Forecasting capital and liquidity needs, both on an ongoing basis and were they to have to wind‑down. This must include expected‑ and stressed‑scenarios. • Undertake recovery action planning: Determine appropriate and credible recovery actions to restore own funds or liquid resources where there is a risk of breaching threshold requirements tied to specific intervention points. • Undertake wind‑down planning: Set out at entity‑level credible wind‑down plans, including timelines for when and how to execute these plans. • Assess the adequacy of own funds and liquidity requirements: Where, in the absence of adequately mitigating risks through systems and controls, the FCA investment firm assesses that additional own funds and liquid assets are required to cover the risk.

38 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Overview of the ICARA process Assessments and actions are conducted on the basis of business model planning, forecasting and stress-testing Firm determines degree to which systems & controls mitigate risk Firm identifies and monitors risk of harm Firm determines if additional own funds / liquidity required to mitigate residual risk Firm determines appropriate recovery actions to restore resources Firm determines wind down plan linked to resources and recovery actions 7.14 We propose that the assumptions behind an FCA investment firm’s ICARA process and its findings should be consistent and coherent. Any assumptions must make sense internally to the ICARA process and any findings should not be considered in isolation. This will help ensure the ICARA process is effective. Example 7.15 An FCA investment firm conducts a stress‑test and finds that it will breach its own funds requirement during a mild economic downturn. If it does not account for this as part of its capital management planning and its recovery planning, the assumptions in its ICARA process will not be consistent. 7.16 An FCA investment firm that links its wind‑down planning to specific indicators of success or failure in its recovery actions would demonstrate that the assumptions used in its ICARA process are consistent and coherent. 7.17 We propose that the FCA investment firm’s governing body will document and sign off this process annually. We are consulting on specific arrangements that will apply to investment firm groups. 7.18 The ICARA process will replace the current Internal Capital Adequacy Assessment Process (ICAAP) for FCA investment firms that are currently subject to IFPRU and BIPRU. Identifying harm 7.19 We propose that an FCA investment firm’s responsibilities under the ICARA will be to monitor and address both risks that it faces, and harm it can pose to clients, counterparties and markets. 7.20 Our conceptual view of harm is set out in ‘Our Mission 2017: How we regulate financial services’. FG20/1 explains that identifying and assessing the potential harm

39 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms to consumers and markets is a fundamental part of assessing adequate financial resources. 7.21 Our expectations for FCA investment firms when identifying harm will be proportionate to the amount of harm posed. This means that we will expect SNI firms to do a lower level of analysis than we would expect from non‑SNI firms. We expect that the larger trading firms will carry out a significant amount of analysis. 7.22 We have provided examples in Annex 1 of MIFIDPRU 7 of the types of potential harm that firms should consider. Risk mitigation 7.23 It is not possible or appropriate to mitigate every risk an FCA investment firm faces or harm it can pose to clients and markets. However, we do expect them to have considered, through the ICARA process, the appropriateness of different measures – financial and non‑financial – they can take. 7.24 It is likely that some FCA investment firms, if not most, will decide that non‑financial mitigants alone are will not appropriately address risks to their soundness or the crystallisation of harm. We expect all firms to have appropriate systems and processes in place to make this decision. 7.25 The application, and our expectations, will vary on a proportionate basis, reflecting the level of potential harm posed. We still expect that all FCA investment firms to approach this assessment using the following steps: • considering the risks before any controls are taken into account • assessing the significance of the risks and what controls are in place to mitigate them • assessing how much residual harm remains after applying the controls, and determine the necessary financial mitigants on that basis 7.26 Our proposed guidance recognises that an FCA investment firm may make use of non￾financial mitigation where appropriate. This includes: • implementing additional internal systems and controls • strengthening governance and oversight processes • changing how it undertakes certain lines of business The application and appropriateness of these measures should reflect the FCA investment firm’s risk appetite. 7.27 For example, an FCA investment firm that is particularly dependent on an IT platform for its revenue generation might improve its back‑up systems and servers to increase its resilience and minimise the risk of outages. Whereas one that has identified that it is at particular risk of money laundering, and consequent regulatory penalty and sanction, might put additional oversight and checks in place to strengthen its anti‑money laundering processes.

40 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.28 An FCA investment firm may find that a residual risk of harm remains in spite of the mitigation it has put in place. It then should decide if it should hold additional own funds and liquid assets, above the minimum requirements, to mitigate this. Business model assessment, forecasting and stress‑testing 7.29 The purpose of an FCA investment firm setting out its business model and strategy is to help it, and us, understand its vulnerabilities as a profit‑generating operation. Risks posed to an FCA investment firm’s capacity to generate sustainable profits have a clear impact on its ability to maintain adequate financial resources. 7.30 We propose that it is not enough for an FCA investment firm to only consider the impact of a business model and strategy on its current and future cash‑generative powers. We also expect it to identify misalignments between the business model and the interests of clients and the wider market. This is directly linked to one of the prudential drivers of harm identified in FG20/1 – if a business model can only be cash‑generative through activities that boost returns at the possible expense of consumers’ interests, for example through portfolio churning to boost fees, we are likely to consider this unacceptable. In such cases, we would expect the FCA investment firm’s senior management to have already reached the same conclusion. 7.31 Our proposals will require FCA investment firms to conduct a forward‑looking assessment of capital and liquidity requirements as part of business, capital and liquid assets planning. This must include an assessment of how a severe but plausible economic or idiosyncratic stress could affect the its ability to meet the OFAR. FCA investment firms should set out the assumptions that underpin their chosen scenarios, and the impact on individual business lines and portfolios, as well as the firm overall. 7.32 The following gives an example of how an FCA investment firm might consider its own funds resources and requirements under a scenario of economic stress. An example of the impact of economic stress Base case forecast Stressed scenario £m Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 CET 1 Capital 360 340 350 360 360 250 280 340 MIFIDPRU 4 requirement 100 Additional requirement 200 Threshold requirement 300 Capital surplus (deficit) 60 40 50 60 60 -50 -20 40 Own funds ratio 120% 113% 117% 120% 120% 83% 93% 113%

41 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Capital Stress scenario (£m) 0 50 100 150 200 250 300 350 400 Q1 Q2 Q3 Q4

Threshold requirement MIFIDPRU 4 requirement Own funds (stressed) Own funds (base scenario) Early warning notification The FCA investment firm has determined that its total own funds requirement is £300m. It holds £360m of own funds in Q1 then experiences a decrease in capital in Q2. In the stressed scenario, the increase is larger and causes a breach of its threshold requirement from which it does not fully recover until Q4. The FCA investment firm should account for this in the ICARA process through management actions, controls, or own funds it would apply to mitigate the impact of this scenario. 7.33 For larger or more complex businesses, for example, larger trading FCA investment firms, we are also proposing that they conduct reverse stress testing. We expect them to identify a range of adverse circumstances that would cause their business model to become unviable, and to assess the likelihood these will occur. Where this risk is found to be higher than the FCA investment firm’s risk appetite, we would expect it to take steps to mitigate it. This may include making appropriate changes to its business model or operating model. 7.34 Annex 1 to MIFIDPRU 7 includes guidance on the types of potential harm FCA investment firms might need to consider. Recovery planning 7.35 We propose that FCA investment firms should identify appropriate recovery actions as part of the ICARA process that will: • help them to avoid a breach of the OFAR • restore compliance with the OFAR where it is breached 7.36 We expect all FCA investment firms to do recovery planning. It covers identifying quantitative and, if appropriate, qualitative indicators that provide an early identification that the firm is running into capital and/or liquidity/funding difficulties. It also covers setting out credible management actions the FCA investment firm will take, linked to these indicators, to try to improve the situation.

42 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.37 Recovery planning needs to be linked to the firm’s own business model forecasting and scenarios. We expect FCA investment firms to consider how they would recover from a credible stressed scenario and prepare accordingly. 7.38 To be credible, a recovery action must have a reasonable likelihood of success in the context of the anticipated wider economic and business environment. But it must also set out the required governance arrangements to allow for executing the recovery action, and likely impediments to it such as requiring regulatory clearance to go ahead. A credible recovery plan will also set out what success looks like. This is important as we will expect FCA investment firms to begin carrying out their wind‑down plans where they have exhausted all credible recovery actions without success. We expect the ICARA to set out the assumptions underpinning recovery plans accordingly. 7.39 We recognise that there may be a considerable overlap between the recovery planning requirements set out for firms as part of their ICARA process and the current requirements in IFPRU 11. The Treasury published a consultation on the application of the UK resolution regime (including the IFPRU 11 requirements) to FCA investment firms in February 2021. As a result, we may amend our proposals to integrate the recovery planning requirements within the ICARA process. In our third consultation due in Q3 2021, we will set out in detail our planned approach for all the elements of IFPRU 11, once the outcome of the Treasury’s consultation is clear. Wind‑down planning and triggers 7.40 The purpose of wind‑down planning is to identify the scenarios that may lead to an FCA investment firm having to wind‑down, and how under those scenarios it would do so. The intention is to reduce the impact of an FCA investment firm’s exit from the market on its clients and the wider markets it serves. This includes inability to pay redress, inability to return or transfer client assets and money or to interrupt continuity of service. 7.41 We propose that FCA investment firms will, through their wind‑down plans: • identify the steps and resources needed to ensure the orderly wind‑down and termination of their business over a realistic timescale • evaluate the potential harm from winding down and actions required to mitigate this • apply consistent assumptions between these steps and other elements of the ICARA process, including business model forecasting and scenarios 7.42 Our expectations for wind‑down planning for FCA investment firms reflect our recently‑published guidance ‘Wind‑Down Planning Guide and Finalised Guidance’ (March 2021). 7.43 Wind‑down planning should also be reflected in the level of own funds and liquid assets the firm determines are necessary to ensure an orderly wind‑down (for the purposes of the overall financial adequacy rule). 7.44 We propose to introduce an ‘own funds / liquid assets wind‑down trigger’. The own funds wind‑down trigger is the higher of an FCA investment firm’s FOR, and any amount we set. The liquid assets wind‑down trigger is the higher of its basic liquidity liquid assets requirement and any amount we set.

43 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.45 The concept of wind‑down triggers will be new to FCA investment firms, so it is important that they familiarise themselves with our proposals. They are the minimum ring‑fenced amount of financial resources that an FCA investment firm should hold at all times to ensure that wind‑down can begin in an orderly way. 7.46 These triggers are separate from the Threshold Requirement. However, it is possible that the Threshold Requirement and the wind‑down trigger will be the same amount. This would be where we or the FCA investment firm have determined that the FOR and/or the basic liquid assets requirement are enough to meet the OFAR. Please refer to the diagrams in Annexes 3 and 4 to see how we anticipate this working. 7.47 If an FCA investment firm’s own funds fall below the own funds wind‑down trigger or if its liquid assets fall below the liquid assets wind‑down trigger, we would – in the absence of a governing body‑level determination of an imminent and credible likelihood of recovery – normally expect that it would start winding‑down. This would be preceded by a number of expected actions by the firm and potentially by us (as set out below in the section on ‘Interventions’). Assessing the adequacy of own funds and liquid assets 7.48 FCA investment firms should first consider how adequate their controls are when assessing what appropriate risk mitigation techniques can be used to address material harm. The FCA investment firm will need to hold own funds or liquid asset resources to comply with the OFAR where its controls alone are not enough to cover the risk. 7.49 We propose that FCA investment firms will need to consider the extent to which any residual risk is covered by its MIFIDPRU 4 own funds requirements and its MIFIDPRU 6 basic liquid asset requirement, when determining an appropriate level of own funds and liquid assets. 7.50 We will expect an FCA investment firm to compare the nature of the identified risk against what would typically be covered under the relevant requirement. Where it determines this is unlikely to be enough, additional financial resources may be needed. This is likely to be the case where the identified risk of harm is unusual or might be particularly severe. It will also be the case where the particular MIFIDPRU 4 requirement was not intended to address the identified risks. For example, risks from undertaking corporate finance activity are not addressed by any K‑Factor. FCA investment firms also need to consider the potential harm from any regulated activities that do not constitute MiFID business and from any unregulated activities, where, in each case, the harm may be material. 7.51 This determination should cover both the FCA investment firm’s ability to remain financially viable throughout the economic cycle, and to ensure it can wind‑down in an orderly way. Determining the own funds threshold requirement 7.52 The MIFIDPRU 4 own funds requirements are built around the PMR, the FOR, and, for non‑SNIs, the KFR. These requirements serve different purposes. The FOR is a proxy for the amount of own funds we would expect all investment firms to hold to allow them to begin wind‑down in an orderly way. The KFR is the amount of own funds

44 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms required to cover the risk of harm from the ongoing operation of the firm’s business. And the PMR is a flat minimum required to underpin the FOR and the KFR. Unlike the FOR and KFR, the PMR does not scale with harm. 7.53 The PMR and FOR are standard requirements that apply to all FCA investment firms. The KFR is a standard requirement that applies to non-SNI firms. Meeting these alone may not be enough to mean that they are meeting threshold conditions. This will depend on the size, business model and complexity of the FCA investment firm’s activities. 7.54 We propose that an FCA investment firm will need to estimate the financial impact of any harm that is not covered by its PMR, FOR or KFR. This will help it to determine the overall amount of own funds it will need to hold to meet the OFAR. This will be its ‘own funds threshold requirement’ and it will need to meet this requirement at all times. If it does not we propose that it will be in breach of threshold conditions. 7.55 We propose that FCA investment firms will set their own funds threshold requirement at the higher of the i) PMR, ii) own funds necessary to cover harms from ongoing operations, or iii) own funds as necessary for wind‑down. We may set this as a higher amount. Diagram 1 shows the process for this. 7.56 SNIs also need to consider the risk of harm from the ongoing operation of their business. If the SNI decides this harm can only be mitigated by holding own funds greater than the PMR or FOR, this becomes its own funds threshold requirement.

45 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Diagram 1: Process for calculating the own funds threshold requirement Firm identifies and measures risk of harm Assessment (A) from ongoing operations Assessment (B) from wind-down Firm determines degree to which systems & controls alone mitigate risk of harm Firm determines degree to which systems & controls alone mitigate risk of disorderly wind-down For ongoing operations For non-SNI firms the starting point will be the K Factor requirement (KFR). The firm may determine the K Factor is insufficient and additional own funds necessary* For SNI firms this is a stand alone assessment** For wind-down For both SNIs and non-SNI firms the starting point will be the fixed overheads requirement (FOR). The firm may determine the FOR is insufficient and additional own funds necessary* If own funds required to cover residual risk, firm determines the appropriate amount The firm’s own funds threshold requirement is the higher of***: • Assessment (A) • Assessment (B) • The firm’s PMR The FOR is always the firm’s own funds wind-down trigger***

• The own funds threshold requirement cannot be lower that the KFR or the FOR. ** The KFR does not apply to SNI firms and the PMR is not linked to harm. *** Unless we specify otherwise. 7.57 We do not propose to allow: • a firm to determine that its own funds threshold requirement is lower than its minimum binding requirement from MIFIDPRU 4 • the firm to attribute the component parts of its KFR to address other sources of harm 7.58 An FCA investment firm may determine internally that a particular requirement is too high for the given source of harm. Under our proposals we will not allow its determination of any ‘excess’ to be used to address other sources of harm. Each component of the KFR is the minimum that we believe is necessary to address that source of harm, and we do not propose to allow it to be used for other purposes. 7.59 Diagram 2 below illustrates how we expect firms to take this into account.

46 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Diagram 2: Showing that FCA investment firms cannot take account of any ‘excess’ they have identified K-AUM K-CMH 60 100 80 Firm’s estimate K-AUM K-AUM Estimate of additional capital required for K - AUM (40) K-CMH K-CMH Firm’s assessment 180 Actual requirement req) 60 (Threshold 20 100 60 40 100 200 req) (Threshold Discrete assessments Aggregation A B C D (A) An FCA investment firm has assessed that its K‑AUM requirement is not enough to address the risk of harm posed by its asset management activities. It decides it is appropriate to hold an additional 40 to address this. (B) It then assesses that its K‑CMH requirement of 100 is excessive for the risk posed in holding client money, in the firm’s view 80 would be enough. (C) Under our proposals the FCA investment firm is not permitted to offset the additional own funds required for the AUM risk with its view on the excess required for the CMH. (D) It must aggregate the K‑AUM and K‑CMH requirements and the additional identified as necessary for AUM. K‑AUM 60 + Additional AUM 40 + K‑CHM 100 = 200 Threshold Req. This is because the KFR requirement is a minimum, and each component requirement is discrete from the others. 7.60 The illustrations in Annex 3 provide examples of how non‑SNIs and SNIs will go about determining the own funds threshold requirement necessary to meet the OFAR. They also set out how the wind‑down trigger (see above) and early warning indicator (see below) are calculated. 7.61 We propose that FCA investment firms should meet any own funds threshold requirement using the same proportions of own funds as set out in MIFIDPRU 3 (see CP20/24), ie at least: • 75% of the own funds threshold requirement must be met by the sum of common equity tier 1 capital and additional tier 1 capital • 56% of the own funds threshold requirement must be met with common equity tier 1 capital

47 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Determining the liquid assets threshold requirement 7.62 The basic liquid assets requirement is based on FCA investment firms having a minimum amount of core liquid assets that will allow them to begin wind‑down in an orderly manner. Meeting this requirement may not be enough to mean that they are meeting threshold conditions. This will depend on the size, business model and complexity of the FCA investment firm’s activities. 7.63 We propose that an FCA investment firm will need to determine if it should hold additional liquid assets to fund its ongoing business and ensure it can be wound down in an orderly way. This total amount will be its ‘liquid assets threshold requirement’ and an FCA investment firm will need to meet this requirement at all times. If it does not it will be in breach of threshold conditions. 7.64 We propose that FCA investment firms will set their liquid assets threshold requirement as the sum of the basic liquid assets requirement and the higher of: • the additional liquid assets necessary at any given point in time to fund ongoing operations, taking into account potential periods of financial stress during the economic cycle • the additional liquid assets required to begin its orderly wind‑down, taking into account inflows of liquid assets that can be reasonably expected to occur during the wind‑down period Diagram 3: Process for calculating the liquid assets threshold requirement Firm identifies and measures risk of harm Assessment (A) from ongoing operations Assessment (B) from wind-down Firm determines degree to which systems & controls mitigate risk Firm determines degree to which systems & controls mitigate risk Firm produces a reasonable estimate of the amount of liquid assets it needs to fund its ongoing business operations at any given point in time, taking into account periods of stress in the economic cycle* Firm produces a reasonable estimate of the additional** amount of liquid assets it would require to commence its wind-down process to ensure an orderly wind-down The firm’s liquid assets threshold requirement is the sum of***: i) the basic liquid asset requirement and ii) the higher of: assessment (A) and assessment (B) The basic liquid asset requirement is always the firm’s liquid assets wind-down trigger ***

• FCA investment firms are reminded that when they assess the amount of liquid assets they need for ongoing operations they cannot use the value of the core liquid assets to meet the basic liquid assets requirement. ** The basic liquid assets requirement may not be enough to provide the liquid assets the FCA investment firm has assessed as necessary to facilitate orderly wind‑down. It may need to hold an additional amount of liquid assets for its funding needs at the start of the wind‑down process. *** Unless we specify otherwise.

48 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Liquid assets to fund ongoing operations 7.65 When assessing the amount of liquid assets required to fund its ongoing business operations, an FCA investment firm should consider, among other factors: • the basic level of liquid assets that would typically be required to operate the firm’s underlying business • any material harms that may realistically occur during the next 12 months and their potential impact on the firm’s liquidity position • any liquid assets that a firm may need to use as collateral or to meet margining requirement • any estimated funding gaps including during periods of stress 7.66 The liquid assets an FCA investment firm requires at any given time may fluctuate. This depends on the timing of a firm’s expected liabilities and the nature of its business. Therefore, a firm should divide the 12‑month period after its ICARA assessment date into quarters and assess the highest amount of liquid assets that it would require at any given time in each quarter. 7.67 We recognise that forecasts of the liquid assets required may become less accurate for later quarters. However, we expect FCA investment firms to use a 12‑month time horizon in the ICARA process to ensure it gives enough attention to potential harms and significant liquidity outflows that may occur during that period. It should also adequately assess how it aims to mitigate them by holding additional liquid assets to cover potential shortfalls. The proposed ICARA Questionnaire (MIF007) will require firms to input their liquid assets values for each of the forthcoming quarters. 7.68 The purpose of the basic liquid assets requirement is to ensure that an FCA investment firm always has a minimum stock of liquid assets to fund the initial stages of its wind‑down process if needed. So they cannot use the value of the core liquid assets that they hold to meet the basic liquid assets requirement for the liquidity needs of their ongoing business. 7.69 We propose that an FCA investment firm’s liquid assets threshold requirement, cannot be lower than the basic liquid assets requirement. Non‑core liquid assets 7.70 Our proposals for core liquid assets to meet the basic liquid asset requirement are described in Chapter 6 of this CP. We also propose in MIFIDPRU 7 to introduce the concept of non‑core liquid assets. These are liquid assets that are not core liquid assets, but can still easily and promptly be converted into cash, even in stressed market conditions. Examples include liquid non-UK government bonds or other liquid financial instruments. We have proposed guidance on the types of features we expect FCA investment firms to take into account when deciding if an asset qualifies as a non‑core liquid asset. 7.71 FCA investment firms will not be able to treat as a non‑core liquid asset any asset that: • belongs to a client • is encumbered • is issued by the firm or an affiliated entity

49 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.72 FCA investment firms will have to consider applying ‘haircuts’ to determine the value of non‑core liquid assets that contribute to meeting the liquid assets threshold requirement. The haircut should reflect the potential loss of value when converting the asset into cash during stressed market conditions. We have proposed guidance on the minimum haircuts we expect FCA investment firms to apply for different types of non‑core liquid asset. 7.73 We propose that FCA investment firms will be able to hold any combination of non‑core liquid assets and core liquid assets to comply with the portion of the liquid assets threshold requirement that is above the basic liquid assets requirement. 7.74 The illustrations in Annex 4 give examples of how FCA investment firms will go about determining the liquid assets threshold requirement necessary to meet the OFAR. They also set out how the liquid assets wind‑down trigger is calculated. Our approach to notification and intervention 7.75 Our proposals should provide greater transparency for our expectations of the actions we expect FCA investment firms to take in certain situations. These should be supported by and linked to their recovery action or wind‑down plan as set out in the ICARA. Our proposals also clarify what firms can expect from us if we feel it necessary to intervene through a supervisory response outside of the SREP. We refer to these as intervention points. 7.76 FCA investment firms should note that the invention points are just a guide for what they can expect from us. We reserve the right to make interventions as we see fit in order to secure our objectives. In most circumstances though, we would expect to follow this framework. 7.77 We propose to introduce notification requirements for FCA investment firms. This will support our supervisory assessment of firms and monitoring of own funds and liquid asset intervention points. They will ensure that we are provided with the necessary information from an FCA investment firm if it meets an intervention point. Our proposals do not replace firms’ existing notification obligations and Principle 11 and SUP 15.3. 7.78 We propose that we are notified with the following types of information: • the FCA investment firm’s current resources compared to threshold requirements • an explanation of why the resources have reached this level • actions it is taking to address the situation • its intentions about wind‑down (if relevant)

50 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.79 In our proposed rules we set out the following intervention points and their notifications: Intervention point Notification requirement Intervention actions Early warning indicator (own funds only) Sent by the firm when its own funds resources fall to within 110% of the own funds threshold requirement (or as required by the FCA). Provides us with an early warning indication that the firm could be facing risks to its financial resilience. At this point we would expect firms to have taken any relevant actions in their recovery plan. For example, if a firm’s recovery plan identifies that own funds resources falling below 115% of the threshold requirement is a trigger for management consideration of various recovery actions, we would expect to see evidence that this has occurred at this point. If we have specific concerns about the firm’s ability to continue to meet its threshold conditions, and the credibility of its proposed response, we may intervene. For example, we may request that aspects of the recovery plan are triggered, that the firm cease discretionary capital distributions, and/or that the firm provide us with enhanced reporting of its situation. The early warning indicator should not be seen as an additional FCA‑set own funds requirement. If there is a sound reason for a firm to be within 110% of its threshold requirement, it is sufficient simply that we are informed and kept up‑to‑date on events. For example, if the firm has identified and accounted for this in scenario planning and/or it is necessary for the purposes of undertaking an important strategic action. Threshold requirements breach (own funds & liquid assets) Sent by the firm when its own funds or liquid assets fall below the respective threshold requirement. Makes aware that the firm no longer meets it threshold conditions. At this point, the focus for us and the firm should very much be on the firm’s recovery, unless the firm chooses to exit the market by voluntarily winding down. However, any proposed actions for recovery must be credible and achievable within a reasonable and realistic timeframe. As set out in our proposed rules, at this point we will have expected that the firm will have triggered all relevant recovery actions, and ceased all discretionary distributions and payments. If necessary, we may intervene to secure our objectives, for example through requesting that the firm’s parent entity provide additional own funds to the firm, and/or placing restrictions on activities the firm can undertake until its situation improves. Wind‑down trigger (own funds & liquid assets). Sent by the firm when its own funds resources fall below the FOR, or its liquid assets fall below the basic liquid assets requirements (or other amounts as set by the FCA). Makes us aware that the firm is now making a decision on if to wind‑down. To maximise the potential for an orderly wind‑down, we will expect a firm that breaches this trigger normally starts winding down immediately, according to its wind‑down plan. If necessary, we may intervene in order to secure our objectives, for example through taking action to protect any client money or client assets, and/or preventing the firm from continuing to carry on regulated activities.

51 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Reviewing and documenting the ICARA process 7.80 We propose that FCA investment firms review their ICARA process at least once every 12 months. They should also review this immediately following a material change in their business model or operating model. We expect larger or more complex FCA investment firms to consider if a half‑yearly review basis is more appropriate. 7.81 We also propose that this review is documented by the FCA investment firm in an ‘ICARA document’. This document must contain: • A clear description of its business model and strategy. • An explanation of the activities it carries out, with a focus on the most material activities. • An explanation of why it has concluded its ICARA is fit for purpose. Or, where this isn’t the case, an explanation of the deficiencies identified, the steps taken to remedy them, and who is responsible for implementing any remedies. • An explanation of any other changes to the its ICARA process that have occurred following the review and the reasons for those changes. • An analysis of the effectiveness of its risk management processes during the period covered by the review. • A summary of the material harms it has identified and any steps taken to mitigate them. • An overview of its business model assessment and capital and liquidity planning. • An explanation of how it is complying with the OFAR. This should include a clear break‑down at the review date of available own funds, available liquid assets, and its assessment of its threshold requirements. • A summary of any stress testing and reverse stress testing it has carried out. • An overview of its wind‑down planning, including any key assumptions or qualifications. Governance and Senior Manager oversight of ICARA 7.82 It is important that senior management’s responsibility for the ICARA process is clearly understood. Under our proposals, the ICARA process is central to an FCA investment firm’s management of the risks that they face and pose to others. The ICARA process brings together planning and forecasting, risk identification, assessment and mitigation, recovery and wind‑down planning. It is the responsibility of the FCA investment firm’s senior management to ensure the process meets our expectations. We will hold senior management and governing bodies responsible for this, and our proposals clarify FCA investment firms’ risk management responsibilities under SM&CR. 7.83 We propose that the FCA investment firm’s governing body must review and approve the content of the ICARA document within a reasonable period after the review has been completed. 7.84 Because we view the ICARA process as a key requirement of the regulatory system for investment firms, we expect that Senior Managers will take an active role in contributing to the required analysis and embedding the requirements in their business areas. We refer these staff to the relevant provisions in COCON, specifically COCON 3 and 4.

52 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms The ICARA Questionnaire 7.85 We propose to replace the Pillar 2 reporting template (FSA019) with the ICARA Questionnaire reporting template (MIF007 – see Chapter 13). This Questionnaire will only require FCA investment firms to report the key information they will have prepared as part of their ICARA process, so the reporting burden will be low. For example, we will be asking for a breakdown of the additional own funds required based on the analysis of harms. The Questionnaire will also ask some questions about the firm’s business model so that we can understand more about the business activities of firms, where no changes in regulatory permissions are needed. 7.86 Key dates that firms will need to be aware of in the ICARA process are: • The ICARA reference date: the date on which the underlying data used to carry out the review of the ICARA process were prepared • The ICARA review date: the date on which an FCA investment firm’s review of the ICARA process is carried out • The ICARA submission date: the date on which the ICARA Questionnaire (MIF007) is submitted to us 7.87 We expect FCA investment firms to design their ICARA process review and reporting timetables so that the time between the reference date and review date, and the review date and submission date is reasonable. This means the assessment will be robust and using relevant timely data. And that we will receive timely information on the outcomes of the ICARA process. 7.88 We propose to allow FCA investment firms the flexibility, in the first instance, to adopt an ICARA review and reporting timetable that fits best with their internal processes. We will be requiring FCA investment firms to notify us of the date on which they will submit MIF007. 7.89 We reserve the right to specify that an FCA investment firm uses a different submission date if we do not feel that we are receiving the ICARA Questionnaire in a timely manner. An FCA investment firm will be able to notify us to amend the submission date as long as there is not more than 12 months between submissions. Firms should also resubmit MIF007 before their next annual submission if there is a significant change in its business or operating model, or due to external factors. 7.90 We are considering introducing additional reporting templates to complement the ICARA Questionnaire. These would be used when we have concerns about an FCA investment firm’s prudential position or where our peer analysis indicates outliers. An example is a template that asks FCA investment firms to report a breakdown of their core and non‑core liquid assets balances by types of liquid asset. Any additional reporting forms will be consulted on in the usual way. Record keeping requirements 7.91 We propose that FCA investment firms keep adequate records, for at least 3 years from the date on which the relevant document was finalised, of their ICARA documents. We also propose they keep documentary evidence of the review and approval of the ICARA document by their firm’s governing body for the same amount of time.

53 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Firms forming part of a group 7.92 Many FCA investment firms are part of larger groups and some groups may contain several investment firms. The ICARA process should be consistent with the basis on which they manage their business and risks on a day‑to‑day basis. So we propose that FCA investment firms which are part of investment firm groups (as defined in our rules) have the option to conduct the ICARA process on a group‑basis, unless we give specific direction otherwise, if that reflects their wider risk management framework. If we are not satisfied with how the ICARA process is being operated or documented on a group level, we may ask for it to be done at an individual FCA firm basis. A group to which MIFIDPRU 2.5 applies is not required to operate the ICARA process on a consolidated basis. 7.93 In any case, each FCA investment firm must still comply with the OFAR on an individual basis and any additional own funds or liquidity resources required should be allocated to the individual entities. Each entity must also have its own specific wind‑down plan including wind‑down triggers. Own funds and liquidity intervention point notifications will also apply on an entity basis. 7.94 As part of their ICARA process, FCA investment firms should also consider any material risks from membership of their group. Where risks are managed on a group basis, the risk management must be done either by an entity which is subject to MIFIDPRU (whether the firm itself or another MIFIDPRU investment firm in the group) or the firm’s UK parent entity. It cannot be undertaken by another type of regulated or unregulated firm 7.95 The ICARA document must be approved by the governing body of the entity which carries out the risk management. Groups with multiple FCA investment firms can produce 1 combined ICARA document that sets out how risks are managed on a group and individual‑entity basis. It should also explain how each individual‑entity complies with the requirements that are applied to it. This includes how each individual‑entity complies with the OFAR and its wind‑down planning. This is because the solvency of FCA investment firms is assessed on this basis, and wind‑down happens on an individual‑entity basis. Supervisory Review and Evaluation Process (SREP) 7.96 We are changing the way we do many things as part of Transformation, including how we assess firms’ prudential standing. Assessing whether an FCA investment firm continues to meet threshold conditions is an important role of supervision and the SREP is one of our key tools for assessing its compliance with the OFAR under the IFPR. We use the SREP to carry out the prudential aspects of our strategic objective – to ensure that relevant markets function well – and to meet our 3 operational objectives. 7.97 With the introduction of the IFPR, we propose to re‑orientate our approach to SREP. We propose to move away from a minimum SREP cycle for most FCA investment firms currently subject to one. Instead we will use a harm‑led approach. We will gather intelligence from a range of sources, not least through benchmarking of FCA firm reporting and the data provided in the ICARA Questionnaire. We may still apply a minimum SREP cycle to certain firms which present a higher risk of harm. We may also undertake multi‑firm review work (eg sectoral reviews) in line with our priorities.

54 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms What firms can expect from us 7.98 When conducting a SREP, we propose to normally consider information from the ICARA document, as well as any other relevant information provided by the FCA investment firm. This could be from reporting, by interviews with the firm or other information we may request for the purposes of the SREP. 7.99 We propose to consider a variety of factors as part of the SREP, such as: • the extent to which the FCA investment firm’s risk management framework defines its risk appetite • the FCA investment firm’s governance, including whether there are clear lines of accountability and evidence of appropriate senior management involvement • whether the FCA investment firm has appropriately identified and assessed the materiality of the harm that may arise from its ongoing operations and from a disorderly wind‑down • whether the FCA investment firm has adequate systems and controls in place to monitor and manage the risks from its business • the FCA investment firm’s integration of its ICARA process into its day‑to‑day decision making • whether the FCA investment firm has adequate own funds and liquid assets to comply with the OFAR • whether the FCA investment firm’s capital and liquidity planning and business model analysis (and, where applicable, more detailed stress testing and reverse stress testing) is based on plausible and relevant scenarios, linking to our expectations on the consistency and coherence of the ICARA process • whether the FCA investment firm’s wind‑down planning assessment is adequate, contains a clear explanation of the key steps needed to ensure an orderly wind‑down, and is based on realistic assumptions 7.100 A SREP may be more or less extensive, depending on the nature of our concerns and the potential degree of risk posed by the FCA investment firm or group. In certain cases, we may decide to limit our review to only some of the information and factors that we would normally consider. When and how we will set additional requirements 7.101 Once the SREP is complete, we propose to consider whether any action is needed to ensure an FCA investment firm • is complying with the OFAR • is appropriately managing its risks • does not have a funding profile that indicates that there may be a significant liquidity mismatch between amounts payable and receivables • has adequate plans in place to prevent a disorderly wind‑down. These actions may involve issuing guidance or placing additional requirements on the firm. 7.102 The actions that we may take include: • requiring an FCA investment firm to hold additional own funds or liquid assets • directing an FCA investment firm to implement new risk management or governance arrangements

55 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • imposing additional reporting requirements on a firm • directing an FCA investment firm to hold an own funds or liquid assets in excess of the amounts necessary to comply with the OFAR • withdrawing a permission previously granted under MIFIDPRU to apply a specific treatment such as a K‑CMG permission, or a permission to use an internal model for the purposes of the K‑NPR requirement • requiring the firm to adopt a different wind‑down trigger 7.103 If we conduct a sectoral review, we may specify an additional amount of own funds or liquid assets that all FCA investment firms in that sector should hold, or other measures, without conducting an individual SREP for each one. 7.104 Following a SREP we will let the FCA investment firm know if we are placing any additional requirements on it and why we are. These requirements may include specifying the amount of own funds or liquid assets that the FCA investment firm must hold to meet the OFAR. This amount will become its own funds or liquid assets threshold requirement. 7.105 If subsequently, as part of the ICARA process, the FCA investment firm assesses that it should hold a higher amount of own funds or liquid assets, this amount will become its threshold requirement. FCA investment firms are still required to meet the OFAR at all times. 7.106 We may specify an own funds or liquid asset threshold requirement which exceeds those identified by the FCA investment firm in situations that include: • its business may result in material harm that has not otherwise been adequately mitigated • the way it operates its business suggests that there is a significant risk that it will fail to comply with the OFAR within a reasonable period • its funding profile indicates that there may be a significant liquidity mismatch between amounts payable and receivables • its wind‑down plan does not contain realistic wind‑down triggers • we have significant concerns over its risk management 7.107 We propose that we may set an own funds threshold requirement as: • a percentage of the firm’s MIFIDPRU 4 own funds requirement, • a requirement based on applying a modified co‑efficient to one or more K‑factor metrics for the purposes of the KFR • a fixed amount 7.108 An FCA investment firm must meet its basic liquid assets requirement using core liquid assets. We propose that usually the liquid assets threshold requirement can be met using core and non‑core assets. However, in some cases, we may require an FCA investment firm to meet all or part of its liquid assets threshold requirement with a more limited subset of liquid assets or for it to apply modified haircuts to non‑core liquid assets. 7.109 We propose that any additional requirements following a SREP may be set by individual guidance or by applying a requirement to the FCA investment firm. Where possible, we will invite the FCA investment firm to apply for a voluntary requirement (VREQ). We reserve the right to use an own initiative requirement (OIREQ).

56 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 7.110 Other actions we may take, depending on the concerns we have, include varying or cancelling some or all of an FCA investment firm’s permissions, imposing a requirement on a parent undertaking, or requiring a report by a skilled person. How requirements will be updated 7.111 An FCA investment firm’s business model may change significantly, meaning the requirement we specified no longer aligns with the amount of own funds or liquid assets that the firm requires to comply with the OFAR. In this case, the FCA investment firm should reassess its threshold requirements and may contact us to request a review. If we update the review and then agree with the FCA investment firm’s assessment, we may remove or amend the FCA‑specified requirement. Transition 7.112 FCA investment firms that have been set Individual Capital Guidance or Individual Liquidity Guidance should contact us to discuss how they can transition to the new threshold requirements. Bringing this all together – our expectations 7.113 Our proposals are a significant change from the current approach. It may take FCA investment firms time to adapt to the changes and new expectations. We may decide that additional rules and/or guidance are required, both following feedback to this consultation and after the rules have come into force, based on the experience we and investment firms have adapting to the new approach. 7.114 Diagram 4 is intended to help FCA investment firms understand how we see this process coming together. It shows both the discrete and continuous actions that we and they will have to undertake and how they interact. This diagram is illustrative and is not intended to reflect all the aspects of our proposals. Diagram 4: Actions under the ICARA process Firm Actions FCA Actions Continuous actions Discrete actions Firm undertakes 12-/ 6-monthly ICARA review to assess the ICARA’s compliance with the component elements set out in MIFIDPRU 7 (MIFIDPRU 7.8). This is documented and signed off by the Governing Board (MIFIDPRU 7.10). Firm notifies the FCA of the outcome of its assessment through submission of the ICARA Assessment Questionnaire (MIFIDPRU 9.2). Firm notifies the FCA if it is in difficulty and/or has met an intervention point (MIFIDPRU 7.6 & 7.7). FCA undertakes SREPs based on determined level of harm-posed, at an individual firm- or sectoral-level (MIFIDPRU 7.10). Firm complies on an ongoing basis with the outcome of its ICARA assessment (MIFIDPRU 7.4). Firm provides regular regulatory reporting (MIFIDPRU 9). FCA undertakes continuous monitoring and benchmarking of firm based on regulatory reporting, the Questionnaire, and other relevant sources (MIFIDPRU 7.10).

57 CP21/7 Chapter 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Questions Q11: Are our expectations of firms regarding the ICARA and meeting the OFAR sufficiently clear? If not, which areas would benefit from further clarification? Q12: Is the rationale for and explanation of the own funds and liquid assets wind‑down trigger sufficiently clear? If not, which areas would benefit from further clarification? Q13: Do you agree with our proposal to use an early warning indicator? Q14: Do you agree with our proposed approach to the ICARA for firms forming part of a group?

58 CP21/7 Chapter 8 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 8 Governance 8.1 Effective internal governance arrangements help a firm to achieve its strategic objectives while also ensuring that risks to the firm, its stakeholders and the wider market are effectively identified, managed and mitigated. 8.2 In this chapter we describe our proposals for: • internal governance and controls • which FCA investment firms must establish risk, remuneration and nomination committees • the composition and role of these committees Internal governance and controls 8.3 Given the diversity of FCA investment firms, we propose to set out high‑level requirements on firms’ internal governance to ensure minimum standards in all of them. Under our proposals, all FCA investment firms must have robust governance arrangements that include: • a clear organisational structure with well defined, transparent and consistent lines of responsibility • effective processes to identify, manage, monitor and report the risks they are or might be exposed to, or pose or might pose to others • adequate internal control mechanisms, including sound administration and accounting procedures 8.4 We consider these general requirements are sufficiently flexible to allow each firm to develop and maintain internal governance arrangements appropriate to its legal and ownership structure, business model, the activities it carries out, and the risks the firm is exposed to or might pose to others. 8.5 In meeting these requirements, FCA investment firms must also comply with: • our proposed rules on risk management (set out in Chapter 7) • our proposed MIFIDPRU Remuneration Code (set out in Chapters 9 to 12) and any other remuneration rules to which the firm may be subject • all other relevant requirements in the Senior management arrangements, Systems and Controls sourcebook (SYSC) of our Handbook 8.6 A firm’s internal governance and controls should always be appropriate and proportionate to the nature, scale and complexity of the risks inherent in its business model and activities. As part of MIFIDPRU 7, we propose to give guidance on the minimum criteria that an FCA investment firm should take into account. These include: • whether it is subject to basic, standard or extended remuneration requirements (see Chapters 9 to 12) • its legal form, including its ownership and funding structure

59 CP21/7 Chapter 8 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • whether it is part of a group • the type of activities for which it is authorised, including their complexity and volume • its business model and strategy, including risk strategy, risk appetite and risk profile • its types of clients • its outsourced functions and distribution channels • its existing IT systems, including continuity systems Risk, remuneration and nomination committees 8.7 Establishing committees helps management bodies in their supervisory function. Committees draw on the specific knowledge and areas of expertise of individual management body members. While committees should prepare decisions and make recommendations to the management body in its supervisory function, the management body has overall responsibility. Firms in scope 8.8 We propose to require the largest non‑SNI firms to have risk, remuneration and nomination committees. A non‑SNI firm would be subject to this requirement if: • the value of its on‑and off‑balance sheet assets over the preceding 4‑year period is a rolling average of more than £300m, or • the value of its on‑and off‑balance sheet assets over the preceding 4‑year period is a rolling average of more than £100m but less than £300m, and it has trading book business of over £150m and/or derivatives business of over £100m 8.9 Our proposal would replace the current requirement for ‘significant IFPRU firms’ to establish these committees. While the new requirement will mean more FCA investment firms needing to establish committees, we believe it is appropriate and in line with the wider objectives of the IFPR to apply the same rules to all MiFID investment firms meeting the criteria above. 8.10 Similarly, retaining the conditions and thresholds associated with the definition of ‘significant IFPRU firm’ would mean combining elements of the current prudential regime with those of the IFPR. It would also add an additional layer of complexity to the new regime. 8.11 We would encourage non‑SNI firms outside the scope of our proposed requirement to consider whether establishing or maintaining risk, remuneration and/or nomination committees might benefit their internal governance. Committees at individual entity and investment firm group level 8.12 We propose to require the non‑SNI firms in scope of this requirement to establish the 3 committees at individual entity level. This would ensure they provide focused support and advice to the firm’s management body. 8.13 We received feedback to our discussion paper, ‘DP20/2 – A new UK prudential regime for MiFID investment firms’ from industry stakeholders who argued that having committees at individual entity level could result in duplication of structures and

60 CP21/7 Chapter 8 Financial Conduct Authority A new UK prudential regime for MiFID investment firms tasks, particularly in FCA investment groups with multiple non‑SNI firms. They also pointed out that groups frequently manage their risks and remuneration policies primarily at group level, meaning that separate committees in each entity may result in fragmentation and have a negative impact on the FCA investment firm’s overall risk management. 8.14 We have listened to this feedback and propose to permit firms to apply to us for a modification of the requirement to establish 1 or more of the committees at individual entity level. 8.15 An FCA investment firm would need to set out in its application why it considers setting up the relevant committee at individual entity level would be unduly burdensome. It would also need to explain how relying on the group level committee would not adversely affect any of the FCA’s 3 operational objectives. This may be done by demonstrating that the group level committee meets the composition requirements set out below, and has members with appropriate knowledge, skills and expertise on the individual entity. 8.16 Modifying the committees requirement may also be relevant to FCA investment firms permitted to use the group capital test. This is because ‘group level’ in this context refers not to the prudential consolidation group but to the UK parent undertaking and its subsidiaries (investment firm group). 8.17 Firms should use our standard waivers and modifications form for these applications. 8.18 We intend to take the following approach to FCA investment firms that are currently ‘significant IFPRU firms’ and have waivers or modifications of the existing requirements: • If a firm has an existing waiver or modification that expires before 31 December 2021, it should apply to renew it before the date of expiry. A firm should indicate in its application whether it expects to be in scope of the committees requirement under the new regime. Where this is the case, we will consider whether it is appropriate to grant the waiver or modification so that it transfers to the new regime. • If a firm has an existing waiver or modification that expires after 31 December 2021, we will transfer it automatically to the IFPR regime. Upon expiry, the firm will need to submit a new application if it wants to continue to rely on the waiver or modification. 8.19 If a significant IFPRU firm no longer requires its waiver or modification because it will not be subject to the committees requirement under the new regime, the waiver or modification will automatically fall away. 8.20 If a firm is not a significant IFPRU firm and expects to be in scope of the committees requirement under the new regime, it may make a waiver or modification application. We would encourage firms to submit their applications as early as possible after summer 2021 to ensure the application can be determined in time for the start of the new regime. 8.21 Our general approach to applications under the IFPR is in Chapter 15.

61 CP21/7 Chapter 8 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Composition of committees 8.22 We propose to require firms in scope of the committees requirement to ensure at least 50% of members of each of the 3 committees are non‑executive members of the management body. This must include the committee chair. For example, if a committee is composed of the chair and 2 further members, the chair and 1 of the other members must be non‑executives. This composition rule would apply to FCA investment firms with legal structures which permit them to have non‑executive members of their management body. 8.23 We consider that this would ensure the committees are sufficiently independent from the executive to be able to prepare decisions for and make recommendations to the management body. At the same time, it would not place an undue burden on FCA investment firms to recruit large numbers of non‑executives. 8.24 Committees in FCA investment firms outside the scope of the committees requirement would not be subject to this rule on composition. 8.25 We do not propose as part of this consultation to introduce requirements on the diversity of committee members. As part of our broader work on diversity and inclusion, we will consider whether it would be appropriate for us to introduce further requirements on the diversity of management body members. Role of committees 8.26 Our proposals for a new MIFIDPRU Remuneration Code in Chapters 9 to 12 give examples of how we consider an FCA investment firm’s remuneration committee should be involved in establishing, implementing and monitoring the firm’s remuneration policies and practices. 8.27 We do not propose to set out the role of each of the committees in more detail, as this should be decided by the FCA investment firm’s management body. The UK Corporate Governance Code also provides a guide to standards of internal governance policies and practices. Senior Manager Functions 8.28 Under the SM&CR, an FCA solo‑regulated firm is an Enhanced firm if it meets any 1 of 6 criteria. One of these is being a ‘significant IFPRU firm’. 17 Senior Manager Functions (SMFs) apply to Enhanced firms. These include the Chair of the Risk Committee (SMF10), Chair of the Remuneration Committee (SMF12) and Chair of the Nomination Committee (SMF 13). An Enhanced firm must only have an individual approved for an SMF if the role exists in that firm. 8.29 Our proposals may mean that a small number of firms that are not ‘significant IFPRU firms’ but are Enhanced firms under the SM&CR will need to establish committees. This would mean they would also need to appoint a chair, who would need to be approved as an SMF10, SMF12 or SMF13. 8.30 Firms should note that anyone who is to perform an SMF needs to be approved by us before they can start their role. You can find more information, including how to apply for approval of an SMF, on our SM&CR webpage for solo‑regulated firms.

62 CP21/7 Chapter 8 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Consequential changes to internal governance rules 8.31 Some sections of SYSC contain governance requirements which overlap with or are closely related to our proposals on internal governance and committees. Many of the provisions apply to only some MIFIDPRU firms, for example those currently classified as significant IFPRU firms or BIPRU firms. Some also apply to other types of firms we regulate, such as banks and designated investment firms. 8.32 In our next IFPR consultation we will propose changes to the SYSC governance requirements which result from our proposals in this CP and CP20/24. This may include replicating in or moving some provisions into MIFIDPRU 7. Q15: Do you have any comments on our proposals for high‑level rules on internal governance and controls? Q16: Do you agree with our proposals to require certain non‑SNI firms to have a risk committee, remuneration committee and nomination committee?

63 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 9 MIFIDPRU Remuneration Code: scope and application 9.1 In this chapter, we set out the proposed scope and application of our new remuneration regime for FCA investment firms. The draft rules and guidance are in SYSC 19G and in the revised version of our General guidance on the application of ex post risk adjustment to variable remuneration (Appendix 2). 9.2 This chapter covers: • overview of our approach • scope and application to firms • scope and application to individuals 9.3 In Chapters 10, 11 and 12, we cover the remuneration requirements applicable to different categories of FCA investment firms. Firms should read these chapters as follows: Table 3: Relevant chapters on remuneration by category of FCA investment firm Category of FCA investment firm Chapters on remuneration SNI firms Chapter 10 Non‑SNI firms which do not meet the conditions set out in paragraph 9.22 below Chapters 10 and 11 Non‑SNI firms which meet the conditions set out in paragraph 9.22 below Chapters 10, 11 and 12 9.4 We set out our proposals for regulatory reporting on remuneration in Chapter 13 on reporting. These are relevant to SNI firms and non‑SNI firms. 9.5 We intend to consult on public disclosure of remuneration information in our third IFPR CP. Overview of approach What we want to achieve 9.6 Remuneration is a key driver of behaviour for all firms and individuals. Appropriate remuneration policies and practices help support prudential soundness and risk management in firms. They also ensure appropriate outcomes for customers and markets, and so reduce the likelihood of harm. 9.7 The objectives of our proposed approach are to: • promote effective risk management in the long‑term interests of the firm and its customers • ensure alignment between risk and individual reward

64 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • support positive behaviours and healthy firm cultures • discourage behaviours that can lead to misconduct and poor customer outcomes 9.8 Most stakeholders who commented on the remuneration aspects of DP20/2 encouraged us to create a remuneration regime for FCA investment firms that is appropriate for the UK market and allows for proportionality between investment firms. We have taken on board this feedback when developing the proposals in this chapter and Chapters 10, 11 and 12. The MIFIDPRU Remuneration Code 9.9 We propose to create a single remuneration code for all FCA investment firms – SYSC 19G in our Handbook. Our proposed rules and guidance are tailored for FCA investment firms, building on the remuneration provisions in our existing remuneration codes. 9.10 Creating a single remuneration code for FCA investment firms means deleting the IFPRU Remuneration Code (SYSC 19A) and the BIPRU Remuneration Code (SYSC 19C). We will also revoke our non‑Handbook guidance documents on these codes: • FG17/6: General Guidance on Proportionality: the IFPRU Remuneration Code (SYSC 19A) • FG20/6: IFPRU investment firms Remuneration Code (SYSC 19A) – Frequently asked questions on remuneration • FG17/7: General Guidance on Proportionality: The BIPRU Remuneration Code (SYSC 19C) and Pillar 3 disclosures on Remuneration (BIPRU 11) 9.11 We also propose to extend the scope of our existing General guidance on the application of ex post risk adjustment to variable remuneration to FCA investment firms. 9.12 We explain in this chapter how firms in scope of both the MIFIDPRU Remuneration Code and the Alternative Investment Fund Manager (AIFM) Remuneration Code (SYSC 19B) or the Undertakings for Collective Investment in Transferable Securities (UCITS) Remuneration Code (SYSC 19E) should apply them. 9.13 The scope, application and content of our rules on staff incentives and the remuneration of sales staff and advisers (SYSC 19F) remain unchanged. 9.14 Following the UK’s exit from the EU, the final EBA guidelines on sound remuneration policies under the IFD will not apply to FCA investment firms. Timing of application 9.15 The proposals on remuneration would enter into force on 1 January 2022. Firms would need to apply the new rules from the start of their next performance year beginning on or after 1 January 2022. 9.16 Firms currently in scope of the IFPRU or BIPRU Remuneration Codes should continue to apply those until 1 January 2022, or the beginning of their next performance year after that date, whichever is later.

65 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Scope and application to firms SNI firms 9.17 In Chapter 2 of CP20/24, we proposed criteria that an FCA investment firm would need to meet to qualify as an SNI. Our view is that it would be disproportionate to require these smaller, less complex firms to comply with all aspects of the IFPR given they are less likely to cause significant harm to customers and markets. 9.18 We propose to apply this proportionality approach to the MIFIDPRU Remuneration Code by requiring SNI firms to comply with only a small number of remuneration rules. We call them the ‘basic remuneration requirements’ and explain them in Chapter 10. 9.19 Because they are principles‑based, they give firms a high degree of discretion in how they comply with them. Many SNI firms are in scope of the IFPRU or BIPRU Remuneration Codes. This means they are currently subject to more detailed remuneration requirements than we are proposing to apply under the new MIFIDPRU Remuneration Code. 9.20 We consider that applying these requirements to SNI firms will support the overall objectives outlined in paragraph 9.7 above. Given the total number of SNI firms, exempting them from all remuneration rules could negatively impact the prudential and conduct standards of the UK investment firm sector as a whole. This could have implications for customers and the market. Non‑SNI firms 9.21 We also propose to apply proportionality to non‑SNI firms to recognise the different risks they pose. For example, some FCA investment firms are categorised as non-SNI firms solely because they are permitted to deal on their own account or hold client money, but their overall size and significance means the potential harms to customers and impacts on the market are more limited. 9.22 We propose that a non‑SNI firm is in scope of all the remuneration rules in SYSC 19G if: • the value of its on‑and off‑balance sheet assets over the preceding 4‑year period is a rolling average of more than £300m, or • the value of its on‑and off‑balance sheet assets over the preceding 4‑year period is a rolling average of more than £100m (but less than £300m), and it has trading book business of over £150m, and/or derivatives business of over £100m 9.23 We summarise these criteria in a flow diagram in Annex 5. 9.24 A non‑SNI firm above these thresholds would be in scope of the rules on deferral of variable remuneration, use of non‑cash instruments and retention periods. We call these the ‘extended remuneration requirements’. We explain them in Chapter 12. 9.25 A non‑SNI firm below the thresholds would not be in scope of these more complex remuneration rules. It would be subject to the ‘standard remuneration requirements’. We explain these in Chapter 11. 9.26 Nevertheless, we would encourage all firms to consider whether choosing to apply further rules (or parts of them) might be helpful in ensuring effective risk management and providing appropriate incentives for some or all of their staff.

66 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Diagram 5: Overview of application of remuneration requirements *Largest non-SNIs Non-SNIs SNIs and non-SNIs Extended remuneration requirements Standard remuneration requirements Basic remuneration requirements Firm poses higher risk of harm to customers and markets Firm poses lower risk of harm to customers and markets

• based on total on- and off-balance sheet assets, size of trading book and size of derivatives business Total assets threshold 9.27 To work out the appropriate place to set the proportionality threshold for non‑SNI firms, we looked at how many non‑SNI firms would be in scope and the percentage of the total assets in the market that would be covered if we were to set the threshold at £100m or £300m. Diagram 6: Non‑SNIs in scope of extended remuneration requirements under potential thresholds 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Number of firms If threshold at £300m: 101 firms in scope, covering 74% of total assets If threshold at £100m: 234 firms in scope, covering 86% of total assets Threshold at £300m Threshold at £100m Cumulative total assets 1112131415161718191 101 111121 131 141 151 161 171 181 191 201 211 221 231 241 251 261 271 281 291

67 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 9.28 By setting the threshold at £300m, we expect around 101 firms to be in scope of the extended remuneration requirements. Together, these firms hold 74% of the total assets in the market. If we were to set the threshold at £100m, more than twice as many firms would be in scope but only an additional 12% of the total assets. This is likely to result in a disproportionate burden on the additional 133 firms in scope because they would be much smaller in terms of total assets. 9.29 The 101 firms in scope are the largest firms whose activities are of a nature and scale that they have greater potential to cause harm to customers and markets. We consider it is appropriate to require them to apply deferral and pay out a portion of variable remuneration in shares/instruments. Trading book and derivatives business 9.30 If we used the total on‑ and off‑balance sheet assets as the sole criterion, all firms with assets of £300m or below would be out of scope of the extended remuneration requirements. A small number of firms have assets below this level but have significant trading books or derivatives business. 9.31 By also having a requirement to have a trading book value of £150m or less and a derivatives business value of £100m or less, we intend that these firms are also subject to the rules on deferral and pay‑out in shares/instruments. This reflects the greater level of potential harm to customers and the market that could arise from misalignment between risk and individual reward in trading activity. Calculating the values 9.32 When calculating these metrics, we propose that non‑SNI firms use their total gross assets, total gross trading book assets and the total gross market value of their derivatives business. They must be calculated on an individual (solo entity) basis. 9.33 We suggest that any amounts in foreign currencies must be converted into Sterling using the relevant conversion rate determined by reference to an appropriate market rate. This could be the relevant daily spot exchange rate against Sterling published by the Bank of England. 9.34 We propose that the value used for the on‑ and off‑balance sheet assets be a simple average of the assets over the preceding 4 years. Using this average would mitigate the risk that a firm close to the threshold needs to repeatedly move between the 2 categories of non‑SNIs due to relatively minor fluctuations. Notifications 9.35 For a non‑SNI firm to move from extended to standard remuneration requirements, we propose that the necessary thresholds should have been met continuously for 6 months. A firm must notify us when this is the case. 9.36 Where a firm subject to standard remuneration requirements no longer meets the necessary thresholds, we propose that the firm must notify us promptly. The firm must then comply with the extended remuneration requirements within 12 months of having first exceeded the relevant threshold. 9.37 For both types of notification, firms should use the Notification Form on which we are consulting as part of this CP. We set out our general approach to notifications under the IFPR in Chapter 15.

68 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Ongoing monitoring 9.38 Following implementation of the proposed thresholds, we would monitor any unintended impacts of these on the market. We would look in particular for trends in firms restructuring, changes in the employment market or competition impacts. Application in particular circumstances Application to subsidiaries established in third countries 9.39 We have carefully considered whether it would be appropriate to apply the MIFIDPRU Remuneration Code to entities in third countries that are part of an FCA investment firm group to which prudential consolidation applies. 9.40 A number of firms and trade bodies expressed concerns in their responses to DP20/2 that applying UK remuneration rules to entities in third countries creates practical challenges. This is because they must comply with both the UK rules and the rules of the third country. Firms argued that this can result in contradictory or excessively burdensome requirements relative to the aims of the policy, with adverse consequences for recruitment and retention. 9.41 We have listened to this feedback. We are proposing to apply the remuneration rules only to the material risk takers (MRTs) of group entities in third countries who oversee or are responsible for business activities that take place in the UK. We consider this will reduce the compliance burden without increasing the prudential or conduct risks in relation to the consolidation group or its UK business activities. FCA investment firm groups 9.42 If we have granted permission to an investment firm group to use the group capital test (see Chapter 3 of CP20/24 for details), then no prudential consolidation is required. Each FCA investment firm in the group would need to apply the basic, standard or extended remuneration rules on an individual entity basis. 9.43 Where prudential consolidation applies, then the relevant remuneration rules (basic, standard or extended requirements) should be applied at both individual entity and consolidated level. The UK parent undertaking should ensure the correct implementation at consolidated level. 9.44 Where entities within a consolidation group are subject to different remuneration requirements, the way these apply will differ depending on the rules that apply. This could be because: • The entities are subject to different levels of requirements within the MIFIDPRU Remuneration Code, for example all are non‑SNI firms but some are subject to the standard requirements, others to the extended requirements. • The entities are subject to different remuneration codes, for example the group contains FCA investment firms (subject to the MIFIDPRU Remuneration Code) and AIFMs without MiFID permissions (subject to the AIFM Remuneration Code). 9.45 In these instances, we propose that: • firms must apply the stricter of the requirements (for example longer deferral periods) to any MRT who has a material impact: – on the risk profile of another entity in the group (or of the assets it manages) that is subject to the stricter requirements or remuneration code, or

69 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms – on the risk profile of the group as a whole (or of the assets it manages) • firms may apply the requirements applicable to the individual entity (and not the group) to any other MRT. Groups with credit institutions or PRA‑designated investment firms 9.46 Our proposed approach to FCA investment firm groups is consistent with our approach to groups in scope of the Dual‑regulated firms Remuneration Code (SYSC 19D), which we set out in PS20/16 ‘Updating the Dual‑regulated firms Remuneration Code to reflect CRD V’ (December 2020). 9.47 We set out in Chapter 3 of CP20/24 that groups containing both a PRA‑designated investment firm and an FCA investment firm, but no credit institution, will be subject to prudential consolidation under both the UK CRR and the IFPR. This means the group must satisfy the consolidated requirements of both SYSC 19D and SYSC 19G. We propose that firms apply these remuneration requirements in the same way as FCA investment firm groups. Application to collective portfolio management investment firms 9.48 Collective portfolio management investment firms (CPMIs) are authorised as full‑scope AIFMs or UCITS management firms. They are also permitted to undertake discretionary client‑by‑client portfolio management and provide certain investment services. These investment services would usually require authorisation under MiFID but, under our current rules, none of our remuneration codes apply to this ‘MiFID business’. 9.49 In line with our broader approach to CPMIs under the IFPR, we consider that the potential for harm to customers and markets is the same for these additional investment services regardless of what type of firm is carrying them out. 9.50 For this reason, we propose that the MIFIDPRU Remuneration Code should apply to the MiFID business of CPMIs. This means that CPMIs will need to apply 2 different remuneration codes, as their non‑MiFID business is already subject to the AIFM or UCITS Remuneration Codes. 9.51 Where an MRT of a CPMI has responsibilities for just MiFID or just non‑MiFID business, the firm should apply the relevant remuneration code. Where an MRT has responsibilities for both MiFID and non‑MiFID business, we propose that the firm must apply the stricter of the requirements (for example any longer deferral periods) to the individual. Scope and application to individuals Material risk takers 9.52 The basic remuneration requirements are general principles so apply to all staff in all FCA investment firms. The additional rules to be applied by non‑SNIs are applicable only to those individuals identified as MRTs. This is because of the higher impact MRTs can have on the risk profile of the firm and the assets it manages, and the need to apply further requirements to their pay to ensure alignment of risk and reward. Identifying material risk takers 9.53 We propose to require all non‑SNIs to identify the MRTs in relation to their firm on an annual basis. The aim is to identify all those individuals whose professional activities can have a material impact on the risk profile of the firm or the assets it manages. In conducting this exercise, an FCA investment firm should consider all types of risks involved in its professional activities. These may include prudential, operational, market, conduct and reputational risks.

70 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 9.54 The term ‘staff’ should be interpreted broadly so as to include all relevant individuals. These should include employees of the firm itself, partners or members (in the case of partnership structures), employees of other entities in the group, employees of joint service companies, and secondees. 9.55 It is important that firms consider all types of roles that may have a material impact on the firm’s risk profile or on the assets it manages. To assist with this, we are proposing a list of categories of staff that we consider should always be deemed MRTs due to the responsibilities inherent in the roles. 9.56 We propose that a staff member must be identified as an MRT if they: • are a member of the management body (in its management or supervisory function) or of senior management • have managerial responsibilities for the activities of a control function or for the prevention of money laundering and terrorist financing • have managerial responsibility for a business unit that is carrying on at least one of the following regulated activities: – arranging (bringing about) deals in investments – dealing in investments as agent – dealing in investments as principal – managing investments – making investments with a view to transactions in investments – advising on investments, except P2P agreements – operating an organised trading facility • work for a firm with permission to carry on any of the regulated activities mentioned in the above point, and are responsible for managing any of the following: – information technology – information security – the outsourcing arrangements of critical or important functions • are responsible for managing a material risk or risk management policies • have authority to take decisions approving or vetoing the introduction of new products 9.57 For the purpose of these categories, we propose defining ‘managerial responsibilities’, ‘control function’ and ‘business unit’ as set out in the proposed changes to the Handbook Glossary. 9.58 These categories of staff are intended to be a starting point only. We would expect firms to develop their own additional criteria to identify further individuals based on the specific types of activities and risks relevant to the FCA investment firm. To assist with this, we include in SYSC 19G.5 some examples of other roles we have seen firms include as MRTs. We also include guidance on the sorts of factors which firms may find useful to consider. 9.59 We are not proposing to require firms to identify individuals based solely on the level of their remuneration because we do not view this as a reliable indicator of the level of risk involved in a role in an FCA investment firm.

71 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Material risk takers at consolidated level 9.60 If a non‑SNI firm is part of an FCA investment firm group to which prudential consolidation applies, then MRTs should be identified at both solo and consolidated level. We propose that the UK parent undertaking should be responsible for the MRT identification process at a consolidated level. 9.61 The UK parent undertaking should assess which individuals have a material impact on the risk profile of the investment firm group. It may also be helpful for the UK parent undertaking to play a role in coordinating the identification process across the group entities. Relationship with the Senior Managers Regime (SMR) 9.62 Some respondents to DP20/2 told us they are unsure about the relationship between SMFs under the SMR and MRTs. A small number suggested these categories could be combined into a single set of individuals. 9.63 We acknowledge there are overlaps between these categories. For example, in line with the criteria we are proposing above, a Money Laundering Reporting Officer (SMF17) would usually also be identified as an MRT. 9.64 Nevertheless, we would remind firms that identifying MRTs and assigning accountability to SMFs have separate and distinct purposes. 9.65 SMFs identified under the SMR are intended to cover only the most senior individuals at a firm who need to be approved by the FCA. By contrast, MRTs must be identified by firms to cover a wider range of risk‑taking roles, so it is not possible to combine them. Exemption for certain individuals 9.66 Similarly to our existing remuneration codes, we propose to exempt those MRTs who earn below a certain amount from some remuneration requirements. 9.67 These are the same requirements from which non‑SNIs subject to the standard remuneration rules would be exempt. The rules are those on: • deferral of a portion of variable remuneration • pay‑out of a portion of variable remuneration in shares, instruments or alternative arrangements • the holding and retention periods for discretionary pension benefits when an MRT leaves the firm 9.68 We do not consider it proportionate for these remuneration requirements to apply to individuals with lower levels of variable remuneration. Lower levels of variable remuneration are less likely to incentivise inappropriate risk‑taking. Applying the rules listed above would be unlikely to substantially further the objective of promoting effective risk management. Threshold for exemption 9.69 It is not possible to say with certainty whether a particular amount of variable remuneration is likely to incentivise MRTs to take inappropriate risks. Similarly, it is difficult to pinpoint at what percentage of the total remuneration an individual’s behaviour or decision‑making may be more decisively influenced by their potential

72 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms variable remuneration. Decisions are influenced by many factors and the behaviour of individuals differs from person to person. 9.70 We surveyed a representative sample of FCA investment firms to obtain data on how much variable and total remuneration their MRTs earn. The data revealed that MRTs’ earnings vary greatly with a broadly equal distribution across earnings categories. It did not provide any clear indication of where it might be appropriate to set the threshold. 9.71 In our existing remuneration codes for IFPRU and BIPRU firms, AIFMs and UCITS management companies, we set out in guidance that we that we do not generally consider it necessary for firms to apply certain rules to individuals whose total remuneration is £500,000 or less and whose variable remuneration represents a maximum of 33% of their total remuneration. This means it is possible for an individual to benefit from proportionality if they receive variable remuneration of up to £166,667 (provided the total remuneration does not exceed £500,000). 9.72 This guidance has been applied by many investment firms for over 10 years and we have not found evidence to suggest it should be set at a higher or lower level. 9.73 For these reasons, we propose to incorporate our current approach into the new MIFIDPRU Remuneration Code as rules with 2 modifications: • Change the reference point from £500,000 of total remuneration to £167,000 of variable remuneration. This means there would be no maximum total remuneration. We consider this approach to be more appropriate because it is not the amount of the total remuneration that can incentivise inappropriate risk‑taking. Instead, it is the variable component and the ratio between the variable and fixed components that are relevant. • Change the percentage of the total remuneration which can be variable from 33% to one‑third (33.3%). This would align the approach with that applicable to banks, building societies and designated investment firms in SYSC 19D. We would expect this to simplify the application of the rules for FCA investment firms in CRR groups. 9.74 With these modifications, our proposals mean that an MRT would need to meet 2 criteria to qualify for the exemption. • have variable remuneration of £167,000 or less • have variable remuneration which makes up one‑third or less of their total remuneration 9.75 Individuals who do not meet these exemption criteria must still be identified as MRTs. 9.76 We would be interested to hear from stakeholders who have data or other evidence which may help us determine appropriate thresholds for this exemption. We will carefully consider any further information we receive before finalising our rules. We may also revisit the finalised criteria at a later date in light of new evidence or subsequent developments that may change our view of this, including those regarding EU market access.

73 CP21/7 Chapter 9 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Part‑year material risk takers 9.77 The proposed threshold of £167,000 is based on an MRT who is in role for a full performance year of 12 months. In practice, an individual may take on an MRT role at any point during the performance year, either from a non‑MRT role within the firm or as an external hire. 9.78 We propose to set out in a rule that: • FCA investment firms must apply the full £167,000 variable remuneration threshold to part‑year MRTs • the requirement that the variable remuneration must not be more than one‑third of the MRT’s total remuneration needs to be applied to the relevant portion of the total remuneration paid for the part‑year period they were in role • any guaranteed variable remuneration, for example a ‘sign‑on bonus’, must be treated as part of the variable remuneration for the part‑year concerned 9.79 We also include in SYSC 19G.5 a worked example. Q17: Do you agree with our proposal for firms to apply the new MIFIDPRU Remuneration Code from the start of their next performance year beginning on or after 1 January 2022? Q18: Do you agree that SNI firms should be subject to the ‘basic remuneration requirements’? If not, please explain why not. Q19: Do you agree that only certain non‑SNI firms should be required to apply the remuneration rules on deferral, pay‑out in instruments and discretionary pension benefits? Do you have any comments on the thresholds we propose? Q20: Do you have any comments on our proposed approach to identifying material risk takers? Q21: Do you agree with our proposals for exempting certain individuals from the rules on deferral, pay‑out in instruments and discretionary pension benefits? Do you have any evidence that may assist us in defining the scope of the exemption? Q22: Do you have any other comments on the proposed scope and application of the remuneration rules?

74 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 10 MIFIDPRU Remuneration Code: basic remuneration requirements 10.1 In this chapter, we set out the basic remuneration requirements we propose to apply to all FCA investment firms and in relation to all staff. They focus on ensuring that firms have remuneration policies and practices meeting minimum standards and are subject to sound governance. Table 4: Overview of basic remuneration requirements Basic remuneration requirements Firm’s remuneration policy must: • be proportionate to the size, internal organisation and nature, as well as to the scope and complexity, of its activities • be gender‑neutral • be consistent with, and promote, sound and effective risk management • be in line with the firm’s business strategy and objectives, and take into account long term effects of investment decisions taken • contain measures to avoid conflicts of interest, encourage responsible business conduct and promote risk awareness and prudent risk‑taking Governance and oversight: • Management body must adopt and periodically review the remuneration policy, and have responsibility for overseeing its implementation. • Staff with control functions must be independent from the business units they oversee, and be remunerated according to objectives linked to their functions. • Remuneration of senior staff in risk management and compliance functions must be directly overseen by the remuneration committee or management body. Fixed and variable remuneration: • The remuneration policy must make a clear distinction between the criteria applied to determine fixed and variable remuneration. • The fixed and variable components of the total remuneration must be appropriately balanced. • When assessing individual performance, both financial and non‑financial criteria must be taken into account. Restrictions on variable remuneration: • Variable remuneration must not affect the firm’s ability to ensure a sound capital base. • A firm which benefits from extraordinary public financial support must not pay any variable remuneration to members of the management body. Remuneration policy design 10.2 We propose that all FCA investment firms should have a remuneration policy in place for all staff. We would expect it to cover all components of remuneration covered in our proposed MIFIDPRU Remuneration Code.

75 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Aligning risk and reward 10.3 The central objective of every remuneration policy must be that it is consistent with, and promotes, sound and effective risk management by aligning risk and reward. 10.4 To achieve this objective, we propose that an FCA investment firm’s remuneration policy should reflect its business strategy and objectives. These cover the FCA investment firm’s risk appetite and risk strategy, including with regard to environmental, social and governance (ESG) risk factors, and also extend to its culture and values. 10.5 The remuneration policy should also contain measures to avoid conflicts of interest, encourage responsible business conduct, and promote risk awareness and prudent risk taking. Proportionality 10.6 Overall, an FCA investment firm’s remuneration policy should be proportionate to the size, internal organisation and nature, as well as to the scope and complexity, of the firm’s activities. 10.7 This means that the content and level of detail of the remuneration policy may depend on a number of factors. These include the number of staff it employs, the different types of roles, the activities it carries out, and whether or not the FCA investment firm is part of a group with a group‑wide remuneration policy. Gender neutrality 10.8 We propose to introduce a requirement for FCA investment firms’ remuneration policies and practices to be gender neutral. 10.9 We would use the definition of ‘gender neutral remuneration policy’ which we added to our Handbook Glossary in 2020 when we introduced this requirement for credit institutions and designated investment firms. The definition requires a remuneration policy to be ‘based on equal pay for male and female workers for equal work or work of equal value’. 10.10 This is in line with the Equality Act 2010, which imposes this legal requirement on all employers in the UK. It includes equality in pay and all other contractual terms, for example variable remuneration. 10.11 A small number of respondents to DP20/2 questioned the value of including in our rules a requirement which already exists in statute. We propose to include it because it would: • support and reaffirm our aim to drive healthy purposeful cultures in firms, which includes developing an inclusive and diverse workplace • support us in supervising the extent to which FCA investment firms are meeting this standard and in holding their management body and, where they exist, chairs of remuneration committees, to account if they fail to do so • further our commitment to upholding our Public Sector Equality Duty, and support our actions as a regulator in helping to eliminate poor conduct prohibited by the Equality Act

76 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 10.12 We do not anticipate that the addition of this requirement would impose any additional burden on FCA investment firms. As the Equality Act has been in place for many years, we would expect firms to already be actively taking steps to ensure their remuneration policies reflect the required standards, in line with the Conduct Rule on observing proper standards of market conduct. 10.13 The Equality Act also prohibits discrimination on the basis of an individual’s protected characteristics, including in the context of employment. It lists the following as protected characteristics: age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex, and sexual orientation. 10.14 Against this background, we propose to supplement our suggested rule on gender neutrality with a guidance provision. It would remind firms of their existing obligations as employers to ensure their remuneration policies and practices do not discriminate against applicants and employees on the grounds of any of the protected characteristics. This includes when assessing performance for the purpose of awarding variable remuneration. Governance and oversight 10.15 The effectiveness of remuneration policies and practices is dependent on the governance and oversight around their development, review and implementation. 10.16 We propose that every FCA investment firm should ensure the management body in its supervisory function adopts and periodically reviews its remuneration policy. The management body should also be responsible for overseeing the implementation of the policy and ensuring its compliance with our remuneration rules. If the FCA investment firm has a remuneration committee, it must also play a role in the oversight. 10.17 We propose to include guidance in our Handbook which clarifies: • It is for each FCA investment firm to assess the most appropriate frequency for the periodic review, taking into account all relevant factors. • The development and review of the remuneration policy should be supported by the control functions, including (where they exist) risk management, compliance, internal audit and human resources, and by business units. • The processes and decision‑making around the development, review and amendment of remuneration policies and practices are subject to our general record‑keeping requirements. 10.18 At present, we provide on our website templates for Remuneration Policy Statements (RPS) which IFPRU and BIPRU firms may use to record how their remuneration policies and practices comply with the relevant rules. We intend to review and amend these templates to align them with the final MIFIDPRU Remuneration Code. 10.19 To mitigate the risk of conflicts of interest arising, our proposals are: • No variable remuneration should be awarded to members of the management body who do not perform any executive function in the firm.

77 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • The remuneration of senior staff in risk management and compliance functions is directly overseen by the management body in its supervisory function or, where one exists, the remuneration committee. • All staff with control functions are independent from the business units they oversee, have appropriate authority, and are remunerated according to objectives linked to their functions (independent of the performance of the business areas they control). Fixed and variable remuneration Distinguishing between fixed and variable remuneration 10.20 We propose a rule requiring all FCA investment firms to have remuneration policies which make a clear distinction between fixed and variable remuneration. This should include the criteria on which the award of any variable remuneration is based. 10.21 The distinction should result in a clear allocation of all components of remuneration to either fixed or variable remuneration. There is no third or hybrid category. In allocating individual components, it is the quality and purpose of the component that is decisive, not the label applied to it. 10.22 To guide firms in their allocations, we suggest: • Fixed remuneration should be permanent, pre‑determined, non‑discretionary, non‑revocable and not dependent on performance. • Variable remuneration should be based on performance or, in exceptional cases, other conditions; it includes discretionary pension benefits. Appropriate balance 10.23 Remuneration can directly and indirectly influence behaviour. It can incentivise certain behaviours and discourage others. Under our proposals, all FCA investment firms would need to ensure that the fixed and variable components of an individual’s total remuneration are appropriately balanced. 10.24 This means the fixed remuneration must represent an amount and a proportion of the total which is sufficiently high to enable the variable remuneration policy to be fully flexible. This flexibility should include the possibility of paying no variable remuneration at all. 10.25 The purpose of this is to ensure that no individual is dependent on variable remuneration to an extent likely to encourage them to take risks outside the risk appetite of the firm. 10.26 All relevant circumstances should be considered when determining what constitutes an ‘appropriate balance’. These should include the FCA investment firm’s business activities, and the role of the individual and their exposure to risk. We would expect an FCA investment firm to be able to explain why it considers a particular split of fixed and variable remuneration appropriate. 10.27 Our proposal does not mean that every staff member must be able to earn variable remuneration. In may be appropriate for some categories of staff to receive only fixed remuneration which would not have an incentivising effect. But it would not be an appropriate balance for any individual to receive only variable remuneration.

78 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Remuneration and profit‑sharing 10.28 In many situations, all or most payments received from a firm by an individual such as an employee or contractor are remuneration for work and/or services. Where the individual is a partner in a partnership or a member of a limited liability partnership (LLP) and also works in the business, the distinction may be less clear. (For ease, we refer to both as ‘partnerships’ and ‘partners’.) 10.29 As part of this CP, we are consulting on guidance provisions in SYSC 19G.4 to assist partnerships in determining which types of payments to partners should be treated as remuneration for the purposes of the MIFIDPRU Remuneration Code, and which as a return on equity (not in scope of our rules). 10.30 Our proposed guidance suggests that FCA investment firms consider how a partner currently receives their profit share and the rationale for the payment. The nature of the payment is decisive, not the label attached to it. Alternatively, or in combination with the above approach, a firm could use a benchmarking approach. 10.31 We also set out in our draft guidance that we would expect a reasonable portion of a partner’s profit share to be considered as remuneration. Co‑investment and carried interest 10.32 Staff at FCA investment firms, in particular investment managers, often participate in co‑investment and carried interest arrangements. We propose guidance in SYSC 19G.4 to help firms distinguish between them. 10.33 In summary, we would not usually consider returns made by staff on co‑investment arrangements to constitute remuneration for the purposes of our rules. We would, however, usually consider carried interest as remuneration. Financial and non‑financial criteria 10.34 Poor performance can pose significant risks for firms. These may be financial, such as poor investment decisions or poor risk management leading to financial losses. But they may also be non‑financial, for example behaviours contrary to the firm’s values resulting in misconduct, mis‑selling and reputational damage. 10.35 We propose that all FCA investment firms must take into account both financial and non‑financial criteria when assessing the individual performance of their staff. This aims not only to discourage inappropriate behaviours but also to incentivise and reward behaviour that promotes positive non‑financial outcomes for the firm. 10.36 To ensure the overall outcome of the individual performance assessment is appropriate, there should be a balance between financial and non‑financial criteria. We propose guidance that an equal split between financial and non‑financial criteria will be appropriate for some investment firms, while a slightly different split may better suit others. 10.37 To help FCA investment firms to identify and apply appropriate non‑financial criteria, we propose to include guidance in SYSC 19G.6 around our expectations as well as a non‑exhaustive list of examples of non‑financial criteria.

79 CP21/7 Chapter 10 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Restrictions on variable remuneration 10.38 We propose that variable remuneration must not be awarded, paid out or allowed to vest if it would affect the ability of an FCA investment firm to ensure a sound capital base. This would help to ensure that it does not endanger the prudential soundness of the individual FCA investment firm or the investment firm group. 10.39 In line with this approach, we also propose that an FCA investment firm which benefits from extraordinary public financial support (for example, a government bail‑out) must not pay any variable remuneration to members of its management body. 10.40 An FCA investment firm may pay variable remuneration to other staff. But if doing so would be inconsistent with maintaining a sound capital base and would compromise the firm’s timely exit from extraordinary public financial support, then the variable remuneration must be limited to a portion of the firm’s net revenue. Q23: Do you have any comments on the specific remuneration rules which we propose to apply to all FCA investment firms (‘basic remuneration requirements’)?

80 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 11 MIFIDPRU Remuneration Code: standard remuneration requirements 11.1 In this chapter, we set out the standard remuneration requirements that would apply to all non‑SNI firms in addition to the basic requirements in Chapter 10. 11.2 Of particular significance is the requirement on all non‑SNI firms to identify their MRTs (see Chapter 9 above). Unlike the basic remuneration requirements, which apply to all staff, the additional rules that make up the standard requirements apply only to MRTs. However, we would encourage firms to consider applying them to wider categories of staff where this would contribute to sound risk management and/or a healthy firm culture. Table 5: Overview of standard remuneration requirements Standard remuneration requirements • Basic remuneration requirements Performance assessment: • Performance‑related variable remuneration of MRTs must be based on a combination of the performance of the individual, the relevant business unit and the firm overall • Performance assessment must be based on a multi‑year period Restrictions on non‑performance￾related variable remuneration of MRTs: • Guaranteed variable remuneration • Retention awards • Buy‑out awards • Severance pay Ex ante and ex post risk adjustment • Firms must take into account all types of current and future risks when: – measuring performance to calculate bonus pools – awarding and allocating bonuses • Firms must: – have in‑year adjustments, malus and clawback arrangements in place – set minimum malus and clawback periods – determine triggers for malus and clawback Other requirements on firms: • Set a ratio between variable and fixed remuneration • Ensure remuneration policy is subject to an annual review by control functions • Discretionary pension benefits must be in line with business strategy, objectives, values and long term interests of the firm • Take all reasonable steps to ensure MRTs do not undermine the remuneration rules • Must not pay variable remuneration through vehicles or methods that facilitate non‑compliance

81 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Setting a ratio between variable and fixed remuneration 11.3 We do not consider it would be appropriate for us to set a single maximum ratio between variable and fixed remuneration (often referred to as a ‘bonus cap’). 11.4 Instead, we propose that non‑SNI firms should set their own ratios for MRTs as part of their remuneration policies. This is to ensure firms actively monitor and manage the risks arising from high ratios of variable to fixed remuneration. This would be in addition to the basic requirement that all FCA investment firms should ensure an appropriate balance between fixed and variable remuneration for all staff. 11.5 When setting ratios, a firm should consider the impact that different categories of MRTs have on the risk profile of the firm or the assets it manages. For this reason, different ratios can be set for different categories of staff. 11.6 Ratios may also differ from one performance year to the next as a firm’s risks, strategies and priorities shift. Performance assessment 11.7 We propose that non‑SNI firms should ensure that the total performance‑related variable remuneration of an MRT is based on a combination of the assessment of the performance of the individual, of the relevant business unit and the firm overall. 11.8 The performance assessment must also be based on a multi‐year period which takes into account the business cycle of the firm and its risks. This ensures that the assessment is based on longer‑term performance and that the payment of the variable remuneration is spread over an appropriate period. Ex‑ante risk adjustment 11.9 Risk adjustment is an important element of measuring performance for the purpose of setting variable remuneration and requires the use of sound judgement. When measuring performance to calculate pools of variable remuneration, we propose to require non‑SNI firms to take into account all types of current and future risks as well as the cost of the capital and liquidity required. 11.10 We also propose that a non‑SNI firm must ensure that its total variable remuneration is generally considerably contracted, including through malus or clawback arrangements, where the financial performance of the firm is subdued or negative. 11.11 The variable remuneration awarded and allocated within the firm should also consider all types of current and future risks. We propose that non‑SNI firms include both financial risks (for example economic profit or economic capital) and non‑financial risks (such as reputation, conduct and customer outcomes, values and strategy). 11.12 We would expect a non‑SNI firm to be able to provide us with details of all adjustments made, including clear explanations of how they have been quantified or discretion exercised.

82 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Ex‑post risk adjustment 11.13 Ex‑post risk adjustment refers to the process and mechanisms by which a firm adjusts an individual’s variable remuneration to take account of a specific crystallised risk or adverse performance outcome, including those relating to misconduct. 11.14 Under our proposals, all non‑SNI firms would be required to have in place ex‑post risk adjustment mechanisms as part of their remuneration policies. These should include at least in‑year adjustments, malus and clawback to enable the firm to reduce or cancel cash awards, the number or value of shares and other non‑cash instruments, as appropriate. They should enable an MRT’s variable remuneration to be reduced by up to 100%. 11.15 As we intend to require only some non‑SNI firms to apply deferral (see Chapter 12), some will not be able to use malus if there is no deferred remuneration that can be adjusted. 11.16 We propose that non‑SNIs subject to the standard remuneration requirements would still need to put in place clawback mechanisms so these can be applied as needed. Alternatively, it remains open to these firms to reduce expected current year awards or use deferral periods, which would then enable the use of malus too. Minimum periods of application 11.17 We propose that firms should set malus and clawback periods to allow sufficient time for any potential risks to crystallise and for adjustments to be made. This may mean that they differ for different categories of MRTs. 11.18 To ensure a consistent minimum standard, we propose to require non‑SNI firms to: • ensure that malus can be applied until the award has vested in its entirety • ensure that the clawback period spans at least the combined length of the deferral and retention periods (where they exist) Criteria for application 11.19 We consider that it is appropriate for us to set out only high‑level situations in which malus and/or clawback must be applied. It should be for an FCA investment firm to determine the criteria or ‘triggers’ it considers appropriate for the types of risk it is exposed to or might pose to others. This may include differing criteria for the application of malus and clawback. 11.20 We propose that the criteria or ‘triggers’ must, as a minimum, cover situations in which: • the MRT in question participated in or was responsible for conduct which resulted in significant losses to the non‑SNI firm, or • the MRT in question failed to meet appropriate standards of fitness and propriety. 11.21 Furthermore, we consider that malus should be applied where: • there is reasonable evidence of employee misbehaviour or material error, or • the firm or the relevant business unit suffers a material downturn in its financial performance, or • the firm or the relevant business unit suffers a material failure of risk management.

83 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 11.22 Clawback should always be applied in cases of fraud or other conduct with intent or severe negligence which led to significant losses. Non‑Handbook guidance 11.23 Many industry stakeholders commented in their feedback to DP20/2 that they would find it useful if we were to issue more detailed guidance on how we would expect non‑SNI firms to comply with our proposed rules on ex‑post risk adjustment. 11.24 Our existing General guidance on the application of ex‑post risk adjustment to variable remuneration provides further detail of our expectations on malus and clawback, including on how they should be invoked in an effective, timely, consistent and transparent way. The guidance currently applies only to firms in scope of our Dual‑regulated firms Remuneration Code (SYSC 19D). 11.25 We are consulting as part of this CP on extending the scope of the existing guidance to also make it applicable to FCA investment firms. The content continues to reflect our expectations, so the substance would remain unchanged. 11.26 The proposed guidance can be found in Appendix 2. Non‑performance‑related variable remuneration 11.27 If a firm were to make extensive use of non‑performance‑related variable remuneration, the positive effects of aligning risk and reward for individuals could be significantly weakened. 11.28 For this reason, we propose to include in the MIFIDPRU Remuneration Code rules and guidance about the use of guaranteed variable remuneration, retention awards, buy‑out awards and severance pay for MRTs. 11.29 The use of such awards would need to be appropriate in each instance they are used. As forms of variable remuneration, they would also be subject to the same requirements, such as deferral and ex post risk adjustment. Guaranteed variable remuneration 11.30 Guaranteed variable remuneration is sometimes referred to as a ‘sign‑on bonus’ or ‘golden handshake’. These awards are often used as a way of compensating new employees in cases where they have lost the opportunity to receive variable remuneration by leaving their previous employment during the performance year. 11.31 We propose that guaranteed remuneration should be awarded to MRTs by non‑SNIs only: • rarely and not as common practice • in the context of hiring new MRTs • in the first year of service • where the firm has a strong capital base

84 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Retention awards 11.32 Retention awards are bonuses which are dependent on an MRT remaining in role until a defined event or at a specified point in time. For example, retention bonuses may be used under restructurings, in wind‑down or in the context of specific projects within a firm. 11.33 To ensure a level playing field in the recruitment and retention of key staff, we consider it is appropriate to permit retention awards. However, as for guaranteed variable remuneration, we propose that they should not be used as a matter of course but instead are used only rarely. We also propose that they should be awarded only after the event or time period has ended. Buy‑out awards 11.34 Buy‑out awards involve a firm compensating a new employee, or ‘buying out’ their previous contract with another employer, where the deferred variable remuneration of the staff member was reduced, revoked or cancelled by the previous employer. This may be because they terminated their contract or because the individual has to pay back some money, for example where the employer has paid for a training course or qualification for the individual that was attached to a retention clause. 11.35 In these situations, we propose to require non‑SNIs to ensure the buy‑out award: • is aligned with the long‑term interests of the firm • remains subject to the same pay‑out terms required by the previous employer, for example by following the same deferral and vesting schedule, and being subject to the same malus and/or clawback provisions, if applicable Severance pay 11.36 We also propose to place some requirements on payments made to MRTs by non‑SNIs relating to the early termination of an employment contract. This is sometimes called ‘severance pay’. 11.37 We propose that: • the ability to make severance payments, and any maximum amount or criteria for determining the amount, should be set out in the firm’s remuneration policy • all severance payments: – must reflect the individual’s performance over time – must not reward failure or misconduct Other requirements Annual review of remuneration policy by control functions 11.38 We propose that a non‑SNI firm should ensure that the design, implementation and effects of its remuneration policy are subject to an independent, internal review by staff engaged in control functions at least annually.

85 CP21/7 Chapter 11 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 11.39 The review should be conducted by the internal audit function, where one exists. We would expect the results of the review and the actions taken to remedy any findings to be appropriately documented. Discretionary pension benefits 11.40 Discretionary pension benefits are a form of variable remuneration. We do not consider pension benefits to be discretionary if they are consistently granted to a category of staff and are not linked to performance. 11.41 Under our proposals, all non‑SNIs would be required to: • ensure that all discretionary pension benefits are in line with the business strategy, objectives, values and long‑term interests of the firm • award the full amount in shares, instruments or within any alternative arrangements we have approved • apply malus and clawback to discretionary pension benefits in the same way as to other elements of variable remuneration Non‑compliance 11.42 We propose to include rules which aim to prevent non‑SNI firms and their MRTs from undermining the objectives of the MIFIDPRU Remuneration Code. 11.43 We propose that non‑SNI firms should take all reasonable steps to ensure that MRTs do not transfer the downside risks of variable remuneration to another party by using personal hedging strategies or remuneration‑ and liability‑related insurance. Examples of actions a firm might take include requesting an undertaking or declaration from its MRTs, and implementing policies regarding dealing in financial instruments. 11.44 We also propose a rule that requires non‑SNI firms to ensure variable remuneration is not paid through vehicles or methods that facilitate non‑compliance with our remuneration rules or the MIFIDPRU sourcebook. 11.45 We would emphasise that we would expect all firms to comply not only with the letter but also the spirit of the remuneration rules we are proposing. We consider that our rules and firms’ remuneration policies will be most effective when firms embed them in their wider prudential, risk management and conduct frameworks. Q24: Do you have any comments on the specific remuneration rules we are proposing to apply to all non‑SNI firms (‘standard remuneration rules’)? Q25: Do you agree with our proposal to extend the existing non‑Handbook guidance on ex post risk adjustment to FCA investment firms?

86 CP21/7 Chapter 12 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 12 MIFIDPRU Remuneration Code: extended remuneration requirements 12.1 In this chapter, we set out the remuneration rules that would apply to the largest non‑SNI firms in addition to the basic and standard remuneration requirements set out in Chapters 10 and 11. We call them the extended remuneration requirements. Table 6: Overview of extended remuneration requirements Extended remuneration requirements • Basic remuneration requirements • Standard remuneration requirements Pay‑out of variable remuneration: • At least 50% to be paid out in shares, instruments or using alternative arrangements approved by the FCA • Must be subject to an appropriate retention policy Deferral and vesting: • At least 40% of variable remuneration to be deferred for at least 3 years • At least 60% to be deferred where the variable remuneration is a particularly high amount, and always where it is £500,000 or more • Must not vest faster than pro rata Discretionary pension benefits: • Where MRT leaves the firm before retirement, firm must hold the pension benefits for 5 years • Where MRT retires, the firm must pay out the pensions benefits and MRT must retain them for 5 years Remuneration committees: • Chair and at least 50% of members must be non‑executive members of the management body (where legal structure of firm permits) • Modification of requirement possible for group level committees Pay‑out in shares, other instruments or using alternative arrangements 12.2 By linking the value of variable remuneration to the credit quality of the firm, the financial interests of the individual are aligned with those of the firm. In particular, the individual will participate in any losses that result in a deterioration of the credit quality. Types of instruments 12.3 We propose to require non‑SNI firms subject to extended remuneration requirements to pay at least 50% of an MRT’s variable remuneration in shares or other instruments. 12.4 To reflect the diverse structures and activities of investment firms and to minimise the administrative burden, we propose to permit the use of a broad range of instruments: • shares (or equivalent ownership interests) • share‑linked instruments (or equivalent non‑cash instruments)

87 CP21/7 Chapter 12 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • Additional Tier 1 (AT1) instruments, Tier 2 instruments or other instruments which can be fully converted to Common Equity Tier 1 instruments, or written down, and that adequately reflect the firm’s credit quality • non‑cash instruments which reflect the instruments of the portfolios managed 12.5 To meet the objectives of this proposed rule, the instruments used by firms need to be appropriate for use in variable remuneration. They must appropriately reflect the credit quality of the firm as a going concern. This is inherent in shares, share‑linked instruments and non‑cash instruments which reflect the instruments of the portfolios managed by the firm. 12.6 To ensure this for AT1, Tier 2 and other convertible or write‑down instruments, we propose to define the general requirements which must be met. These include (but are not limited to): • The instrument must be issued by the FCA investment firm. • The instrument must not be secured or subject to a guarantee that enhances the seniority of the claims of its holder in insolvency. • The instrument must be either a convertible or a write‑down instrument. • Any right to redeem, call or repurchase the instrument must be exercisable only at the sole discretion of the firm. 12.7 We also propose some additional requirements specifically for convertible instruments and some specifically for write‑down instruments. 12.8 Our full proposals can be found in the Annex to SYSC 19G. We would welcome feedback from stakeholders on whether they strike the right balance between flexibility and clarity. Alternative arrangements 12.9 We recognise that some non‑SNI firms do not issue the types of instruments mentioned above. This may be because their legal structure prevents them from doing so, for example partnerships and LLPs. There may also be cases where it would not be proportionate to issue instruments purely for use in variable remuneration, for example when a firm could instead use instruments issued by other entities within the FCA investment firm. 12.10 We propose that firms in these situations – and only these firms – should apply to us for a modification of the rule on pay‑out in shares and other instruments. In its application, an FCA investment firm should put forward detailed proposals for an alternative arrangement that it considers would also meet the objectives of the rule. 12.11 Firms should use our standard waivers and modifications form for their applications, and consider the guidance we are proposing in SYSC 19G.6. Our general approach to applications in the IFPR is in Chapter 15.

88 CP21/7 Chapter 12 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Deferral and vesting 12.12 We propose that non‑SNI firms subject to the extended remuneration requirements must ensure: • at least 40% of the variable remuneration awarded to an MRT is deferred for at least 3 years • where the variable remuneration is a particularly high amount, and in any case where it is £500,000 or more, at least 60% is deferred • the deferred variable remuneration does not vest faster than on a pro rata basis 12.13 The requirement that variable remuneration may not vest faster than pro rata means that if £60,000 is deferred over 3 years, then no more than £20,000 may vest each year. The first deferred portion must not vest sooner than a year after the start of the deferral period. 12.14 The aim is to enable an appropriate portion of the variable remuneration to be adjusted for risk outcomes over an appropriate period. We propose guidance in SYSC 19G.6 which sets out the criteria it may be useful for firms to consider when deciding how to structure the deferral schedule. Proportion and length of deferral 12.15 We propose to include in SYSC 19G.6 guidance on our expectations of how firms should determine the proportion to be deferred and the deferral period. This includes: • Length of deferral period: We would expect the variable remuneration of MRTs whose roles and responsibilities mean they have a considerable impact on the risk profile of the firm or the funds it manages (for example members of the management body or senior management), to be subject to a deferral period longer than the 3‑year minimum. • ‘A particularly high amount’: It may be appropriate in certain circumstances for amounts below £500,000 to be considered ‘particularly high’ in the context of pay arrangements at the firm concerned, so subject to 60% deferral. Deferred and non‑deferred payments 12.16 Both payments in cash and in shares/instruments can be deferred. We propose to require non‑SNI firms to pay out at least 50% of the deferred portion of the variable remuneration in shares, instruments or by using alternative arrangements. 12.17 We also clarify in guidance that we consider it good practice for the deferred portion of variable remuneration to contain a higher proportion of shares/instruments than the non‑deferred (upfront) portion. Interest and dividends 12.18 Since the firm remains the legal owner of any deferred shares or instrument until the remuneration vests, any interest and dividends paid on the shares or instrument during the deferral period are received and owned by the firm. They must not be paid to the MRT either during or after the deferral period.

89 CP21/7 Chapter 12 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Taxation of partners 12.19 We set out in DP20/2 that under partnership tax rules, partners of partnerships and members of LLPs are taxed on their profit shares in the year the profits arise. This may result in a tax liability in respect of variable remuneration which is deferred (so‑called ‘dry’ tax charge). 12.20 A small number of respondents to our DP asked us to consider giving firms the possibility of deferring variable remuneration on a net of tax basis to prevent a ‘dry’ tax charge from arising. However, the tax implications of deferral are not within our remit. 12.21 Specific tax provisions already exist for deferred variable remuneration and partnerships which are AIFMs. We are continuing to engage with HM Treasury and HM Revenue & Customs, who are responsible for taxation policy. Retention 12.22 We propose that FCA investment firms must ensure all shares and instruments issued for variable remuneration are subject to an appropriate retention policy. This means they cannot be sold or accessed by the MRT for an appropriate period of time after the date on which they vest. 12.23 What is an appropriate period varies depending on a number of factors. We suggest in guidance that firms should consider at least: • the length of the deferral period • the length of the business cycle • the types of risks relevant to the role of the MRT • how long it could take for the risks underlying the performance to crystallise 12.24 As a guide, the greater the impact of the MRT on the risk profile of the firm and/or the funds managed, the longer the retention period should be. Discretionary pension benefits 12.25 Where an MRT leaves the firm before retirement age, we propose that the FCA investment firm must hold the pension benefits for 5 years in the form of shares, instruments or within any alternative arrangements. 12.26 Where an MRT leaves the FCA investment firm upon reaching retirement age, the firm must pay out the pensions benefits in shares, instruments or by means of any alternative arrangements. We propose that they be retained by the MRT for 5 years. Remuneration committees 12.27 We propose that a non‑SNI firm subject to the extended remuneration requirements must establish a remuneration committee. We provide further details of our proposals in Chapter 8.

90 CP21/7 Chapter 12 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 12.28 We do not consider it would be proportionate to require all non‑SNI firms to establish remuneration committees. However, we would encourage non‑SNI firms not subject to this requirement to consider whether establishing or maintaining one might contribute to the better alignment of risk and individual reward across the firm. Q26: Do you agree with our proposals for rules on paying out variable remuneration in shares, other instruments or using alternative arrangements? Q27: Do you have any comments on our proposals on deferral, vesting and retention?

91 CP21/7 Chapter 13 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 13 Regulatory reporting 13.1 In this chapter, we set out further proposals for regulatory reporting under the IFPR (beyond those consulted upon in CP20/24). Our proposals for MIFIDPRU reporting are based on the information that FCA investment firms should already have available as management information, or already need to record as part of our proposals for the requirements to which they relate. 13.2 Our intention is to collect an appropriate amount of data that will let us supervise FCA investment firms, including CPMIs, against the requirements of the IFPR. We will collect any additional information or clarification required on an ad hoc basis. The amount of data requested is proportionate to the size and complexity of the FCA investment firm. 13.3 We have published the proposed reporting templates. To ensure the consistency and comparability of the data FCA investment firms submit, we are also consulting on draft instructions on how to complete the templates, including key definitions of the terms used. 13.4 This chapter includes our proposals for reporting on: • the liquid asset requirement • the ICARA process • remuneration, and • updating FIN067 additional reporting for CPMIs 13.5 We are still considering any additional information we need on securitisations and intend to consult on amending or replacing FSA046 and FSA058 at a later date, possibly after the IFPR is introduced. 13.6 Our proposals for calculating the values that should be reported on are in: • Chapter 6 of this CP for the liquid asset requirement (MIFIDPRU 6) • Chapter 7 of this CP for the ICARA process (MIFIDPRU 7) • Chapters 9 to 12 of this CP for remuneration requirements (SYSC 19G) 13.7 Our approach to the FIN067 return will remain substantially the same, but we are also taking this opportunity to simplify the form and reduce the amount of information that we collect from CPMIs. 13.8 We will be providing detail on feedback we received to our first set of proposals on regulatory reporting in CP20/24, and how we will be implementing those proposals, in the related policy statement. Liquid asset requirement reporting (MIF002) 13.9 This CP contains our proposals for the type of liquid assets that FCA investment firms should hold and how to calculate their basic liquid asset requirement. These are in found in MIFIDPRU 6. We are also consulting on our proposals on how FCA investment firms should calculate any additional liquid asset requirement. These are found in MIFIDPRU 7.

92 CP21/7 Chapter 13 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 13.10 As a result, we now propose a slightly amended liquid asset reporting form (MIF002), building on our original proposed form in CP20/24, to reflect some of the new terminology that is in line with these proposals. This return will apply to all FCA investment firms and should be completed quarterly. ICARA process reporting – The ICARA Questionnaire (MIF007) 13.11 This CP contains our proposals on how the ICARA process applies to FCA investment firms (see Chapter 7). So that we get a snapshot of the results of the ICARA process, we are proposing a new reporting form that will apply to all FCA investment firms that should be submitted annually. This form, The ICARA Questionnaire will replace the current FSA019 for FCA investment firms. FSA019 will still be relevant for UCITS depositories that are subject to IPRU‑INV chapter 5 requirements. 13.12 This form will provide us with additional information on the results of an FCA investment firm’s review of its ICARA process including where additional harms have been identified. It will include any additional own funds and liquid assets that the firm has identified through their ICARA process that they should hold. More detail on how the ICARA Questionnaire fits into the ICARA process is provided in Chapter 7. 13.13 We also propose to ask for some detail about business models. The activities and services set out in MiFID do not all map neatly to regulated activities under FSMA. In addition, not all the services provided by FCA investment firms, such as corporate finance or venture capital, can necessarily be ascertained by the permissions held. Asking for this information annually will ensure that we are updated as to any changes in an FCA investment firm’s business model where no changes in permission are needed. 13.14 FCA investment firms will be required to notify us of the date on which they will submit MIF007. They can subsequently notify us to amend this date as long as there are not more than 12 months between submissions. 13.15 In certain circumstances, a firm may review its ICARA process more frequently than annually. This may occur where the activities carried on by the firm are significant in their nature, scale or complexity and the firm concludes that it is appropriate to conduct a more regular review. In that case, we propose that the firm must submit MIF007 after each review and must notify us of the submission dates for each. 13.16 A firm may also need to carry out a review of its ICARA process after a significant change in its business or operating model. In that case, we propose that the firm must submit MIF007 within 20 business days of its governing body having approved the outcome of that review. The firm will not be required to notify us in advance of the submission date in these circumstances. This will ensure that we have up‑to‑date information on the firm’s business.

93 CP21/7 Chapter 13 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Reporting requirements for CPMIs 13.17 CPMIs currently complete either FIN067 or FIN068 as a supplemental return, depending on whether they are subject to BIPRU or IFPRU. The IFPR will replace both of those existing regimes. To simplify matters we are proposing to ask all CPMIs to complete a revised FIN067 and we will retire FIN068. The FIN067 return will continue to be a supplemental report that applies in addition to the applicable “MIF00” reports in MIFIDPRU 9. We propose to align the submission dates of the FIN067 return with the submission dates for MIF001 and MIF002, so that CPMI firms can provide the supplemental data in FIN067 alongside the standard data on their capital in MIF001 and their liquid assets in MIF002. 13.18 CPMIs should note that from 1 January 2022, FOR should be calculated as set out in MIFIDPRU 4 for the whole business (see Chapter 4 of this CP) 13.19 We have also taken this opportunity to propose changes to the information that we collect in FIN067, including no longer requiring granular information about the PII policies that CPMIs hold. Remuneration reporting 13.20 This CP contains our proposals for a new MIFIDPRU Remuneration Code that will apply to all FCA investment firms (see Chapters 9 to 12). To support this, we are proposing to introduce a new MIFIDPRU Remuneration Report (MIF008) and retire the existing Remuneration Benchmarking Information Report (REP004) and High Earners Report (REP005). 13.21 We propose to tailor the reporting requirements depending on whether a firm is subject to basic, standard or extended remuneration requirements: • SNI firms would report to us only basic information about the total number of staff they have, and how much total fixed and variable remuneration they awarded in the relevant year. • Non‑SNI firms would need to split this information between material risk takers (MRTs) and non‑MRTs, and also provide information on the ex‑post adjustments made to variable remuneration. • Non‑SNIs subject to extended remuneration requirements would need to provide the above as well as information on the remuneration awarded to their highest 3 earners. 13.22 We do not propose as part of this CP to require FCA investment firms to report on diversity‑related pay gaps, for example gender and/or ethnicity. We will consider the potential use of reporting on diversity‑related data as part of our broader work on diversity and inclusion later this year. 13.23 Our proposals mean that an FCA investment firm which is not part of a consolidation group under the IFPR would complete the remuneration report on a solo basis. This includes firms which are part of a group subject to the group capital test. But an FCA investment firm which is part of an FCA consolidation group would instead complete the report on a consolidated basis. The group may submit a single report to satisfy the reporting requirements of all FCA investment firms in the group.

94 CP21/7 Chapter 13 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 13.24 As is the case for our current remuneration reports, we propose that the new report be submitted annually within 4 months of a firm’s accounting reference date. Q28: Do you have any feedback on our reporting proposals? Please particularly provide details of any areas where you consider additional guidance on how to complete them is needed.

95 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 14 Interaction of MIFIDPRU with other prudential sourcebooks 14.1 In this chapter we set out how MIFIDPRU is intended to interact with other prudential sourcebooks in our Handbook. This will mainly be relevant to FCA investment firms that also carry out non‑MiFID regulated business and so may currently be subject to more than one prudential sourcebook at the same time. 14.2 The other key prudential sourcebooks that are affected by the introduction of MIFIDPRU are: • GENPRU – General Prudential sourcebook • BIPRU – Prudential sourcebook for Banks, Building Societies and Investment Firms • IFPRU – Prudential sourcebook for Investment Firms • MIPRU – Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries • IPRU‑INV – Interim Prudential sourcebook for Investment Business 14.3 In this CP, we also propose amendments to the Glossary of definitions that are necessary to explain how our relevant prudential sourcebooks will apply alongside MIFIDPRU. 14.4 We also propose a three‑year transitional provision to give former exempt‑CAD firms time to comply with any new professional indemnity insurance requirements in MIPRU 3.2 as a result of undertaking non‑MiFID activities such as insurance distribution. 14.5 We intend to consult on the remaining consequential changes in a subsequent consultation paper. That will include: • consequential changes to the chapters of prudential sourcebooks not covered in this consultation; • consequential changes to non‑prudential sourcebooks; and • the remaining consequential changes to the Glossary. 14.6 We know that our Handbook currently requires an investment firm to be a ‘full‑scope’ IFPRU investment firm before it can meet the eligibility criteria for depositaries in FUND 3.11.10R(2). We are minded to allow an FCA investment firm to act as a depositary under the IFPR without the need for dealing on own account, whilst ensuring that the underlying prudential requirements that currently apply to such depositaries continue to apply. We intend to consult on the relevant changes to FUND 3.11, and corollary changes to COLL 6.6B, in a subsequent consultation paper. Our overall approach 14.7 Our overall approach in this CP to other prudential sourcebooks affected by the introduction of MIFIDPRU is to make only the consequential amendments that are needed to: • delete provisions that are no longer required • ensure that the interactions between them and MIFIDPRU work in practice

96 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms For example, there will no longer be a need for provisions that refer to various categories of MiFID investment firm (eg ‘exempt‑CAD’), where we proposed in CP1 that IFPR will apply to all MiFID investment firms prudentially regulated by us. 14.8 We do not propose any material changes in underlying policy now as part of our initial implementation of MIFIDPRU. However, we know that some of the contents of other prudential sourcebooks could be updated and their interactions with MIFIDPRU be improved further. Our broad intention is to review the remaining prudential sourcebooks over the coming years and, where appropriate, to make them more consistent with the concepts in the IFPR. This will also reflect the aim of our Mission in that greater focus will be put on the potential harm that FCA regulated firms can cause to others. General approach to cross‑references 14.9 Where appropriate, we have updated cross‑references so that they refer to MIFIDPRU instead of the UK CRR or deleted prudential sourcebooks. For example, IPRU‑INV 11.6.1G currently explains that CPMI firms are subject to IPRU‑INV 11 in parallel with the requirements for MiFID investment firms in GENPRU, BIPRU or IFPRU. We have updated this provision so that it refers to MIFIDPRU, without otherwise changing the policy approach that CPMI firms are required to comply with the prudential requirements for their MiFID and non‑MiFID activities in parallel. 14.10 However, in other cases we have not updated cross‑references in this way. This is to avoid making material changes to the underlying policy for non‑MIFID prudential sourcebooks. Instead, we have either copied out the underlying material being cross‑referred to, or we have fixed the cross‑reference in time to the day before the IFPR is implemented. For example, in IPRU‑INV 11 and parts of IPRU‑INV 5, the definition of ’own funds’ is currently set by cross‑reference to the UK CRR. We have fixed this cross‑reference in time to the day before the IFPR is implemented, so that it will not be affected by changes made by the IFPR or CRR2. GENPRU 14.11 We propose to delete GENPRU 2, and other parts of GENPRU that relate to GENPRU 2. BIPRU firms currently subject to GENPRU 2 will become subject to MIFIDPRU. 14.12 We will consult on amendments to GENPRU 3 (Cross sector groups) and related provisions in a subsequent publication. BIPRU 14.13 We propose to delete BIPRU in its entirety. BIPRU firms will become subject to MIFIDPRU. 14.14 The few existing provisions that refer to BIPRU in other prudential sourcebooks will either be written into those other sourcebooks or cross reference will be made to the version of BIPRU that exists on the day before the IFPR is implemented.

97 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms IFPRU 14.15 We propose to delete all of IFPRU, except for IFPRU 11. IFPRU firms will become subject to MIFIDPRU. 14.16 The Treasury consulted on the application of the UK resolution regime to FCA investment firms in February 2021. We intend to consult on our approach to the requirements in IFPRU 11 (which supplement the UK resolution regime) in a subsequent consultation, once the outcome of the Treasury’s consultation is clear. MIPRU 14.17 We propose to amend MIPRU 1.3 to remove references to BIPRU. As explained above, any standards that need to be kept (eg on the valuation of residential property) will be brought into MIPRU (see proposed guidance in MIPRU 1.3.3A). 14.18 We will amend the following sections of MIPRU: • 3 (professional indemnity insurance • 4.1 (application and purpose (of capital resources)) • 4.2 (capital resource requirements) • 4.4 (calculation of capital resources) to remove references to types of firm or (parts of) prudential sourcebooks that will no longer exist, or to update references to MIFIDPRU. 14.19 We also propose to clarify that MIPRU 4 does not apply to a MiFID investment firm that has been designated for prudential supervision by the PRA. The PRA is responsible for setting the prudential requirements for these firms. Former exempt‑CAD firms and professional indemnity insurance under MIPRU 14.20 Exempt CAD firms that carry on activities in scope of MIPRU 3.2 (eg insurance distribution activity) are currently exempt from the requirements in MIPRU 3.2, on the basis that they are currently subject to similar professional indemnity insurance requirements in Chapters 9 or 13 of IPRU‑INV. 14.21 As the category of an exempt‑CAD firm will cease to exist once the IFPR is implemented (see Chapter 1 of CP20/24) these firms will no longer be subject to IPRU‑INV. Instead they will become subject to prudential requirements in MIFIDPRU. MIFIDPRU does not require the holding of professional indemnity insurance. 14.22 Former exempt‑CAD firms that carry on activities in scope of MIPRU 3.2 will therefore have to comply with the requirement to hold professional indemnity insurance in MIPRU 3.2 for the first time, consistent with other investment firms that have always had to comply with MIPRU 3.2.

98 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 14.23 As a result, we propose a transitional provision (set out in MIPRU TP 2) to give former exempt‑CAD firms time to comply with any new requirements in MIPRU 3.2. Our proposal is to allow such firms to continue to comply with relevant provisions for professional indemnity insurance in IPRU‑INV Chapters 9 or 13, for a period of three years, upon implementation of the IFPR. 14.24 In particular, former‑exempt CAD firms should note that: • the minimum limit of indemnity for claims in aggregate can be higher under MIPRU 3.2.7R(2)(b) than under the relevant provisions in IPRU‑INV • MIPRU 3.2 also contains material relating to excess levels that differs from the material in IPRU‑INV • MIPRU 3.2 does not make provision for exclusions in the same way as IPRU‑INV 13 14.25 We expect former exempt‑CAD firms to have regard to the requirements in MIPRU 3.2 when renewing their professional indemnity insurance whilst our proposed transitional applies. IPRU‑INV (except IPRU‑INV 11) 14.26 We propose to delete Chapter 9 (financial resources requirements for an exempt‑CAD firm) and Chapter 13.1A (Capital resources and professional indemnity insurance requirements for an exempt CAD firm). Exempt CAD firms and local firms will become subject to MIFIDPRU, and will no longer be subject to IPRU‑INV. 14.27 We also propose to remove exempt BIPRU and exempt IPRU commodities firms from the scope of IPRU‑INV 3. These firms are MiFID investment firms and will become subject to MIFIDPRU. 14.28 We propose to make consequential amendments reflecting the changes above to the following chapters of IPRU‑INV: • 1 (Application and general provisions) • 2 (Authorised professional firms) • 3 (Financial resources for securities and future firms which are not MiFID investment firms) • 4 (Lloyd’s firms) • 5 (Financial resources for investment management firms) • 13 (Financial resources requirements for personal investment firms) • 14 (Consolidated supervision for investment businesses) 14.29 We will also make minor consequential amendments to Appendix 1 and Annex A. 14.30 We are proposing to amend cross‑references to GENPRU, BIPRU, IFPRU and the UK CRR in line with the general approach to cross‑references outlined above. 14.31 In Chapter 14 of IPRU‑INV we propose to update the circumstances under which this chapter will not apply to include situations where the firm is part of a group that contains an FCA investment firm and is included within a prudential consolidation under MIFIDPRU 2.5 or a group capital test under MIFIDPRU 2.6.

99 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 14.32 We have also taken the opportunity to correct an inaccurate cross‑reference in IPRU‑INV 14.5.2R. 14.33 We will publish our proposals for consequential changes to IPRU‑INV Annex D (required forms) in a subsequent consultation. IPRU‑INV 11 14.34 As explained in the “general approach to cross‑references” section, we have amended IPRU‑INV 11 so that it explains that CPMI firms will be subject to MIFIDPRU in parallel with IPRU‑INV 11. This is consistent with our existing approach. For example, a CPMI firm will need to comply with the base requirement in IPRU‑INV 11 in parallel with the permanent minimum requirement (PMR) in MIFIDPRU (see Chapter 5 of CP20/24 for details on the PMR). 14.35 We have not updated the definition of ’own funds’ in IPRU‑INV 11 to refer to MIFIDPRU. Instead, we have fixed the cross‑reference to the UK CRR in time. As a result, CPM firms will not be affected by the changes to the meaning of “own funds” in MIFIDPRU 3. For CPMI firms, this means that the definition of “own funds” will differ between MIFIDPRU and IPRU‑INV 11. 14.36 We explain our proposals for a basic liquid assets requirement in MIFIDPRU 6. CPMI firms, as MIFIDPRU investment firms, will become subject to this requirement in parallel with the liquid assets requirement in IPRU‑INV 11.2.1R(3). CPMI firms should note that there is a different definition of ‘liquid asset’ in each chapter. 14.37 CPM firms and CPMI firms are both subject to a fixed overheads requirement in IPRU‑INV 11. This currently cross‑refers to the fixed overheads requirement in Article 97 of the CRR. We propose to cross‑refer instead to the methodology for calculating fixed overheads in MIFIDPRU 4 (see Chapter 4 of this CP for details). The provisions that are currently in Article 97 of the UK CRR will be deleted in that regulation once the IFPR is implemented, as they are not applicable to banks or PRA designated investment firms. This is consistent with the EU’s changes in Articles 60 and 61 of the Investment Firms Directive. 14.38 We have also explained that a CPMI firm is not required to include its collective portfolio management activities when calculating its K‑factor metrics under MIFIDPRU 4. Glossary 14.39 We propose to make consequential amendments to a small number of defined terms in our Handbook Glossary that are necessary to be consistent with our other consequential amendments. 14.40 These include adding specific reference to ‘dormant account fund operators’ in several definitions where references to ‘BIPRU’ will be deleted, which is necessary so as to leave undisturbed the prudential requirements that apply to a firm conducting this permitted activity.

100 CP21/7 Chapter 14 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Q29: Do you agree with our proposals for consequential changes to our other prudential sourcebooks? If not, please identify which specific provisions you believe are not consequential changes that are needed. Q30: Do you agree with our proposal for a three‑year transitional provision (set out in MIPRU TP 2) to give former exempt‑CAD firms time to comply with any new requirements in MIPRU 3.2? If not, what alternative proposal would you suggest? Q31: Have you identified any specific cross‑references that we may have missed where a consequential amendment could be needed to ensure the relevant provision still operates once IFPR is implemented? If so, please provide details.

101 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 15 Applications and notifications 15.1 In this chapter we explain our approach to applications and notifications under MIFIDPRU. 15.2 We are also consulting on the proposed forms for applications and notifications. 15.3 Once finalised, the forms will be available via Connect, our online application and notification system. We expect to open the gateway for draft IFPR applications and notifications in the summer of 2021. 15.4 This chapter also: • indicates for which applications we are likely to charge a fee • explains what is happening with existing UK CRR permissions • sets out our proposed approach to publishing information on the Financial Services Register for permissions granted under MIFIDPRU • highlights where transitional provisions mean that FCA investment firms do not need to make an application or notification 15.5 The applications and notifications referred to in this chapter cover the material consulted on in CP20/24 and in this CP. In the case of cross‑references to material published in CP20/24, cross‑references to MIFIDPRU are to the version that we will publish in our forthcoming policy statement. In that statement, we intend to introduce some additional material explaining how UK CRR market risk permissions and notifications will work under MIFIDPRU. 15.6 We will place the relevant forms in Annexes at the end of each chapter of MIFIDPRU handbook text. In our final IFPR policy statement we will provide a complete list of IFPR applications and notifications. MIFIDPRU applications and notifications 15.7 MIFIDPRU contains several instances where FCA investment firms or UK parent entities will have to apply to seek our permission to do something or to make a formal notification to us about a particular event. Tables 7 and 8 list all the MIFIDPRU permissions and notifications. 15.8 We have designed a specific form for each of the application and notification requirements listed in Table 7 and Table 8. This is to make it clear to applicant firms the information that we expect them to provide us with to support their application, or the level of detail needed for notifications. The content in each form is based on the specific requirements set out in our rules. We think this is an improvement on the current generic notification form and CRR permission forms. It should make it easier for applicant firms to submit complete applications and notifications. This should also make it easier and more cost‑effective for us to process permissions and notifications.

102 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 15.9 In some application forms, we propose to request that applicant firms attach specific supporting information or documentation. This is to help us judge that they meet the relevant standards or conditions for the permission they are applying for. For example, in the K‑CMG permission forms we propose to require that firms attach a copy of the agreement with their clearing member concerning the margin model and collateral used. 15.10 Other application forms request that applicant firms provide supporting information or documentation to demonstrate they meet certain requirements without being overly prescriptive. For example, investment firm groups wishing to apply for the group capital test are requested to attach supporting information to demonstrate that their structure is sufficiently simple. Common sections for all forms 15.11 As we propose to receive applications through Connect, applicant firms should not need to re‑enter all their basic information when submitting these forms. However, we are proposing to ask for details of the Senior Manager responsible for an application/ notification. 15.12 Where an application or notification is submitted in the context of a group, we also propose to ask for confirmation of the group entities involved. 15.13 Each form will also require that our standard declaration is signed electronically before being submitted to us via Connect. Applications and notifications to be made before 1 January 2022 15.14 Table 7 lists all MIFIDPRU permissions for which FCA investment firms or UK parent entities must formally apply to us. 15.15 We would encourage all firms to submit their applications as early as possible to ensure we can determine them in time, especially where an applicant firm wishes to rely on it from the point at which new rules come into effect on 1 January 2022. 15.16 Due to their nature, some permissions apply to a specific event and will only be relevant once the IFPR has been in operation. 15.17 Where an existing UK CRR permission may carry across it does not require anything to be done for the start of the IFPR. However, some firms not in currently scope of the existing UK CRR permissions may want to apply for these permissions for the first time under IFPR. 15.18 We would encourage FCA investment firms to state explicitly in their feedback which of these permissions, if any, they are thinking of applying for to help us gauge the potential volumes of applications we are likely to receive. We would also encourage trade bodies to gauge interest amongst their members. Based on that information, we will confirm in the subsequent PS by when we would expect firms to submit their applications. Any indications of interest are not binding, and we will treat them as confidential, subject to our ordinary legal obligations.

103 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Table 7: MIFIDPRU permissions Permission Handbook Ref Individual exemption from disclosure requirements 2.3.1R Individual exemption from liquidity requirements where the firm is included in consolidated supervision 2.3.2R Permission to use group capital test (See note 1) 2.4.17R Exemption from liquidity requirements on a consolidated basis 2.5.19R Permission to offset positions within a prudential consolidation group for calculating K‑NPR 2.5.34R K‑CMG permission to include a portfolio of a designated investment firm in a consolidated K‑CMG requirement 2.5.40R K‑CMG permission to include a portfolio of a third country entity in a consolidated K‑CMG requirement 2.5.41R Permission to include interim or year‑end profits in CET1 capital 3.3.2R Permission to include capital instruments issued by a firm as CET1 capital instruments (see note 2) 3.3.3R Permission to reduce own funds, where none of the conditions in MIFIDPRU 3.6.4R apply 3.6.2R Permission to rebase fixed overheads requirement to a lower amount where firm’s projected relevant expenditure decreases by a material amount 4.5.9R Permission to exclude from net open currency positions, positions deliberately taken in order to hedge against the adverse effect of the exchange rate on: (a) the firm’s own funds requirement; or (b) an item which the firm has deducted from its own capital. 4.11.8R Permission to use advanced internal models for the calculation of K‑NPR 4.12.4R Permission to make a material change or a material extension to the use of an advanced internal model 4.12.6R Permission to use sensitivity models to calculate interest rate risk on derivative instruments 4.12.66R Permission to apply K‑CMG to a portfolio 4.13.9R Permission to exclude transactions with certain counterparties from the calculation of firm’s K‑TCD requirement 4.14.6R Note 1: We remind investment firm groups that are intending to apply to use the group capital test that we need to have received their application by 31 January 2022 if they want to take advantage of being able to apply the group capital test on a temporary basis, as set out in MIFIDPRU TP3. Note 2: Firms that were not previously subject to the UK CRR definition of capital do not have to apply for permission to include as CET1 capital instruments that they have already issued provided that the instruments meet the necessary conditions for such capital in MIFIDPRU 3. They should refer to the section on transitional provisions for own funds permissions at the end of this chapter. 15.19 Table 8 lists all IFPR related notifications. We encourage FCA investment firms to notify us as soon as they can if they want to rely on having complied with a notification requirement, for example from the point at which the new rules come into effect on 1 January 2022. 15.20 In some cases, notifications need to be submitted to us within a specified timeframe. For example, firms who intend to issue AT1 or T2 instruments need to notify us of their intention at least 20 business days before the intended issuance date.

104 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Table 8: MIFIDPRU notifications Notification Handbook Ref Notifications of the use of the alternative approach to measure AUM and/or COH for the purpose of determining if a firm can be classified as an SNI firm 1.2.4R Notification of the use of an end‑of‑day value for CMH as a result a qualifying error 1.2.7R Notification that a non‑SNI investment firm qualifies to be reclassified as an SNI investment firm 1.2.13R Notification that a firm no longer qualifies to be classified as an SNI investment firm 1.2.16R Notification of the intended use of proportional consolidation in respect of a relevant financial undertaking 2.5.17R Notification of issuance of additional capital instruments in a class that has already been approved as CET1 instruments (See note 1) 3.3.3R Notification of the intended reduction in own funds instruments where either of the conditions in MIFIDPRU 3.6.4R apply (See note 2) 3.6.3R Notification of the intention to issue AT1 or T2 instruments (See note 3) 3.6.5R Notification of the intended non‑material change or extension to the use of an internal model 4.12.7R Notification of the intended use of own delta estimates in K‑NPR (standardised approach for options) or K‑TCD 4.12.10R 4.14.20R Notification that a firm no longer satisfies all the conditions of a K‑CMG permission previously granted for a portfolio 4.13.10R Notification to cancel a K‑CMG permission for a portfolio and calculate K‑NPR instead 4.13.20R Notification that the concentration risk soft limit has been exceeded 5.6.3R Notification of the concentration risk hard limit breach 5.9.3R Notifications for the exemption from the K‑CON requirement for commodity and emission allowance dealers 5.11.2R Notification by non SNIs of meeting or no longer meeting conditions for exemption from requirements to establish certain committees and from additional remuneration requirements. (See note 4) 7.1.9R and 7.1.12R Notification of own funds falling below certain level 7.6.11R Notification of liquid assets falling below certain level 7.7.14R Notification of a revised ICARA assessment questionnaire (MIF007) submission date(s) 7.8.5R Notification of the intended treatment of instruments which were issued and met the conditions to be classified as AT1 instruments in accordance with the UK CRR before MIFIDPRU sourcebook application date (See note 5) TP 1.8R Notification that the instruments issued by a former non‑CRR firm, its UK parent entity or parent undertaking before MIFIDPRU comes into effect meet the requirements to qualify as own funds under MIFIDPRU TP 7.4R Note 1: We must receive the notification at least 20 business days before the day that the CET1 instruments are due to be issued Note 2: We must receive the notification at least 20 business days before the day that the intended reduction in own funds is due to take effect. Note 3: We must receive the notification at least 20 business days before the day that the AT1 or T2 instruments are due to be issued Note 4: This notification requirement is also referred to in SYSC 19G Note 5: We would prefer to receive this notification before MIFIDPRU takes effect. However, firms have until 1 month after MIFIDPRU comes into force to notify us of the treatment of existing AT1.

105 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Application fees 15.21 We are not proposing to charge fees for the majority of MIFIDPRU applications. However, there are some exceptions where we believe it is fair for us to seek to recover our costs because these costs are likely to be material. The applications we propose to charge a fee for are those requiring a significant level of technical expertise and that will take a substantial amount of time to determine. These include applications to: • use advanced internal models to calculate the K‑NPR (market risk) own funds requirements • use sensitivity models to calculate interest rate risk on derivative instruments • exclude from net open currency positions, positions deliberately taken to hedge against the adverse effect of the exchange rate on: – the applicant firm’s own funds requirement or – an item which the applicant firm has deducted from its own funds • use K‑CMG, instead of K‑NPR 15.22 The fees we propose to charge will be commensurate with the complexity of a given application type and the resources required to assess it. We expect the fee for internal market risk model approvals to be substantial. We expect that moderate fees will apply in all other cases. 15.23 We intend to put forward our proposals on applicable fee amounts and fee structures in our third IFPR CP, due to be published in Q3 2021. 15.24 As rules on fees for MIFIDPRU permission applications are unlikely to be finalised until later this year, those wishing to submit draft applications before then may not have certainty of the applicable fee. Applicant firms will not be required to pay a fee for draft applications until the requisite rules are in force and once the amount of the fee has been confirmed will be able to withdraw their applications without being liable for any application fees. Treatment of existing UK CRR permissions 15.25 In DP20/2, A new UK prudential regime for MiFID investment firms, we indicated which CRR‑based permissions we expected to continue to be in effect under the IFPR. In CP20/24 we proposed preserving the existing UK CRR market risk regime and introduced transitional provisions for the continuing application of UK CRR permissions for own funds.

106 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 15.26 Table 9 summarises how the relevant UK CRR‑based permissions that will continue, map onto MIFPIDPRU. Table 9: UK CRR permissions which carry forward as MIFIDPRU permissions. Existing permissions previously granted will continue to be in effect. Permission UK CRR Article MIFIDPRU Ref Permission to include interim or year‑end profits in CET1 capital Article 26(2) 3.3.2R Permission to classify capital instruments issued by a firm as CET1 capital instruments Article 26(3) 3.3.3R Permission to use sensitivity models to calculate interest rate risk on derivative instruments (see note 1) Article 331 4.12.66R Note 1: We will be explaining our approach to sensitivity model permissions and include the near‑final rules on this in PS1. 15.27 Table 10 shows which existing CRR permissions will become notifications under MIFIDPRU. Table 10: UK CRR permissions which carry forward as notifications Permission UK CRR Article MIFIDPRU Ref Permission to reduce own funds where one of the conditions in MIFIDPRU 3.6.4R apply Articles 77 & 78 3.6.3R Permission to calculate own estimates for delta for the purposes of the standardised approach for options (see note 1) Articles 329, 352(1) & 358 4.12.10R Note 1: Existing UK CRR permissions for own estimates of delta will be treated as permanent notifications under the new rules. This means that we will not expect FCA investment firms currently holding these permissions to submit further notifications in the future for the existing models used for these purposes. For new permissions see: https://www.fca.org.uk/publication/documents/option-price-template-for-notification.xlsx. 15.28 Table 11 shows which existing UK CRR permissions will carry forward as MIFIDPRU permissions but we do not expect there to be any active permissions as at 1 January 2022. Table 11: UK CRR permissions which carry forward as permissions where we do not expect there to be any active permissions at the MIFIDPRU implementation date. Permission UK CRR Article MIFIDPRU Ref Permission to reduce own funds, where none of the conditions in MIFIDPRU 3.6.4R apply (See note 1) Articles 77 & 78 3.6.2R Permission to offset positions held by different group undertakings when applying consolidated market risk requirements Article 325 2.5.34R Permission to exclude from net open currency positions, positions deliberately taken in order to hedge against the adverse effect of the exchange rate on: (a) the firm’s own funds requirement; or (b) an item which the firm has deducted from its own capital. Article 352(2) 4.11.8R Permission to use advanced internal models for the calculation of market risk capital requirement Article 363 4.12.4R Permission to make a material change or a material extension to the use of an advanced internal model Article 363 4.12.6R Note 1: a reduction permission under UK CRR is a ‘point in time’ permission and so is not converted into a MIFIDPRU equivalent.

107 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 15.29 For the avoidance of doubt, any existing UK CRR permissions which are not listed in Tables 3, 4 and 5 will cease to have effect from 1 January 2022. Treatment of existing waivers and modifications 15.30 Most existing waivers and modifications of the rules in our current prudential sourcebooks will also cease to apply from 1 January 2022. We noted this expectation in Chapter 16 of DP20/2. Further information about the amendments to other prudential sourcebooks is given in Chapter 14 of this CP. 15.31 The exception to this is the existing waivers and modifications in respect of the committee requirements under IFPRU. FCA investment firms that remain in scope and whose waivers or modifications will not have expired before 1 January 2022 will be able to have them transferred to the MIFIDPRU regime. We include further details with other governance requirements in Chapter 8 of this CP. FSMA waivers 15.32 Generally, FCA investment firms and UK parent entities wishing to apply for a FSMA waiver or modification in respect of any of the rules related to the IFPR will be expected to use our existing Waiver Application Form. Publication of MIFIDPRU permissions on the Financial Services (FS) register 15.33 We propose to publish any MIFIDPRU permissions that we grant on the FS register, in line with our current approach to publishing FSMA waivers and modifications, and UK CRR permissions. 15.34 Under this approach most waivers, modifications and CRR permissions that are granted are published in full. In some cases, we publish the information in abridged form or do not publish at all, if we think this is appropriate. In general, we believe that publishing MIFIDPRU permissions ensures consistency with the current approach, while also strengthening transparency and public disclosure. Transitional provisions for own funds permissions and notifications FCA investment firms and UK parent entities that have not been subject to the UK CRR definition of capital 15.35 MIFIDPRU TP 7 applies to FCA investment firms and UK parent entities that have not been subject to the UK CRR definition of capital, that is BIPRU firms, exempt CAD firms, locals and exempt commodities firms. This allows these FCA investment firms and parent entities to recognise their existing own funds instruments as own funds under MIFIDPRU where they meet these conditions: • the own funds instruments were issued before the date that MIFIDPRU began to apply, and

108 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms • the instruments meet the conditions in MIFIDPRU 3 to be classed as own funds (excluding any conditions relating to needing to obtain our permission, or to give notification to us before treating them as own funds) 15.36 FCA investment firms and UK parent entities with own funds instruments that meet these criteria do not need to notify, or ask permission from, us in accordance with the normal rules in MIFIDPRU to count these existing instruments as own funds for the purpose of MIFIDPRU 3. This is because the transitional provisions deem the FCA investment firm or UK parent entity to have obtained the relevant permission or to have made the relevant notification under MIFIDPRU. However, these entities do need to notify us, by no later than the date that MIFIDPRU begins to apply, where they intend to count these existing instruments as own funds. 15.37 The transitional provisions also mean that if such an FCA investment firm or UK parent entity subsequently issues further instruments of the same class of existing instruments on substantially the same terms after MIFIDPRU begins to apply, it only needs to comply with the rules that apply to the subsequent issuance. 15.38 For CET1 instruments of an existing class, this means that FCA investment firms must give us advance notice of the subsequent issuance, but they do not require our permission. For AT1 and T2 instruments of an existing class, no further notification is required. However, if an FCA investment firm issues a new class of regulatory capital instruments (or instruments of an existing class on substantially different terms) on or after the date that MIFIDPRU begins to apply, it will need to get our permission (for CET1 instruments) or to notify us (for AT1 or T2 instruments) under the standard rules in MIFIDPRU 3. FCA investment firms that are currently subject to the UK CRR definition of capital 15.39 FCA investment firms that are currently subject to the UK CRR do not need to rely on the proposed transitional in MIFIDPRU TP7. In CP20/24, we included proposed transitional provisions in MIFIDPRU TP1 that would automatically convert existing UK CRR CET1 permissions into their equivalent MIFIDPRU permission. In this consultation, we propose to add additional provisions to MIFIDPRU TP1 to clarify that we will deem notifications made under IFPRU for existing AT1 or T2 instruments issued by IFPRU investment firms equivalent notifications under MIFIDPRU. This means that where former CRR firms are issuing further instruments of pre‑existing classes of regulatory capital instruments on substantially similar terms after MIFIDPRU begins to apply, they only need to comply with the rules that apply to subsequent issuances of an existing class. 15.40 However, current IFPRU investment firms should note that this does not mean that the underlying instruments will automatically satisfy the criteria in MIFIDPRU 3 to qualify as regulatory capital instruments. It is the firm’s responsibility to ensure that those criteria are met if it intends to include existing instruments in its own funds under MIFIDPRU. We remind FCA investment firms that the criteria to recognise instruments as AT1 capital under MIFIDPRU 3 are different from those under the current UK CRR. 15.41 Current IFPRU investment firms that have issued existing AT1 instruments should also note that under our proposals in CP20/24, there is a separate requirement in MIFIDPRU TP1 to notify us of whether those instruments meet the updated AT1 conditions in MIFIDPRU 3.If they do not, the FCA investment firm is required to notify us of the

109 CP21/7 Chapter 15 Financial Conduct Authority A new UK prudential regime for MiFID investment firms approach that it intends to take in relation to such instruments. That notification must be submitted no later than one month after MIFIDPRU begins to apply. 15.42 The above summary of the transitional provisions in MIFIDPRU TP1 and TP 7 is a very high‑level summary of eligibility criteria and the operation of the provisions. FCA investment firms should refer to the rules in those annexes in the draft legal instrument for more detailed information. This includes how we propose to apply an equivalent approach to that outlined above for existing UK parent undertakings that will be required to hold regulatory capital in accordance with MIFIDPRU 3 when IFPR begins to apply. Q32: Do you have any feedback on the applications and notifications forms covered in this chapter, including our proposals for any supporting information or documentation? Please indicate the specific form or forms your feedback relates to. Q33: If you think you might want to apply for any of the permissions that need to be determined before 1 January 2022, please indicate which ones. Q34: Do you agree it is fair and appropriate that we charge fees for the applications in certain circumstances where we have deemed it justifiable to do so? Please suggest what you believe would be an appropriate charge for the applications we have listed in section 11.19. Please indicate which permissions from that list you might be applying for. Q35: Do you agree with our proposed approach to publishing MIFIDPRU permissions on the FS Register?

110 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16 Our approach to the Financial Services Bill and compatibility with our duties and principles 16.1 When we consult on new rules, the Financial Services and Markets Act 2000 (FSMA) requires that we must advance at least 1 of our operational objectives. We are also required to have regard to regulatory principles. 16.2 As explained in CP 20/24, the Financial Services Bill (FS Bill), as currently drafted, sets out additional duties, new ‘have regards to’ considerations, and public accountability requirements we must comply with in our rulemaking for the IFPR. 16.3 We intend to meet the new obligations set out in the FS Bill ahead of the Bill coming into force. The current draft of the FS Bill permits this to enable us to consult stakeholders before implementing these new prudential requirements. 16.4 The drafting of the FS Bill may change as it is debated and considered by Parliament. Nonetheless we believe consulting now is preferable to waiting until the Bill comes into force. This ensures the timely introduction of the IFPR while giving firms sufficient time to prepare for it. We are monitoring the FS Bill’s passage through Parliament and will consider whether any changes to its provisions require us to take any further steps before we introduce the new regime. 16.5 The scope of the secondary legislation that the Treasury makes using the proposed regulation‑making powers in the Bill will affect our powers to introduce the IFPR. Again, we will closely monitor the content of those regulations and will reflect their effect in subsequent consultations if needed. 16.6 The FS Bill, as introduced to Parliament in October 2020, will place a duty on the FCA to make rules for investment firms, using our existing rulemaking powers, to impose the following prudential requirements: • the types and amounts of capital and liquid assets they must hold • the management of risks arising from the strength of firms’ relationship with, or exposure to, clients • regulatory reporting • governance arrangements • remuneration policies and practices • public disclosure 16.7 In doing so, the FS Bill will require us to address the risks to: • consumers arising from investment firms • the integrity of the UK financial system arising from investment firms • which FCA investment firms are exposed 16.8 The FS Bill will also impose similar obligations to make prudential rules for authorised parent undertakings of FCA investment firms, and (if we think such rules are necessary or expedient to advance one of our operational objectives) for unauthorised parent undertakings of FCA investment firms.

111 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.9 The rules the FCA makes to meet these new duties under the FS Bill for the IFPR are referred to in the Bill as ‘Part 9C Rules’. The FS Bill sets out that, when making or amending any ‘Part 9C Rules’, we must have regard to: • any relevant standards set by an international body • the likely effect on the relative standing of the UK as a place for internationally active investment firms to be based or to carry on activities • any other matter specified by the Treasury 16.10 These new considerations are in addition to our existing statutory objectives, our duty to have regard to the regulatory principles in FSMA, and to the importance of taking action to minimise the extent to which it is possible for a business to be used for a purpose connected with financial crime. All of which are considered in the context of the Financial Conduct Authority’s new remit letter of 23 March 2021. Unlike these existing obligations, the new considerations in the FS Bill only apply to Part 9C rules. 16.11 The FS Bill will also require us to consider, and consult the Treasury on, the likely effect of the rules on relevant equivalence decisions. The Treasury is responsible for determining what is considered a relevant equivalence decision and must notify us of these in writing. 16.12 The FS Bill also sets out new accountability requirements. When we consult on our draft IFPR rules, we are required to explain: • the provisions included to address the risks set out above • the ways in which having regard to the above new considerations has affected the rules This is in addition to our existing requirements under section 138l of FSMA. 16.13 When we make our proposed rules, we must publish a summary of the purpose of the rules and explanations and a statement on the points above. We are also required to publish a list of the rules we consider Part 9C rules. How we intend to fulfil our duties 16.14 In this chapter, we set out how we have considered our new duties and have regards obligations set out under the FS Bill, as well as our obligations under FSMA, in relation to the proposals in this CP. 16.15 As set out in CP20/24, we want to provide industry with sufficient time to prepare for the introduction of this new regime. So we have taken a phased approach to consultation. we set out now our draft rules on those areas where we believe industry needs more time to prepare now, rather than waiting until later in 2021 to release a single consultation. 16.16 A consequence is that we will only set out in this CP how we have fulfilled our duties and addressed the risks as required by the FS Bill provisions in the context of the proposals that we are consulting on in this CP. We will explain in our subsequent third consultation how the remaining elements of our proposals further address our duties and the risks set out.

112 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.17 Our intention is that our final consultation will bring together the elements covered in the preceding consultations as well. 16.18 In this CP, we set out our draft rules to introduce the following chapters, or elements of them, of the new prudential sourcebook for MIFID investment firms and related provisions elsewhere in our rules: • MIFIDPRU1 – Application (remainder) • MIFIDPRU4 – Own funds requirements • MIFIDPRU6 – Liquidity • MIFIDPRU7 – Risk Management, Governance, ICARA & SREP • MIFIDPRU9 – Regulatory reporting (remainder) • MIFIDPRU10 – Clearing firms • SYSC19G – Remuneration requirements This CP also contains certain other consequential or non‑material amendments that are connected to the above proposals. 16.19 Below we set out how we believe our proposed rules in these chapters help us fulfil our duties and address the risks. MIFIDPRU1 – Application 16.20 Our duty under the proposed Part 9C of the FS Bill is to make rules for FCA investment firms and certain parent undertakings. In this CP, we propose to include an overall application chapter at the beginning of the new MIFIDPRU sourcebook that identifies the entities to which the rules and guidance in the sourcebook apply. 16.21 Having considered the definition of an FCA investment firm in the FS Bill, we consider that this includes collective portfolio management investment (CPMI) firms. So we are also proposing to add guidance that clarifies that CPMIs must comply with the requirements in MIFIDPRU that are applicable to FCA investment firms, except to the extent that a provision specifically directs otherwise. This will ensure that we meet our obligation to apply Part 9C rules to the required population of firms. More generally, it helps us deliver a more level playing field, and so supports our objective to promote competition. 16.22 The definition of an FCA investment firm in the FS Bill does not include overseas investment firms, including where they operate branches in the UK. Therefore we do not have a duty to make prudential rules that apply to such firms, although we could make rules under our general FSMA rule‑making powers if we considered this appropriate. 16.23 Having considered this issue, we have decided that at present, we will consult on excluding overseas firms from the scope of MIFIDPRU. However, when considering whether to authorise a UK branch of an overseas investment firm, we will assess whether the firm is subject to a prudential regime in its home jurisdiction that applies requirements that are broadly equivalent to MIFIDPRU. We think that this is an appropriate approach, having regard to the practical limitations on applying direct prudential supervision on a branch basis and our published approach on authorising branches of overseas firms ‘Our Approach to international firms’ (Feb 2021).

113 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.24 In this CP, we are also proposing some amendments to clarify the criteria according to which an FCA investment firm will be assessed as small and non‑interconnected (SNI). Most of these amendments do not change the approach that we previously proposed in CP20/24. They are designed to clarify how certain calculations should be performed when assessing whether the criteria are met. 16.25 We also propose to add a new criterion that will prevent a firm from being SNI if it provides clearing services to other users, whether as a direct clearing member of a central counterparty or through indirect clearing arrangements. We think that this is appropriate to reflect the interconnected nature of clearing arrangements and the associated risks within the financial system. In making this amendment we are fulfilling our requirement to address risks to integrity of the UK financial system arising from investment firms. MIFIDPRU4 – Own funds requirements 16.26 To enable us to deliver our Mission and objectives, we must ensure that FCA investment firms have adequate financial resources and be able to put right any harm that they might cause to others. Reflecting our requirements as set out in the Bill, our rules look to minimise the risk of firm failure. However, our intention is not to introduce a zero‑failure regime. We do want to ensure that, if an investment firm does exit the market, this occurs an orderly manner. This helps us address potential harm to consumers and protect the integrity of the financial system. 16.27 In this CP, we propose that the fixed overhead requirement (FOR) will apply to all FCA investment firms. The FOR is one of the factors that determines the level of own funds a firm needs to have (its ‘own funds requirement’). It is an amount equal to one quarter of the firm’s relevant expenditure during the preceding year. Ensuring a firm has own funds reflecting its FOR plays an important role in making sure it can exit the market in an orderly way. 16.28 We are also consulting on how to calculate the remaining K‑factor requirements. These are a mixture of activity‑ and exposure‑based requirements. The K‑factors are a fundamental development within the IFPR. They help us assess the level of risk firms pose based on their activities, and the calculations needed to help determine the amount of own funds they need to hold to cover these risks. This creates a direct link between firms’ own fund requirements and their business and operational models. 16.29 The additions to MIFIDPRU 4 in this consultation cover the K‑factor requirements for MiFID business from: • portfolio management and investment advice of an on‑going nature (K‑AUM); • reception and transmission and execution of client orders (K‑COH); • holding client money (K‑CMH); and • holding client assets (K‑ASA). 16.30 These requirements will help to address risks from activities that have the potential to cause material harm to an FCA investment firm’s clients, such as operational risks from holding client funds or errors in executing a client’s order.

114 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms MIFIDPRU6 – Liquidity 16.31 While all FCA‑authorised firms are required to hold adequate financial resources to meet their liabilities as they fall due, not all FCA investment firms are currently subject to the detailed liquidity requirements set out in BIPRU 12. 16.32 The IFPR introduces minimum quantitative liquidity requirements for all FCA investment firms, including SNIs. These proposed requirements are designed to ensure that all FCA investment firms have a minimum stock of liquid assets to fund the initial process of a wind down, if it becomes necessary to exit the market. This helps us to address the potential harm to consumers, and the UK financial system more widely, that may otherwise arise from the disorderly failure of FCA investment firms. 16.33 The new basic liquidity requirement will require an FCA investment firm to hold an amount of core liquid assets that is at least equal to the sum of a third of the amount of its fixed overhead requirement and 1.6% of the total amount of any guarantees provided to clients. 16.34 This basic requirement must be met through the most liquid assets, in order to support a wind down. Conversely, for going concern purposes, we are allowing greater flexibility to meet the threshold requirements set out in MIFIDPRU7. 16.35 This should help ensure FCA investment firms can continue to function or otherwise exit the market without disruption, by continuing to fund their relevant expenditure for a given period and without having to rely upon continued income. MIFIDPRU7‑ Risk Management, Governance, ICARA & SREP 16.36 With the introduction of the IFPR, we propose to introduce a more proportionate approach to the assessment and setting of prudential requirements. We will achieve this by creating a clearer link, compared to previous regimes, between firms’ size, complexity, and harm they pose to consumers and markets. 16.37 FCA investment firms’ risk management practices and governance are critical in enabling them to assess the appropriate non‑financial and financial resources required to cover the risk of harm they pose, both on an ongoing basis and to exit the market. 16.38 Our proposed rules make clear senior management’s responsibilities to deliver effective risk management, including Senior Managers’ responsibilities. 16.39 Reflecting the wider duties set out for us, our proposed rules emphasise the requirement for FCA investment firms to identify and mitigate the harm they may cause to consumers and the market throughout the economic cycle. This means that an FCA investment firm should consider as part of its ICARA process how the risk of harm may develop in future, including in the event of a disorderly wind‑down, rather than focussing on a static assessment based on current circumstances. 16.40 These proposals will also allow us to re‑orientate our prudential supervisory approach to a more sectoral and risk‑based approach, concentrating on areas where harm is most likely to arise. This will help us fulfil our duty to mitigate the risks to consumers and the market arising from FCA investment firms, as well as to reduce those risks that firms themselves may be exposed to.

115 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms MIFIDPRU9‑ Regulatory reporting 16.41 In this CP, we are consulting on the proposed reporting forms on an FCA investment firm’s ICARA process and on remuneration requirements. We are also consulting on amendments to the liquidity reporting forms we proposed in CP20/24 to take into account the proposed rules on the liquid assets requirement, and on amendments to the existing reporting forms for CPMIs to account for changes introduced by the IFPR. 16.42 As set out in our first CP, we need relevant and timely data on the risk profile of individual firms, to enable us to identify trends that point to potential risks to their financial resilience. So effective reporting of liquidity, the outcome of firm’s ICARA assessments, and remuneration requirements, are essential to enable us to deliver on our requirements for the IFPR. 16.43 Our proposed approach is to streamline existing reporting requirements and focus on information that will support a more agile supervisory approach. This relies on having access to more relevant and timely data. The level of detail we propose to collect from FCA investment firms will depend on the complexity of their business model and size. MIFIDPRU10 – Clearing firms 16.44 As part of our engagement with industry participants, we have identified that certain FCA investment firms may provide clearing services, either as direct clearing members of central counterparties or through providing indirect clearing arrangements. These activities may be important, particularly in certain specialist markets where they may increase competition and widen access to clearing services. However, clearing services may also involve additional risks, particularly due to their interconnected nature within the broader financial system. 16.45 Reflecting our requirement to address the integrity of the UK financial system arising from investment firms we propose to apply certain additional requirements to clearing firms. These will include requiring cleared transactions to be included within the calculation of a firm’s daily trading flow (DTF), which will therefore contribute towards its K‑DTF requirement. However, where a firm is both executing and clearing the same trade and the value has already been included in the firm’s calculation of COH or DTF due to the execution activity, we propose that the firm does not need to include the value in DTF again for the clearing activity. We think that this is a proportionate approach to addressing the relevant risks. 16.46 Firms that are direct clearing members of a central counterparty are often required to make pre‑funded contributions to the central counterparty’s default fund. The current UK CRR requires firms to treat these pre‑funded contributions as exposures when a CRR firm is calculating its counterparty credit risk requirement. We propose to adopt a similar approach in our rules by requiring firms to include pre‑funded contributions to the default fund of a central counterparty within their K‑TCD requirement. This will help to address the risks from the firm’s potential financial liability if the central counterparty defaults on its obligations.

116 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Remuneration requirements 16.47 We designed the proposed remuneration rules included in this CP to be consistent with an FCA investment firm’s size and complexity. For example, we propose to apply only basic requirements to SNIs. Non‑SNIs will have to meet more detailed standard rules, including identifying material risk‑takers (MRTs), guaranteed variable remuneration, severance pay, performance measurement, and malus/clawback. The largest non‑SNIs will also need to comply with rules on deferral, retention, and paying a proportion of variable remuneration in non‑cash. 16.48 The overall aim behind our proposals is for firms’ remuneration policies and practices to promote healthy cultures and to help us prevent behaviour that could lead to harm to consumers or markets and that promote effective risk management. This, in turn, should help us mitigate the risks to consumers and the market from FCA investment firms’ activities. Summary 16.49 As set out previously, we consider the impact of our proposals will be to reduce the risks to consumers to which FCA investment firms are exposed (including because of their relationship with their parent undertaking), reduce the risks they pose to clients and counterparties, and to support the integrity of the financial system. 16.50 In so doing, these proposals are part of the fulfilment of our duties under the FS Bill to impose the following requirements on FCA investment firms and their parent undertakings: • the types and amounts of capital they must hold • the management of risks arising from the strength of firms’ relationships with, or exposure to, clients • regulatory reporting • governance arrangements • remuneration policies and practices • public disclosure Advancing our objectives 16.51 The proposals in this CP are intended to advance our objectives to enhance the integrity of the UK financial system, to protect consumers and to promote effective competition in the interests of consumers. 16.52 We consider these proposals compatible with our strategic objective of ensuring that the relevant markets function well. They are intended to refocus prudential requirements away from solely looking at the risks to firms’ balance sheet, to also consider and look to mitigate the potential for harm the firm may pose to others, to their clients and markets. 16.53 For example, the proposed K‑factor approach to determine minimum own funds requirements for non‑SNIs seeks to capture activity and exposure‑based risks that are specific to each firm. FCA investment firms will only have to apply the K‑factors that are relevant to their business model. We believe that aligning standards with different

117 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms categories of risks should help us reduce the potential harm to consumers, therefore improving confidence in the integrity of the market. 16.54 Likewise, by requiring that FCA firms have adequate stress‑testing and wind‑down plans as part of their ICARA process, we are ensuring that firms are taking the necessary steps to avoid a disorderly failure. This, in turn, should help improve the stability of the financial sector overall. 16.55 This should also grant greater protection to consumers, by ensuring the FCA investment firms they deal with have robust governance procedures to monitor risk and adequate financial resources. 16.56 Our proposals will also mean that there will be 1 overarching regime for all FCA investment firms. There is proportionality according to the type of activities they undertake and their size. This will be a significant improvement on the 11 regimes that are currently in place for these firms. FCA investment firms with similar business models will now have similar prudential requirements, rather than markedly different ones due to historical quirks. This will help to improve competition between existing FCA investment firms as well as simplifying prudential requirements for new entrants. How we have taken account of our ‘have regard to’ considerations in developing the draft rules Relevant standards set by an international body (as proposed by the FS Bill) 16.57 For the purpose of the MIFIDPRU chapters included in this and our previous CP, we have identified 1 relevant international standard for investment firms: IOSCO’s ‘Core Principle 30.’ This sets out that: ‘there should be an initial and ongoing capital and other prudential requirements for market intermediaries that reflect the risks that the intermediaries undertake.’ 16.58 We consider that the proposals included in this CP are consistent with this standard. As set out in CP20/24, our proposed rules amend the current levels of initial capital required for authorisation as an investment firm. These are set based on the regulated activity being undertaken, and we proposed to update them to reflect changes to the affected firms in terms of size and business model. Our proposed K‑Factor and FOR requirements help ensure that prudential requirements are aligned with FCA investment firms’ business model, their size and complexity. The ICARA proposals we set out in this consultation further develop this by requiring the firm to establish systems to identify and monitor risks of harm posed by the firm’s activities and business model and strategy. And to mitigate them through controls and/or financial resources. 16.59 Furthermore, we have had regards to relevant standards set by an international body in relation to our remuneration proposals. For example, the Financial Stability Board’s (FSB) Principles and Standards for Sound Compensation Practices (P&S) are high‑level standards which seek to align firms’ remuneration policies and practices with prudent risk management and the long‑term interests of the firm. They cover key areas such as effective governance by the firm’s management body, risk adjustment, pay‑out of variable remuneration in shares or share‑linked instruments, deferral, clawback, and restrictions on guaranteed variable remuneration.

118 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.60 Reflecting the FSB’s focus on global financial stability, the P&S were initially intended primarily for large, systemically relevant financial institutions. But their areas of focus are also relevant to investment firms, as emphasised by the FSB’s growing interest in the implementation of the P&S for the investment and insurance sectors in member jurisdictions. 16.61 We consider that our remuneration proposals in this CP are consistent with the FSB P&S. This applies not only to the overarching objectives but also to the more detailed elements of the P&S, for example that deferral periods should be not less than 3 years. At the same time, we are mindful that the P&S are aimed particularly at systemically relevant firms such as banks. We have ensured our proposals for FCA investment firms are proportionate to the risks posed by these firms. We do this by requiring only the larger investment firms to apply details rules on deferral and pay‑out in instruments. We also allow exemptions for MRTs earning smaller amounts of variable remuneration. We have taken care to ensure that FCA investment firms have sufficient flexibility to establish remuneration policies and practices which are appropriate to the risks associated with their diverse activities, size, complexity and legal structure. 16.62 The revised G20/OECD Principles of Corporate Governance from 2015 apply to financial and non‑financial listed companies. Although only a small proportion of FCA investment firms are listed, ie have shares that are publicly traded, some of the principles are relevant to good governance more broadly. This is particularly the case where the responsibilities of the management board are concerned. 16.63 To the extent they are relevant to non‑listed investment firms, we have taken these principles into account. We consider our proposals on general governance are consistent with them. Examples include monitoring and managing conflicts of interest, ensuring adequate systems and controls, and setting up risk, remuneration and nomination committees, where appropriate. The relative standing of the UK (as proposed by the FS Bill) 16.64 In CP20/24, we described how, when considering the new ‘have regard to’ duty as set out in the FS Bill, we first have to establish a baseline of where the UK stands before the proposed rules come into force. The UK is the world’s largest or second largest financial centre by most measures and has the highest number of domestic and international investment firms operating in Europe. 16.65 As such, we consider the UK has a strong relative standing as a place for international investment firms to establish and conduct business. This is confirmed in discussions we have with firms and industry bodies. They confirm that the deep pool of skilled labour, deep capital markets, time zone, and strong, informed and consistent regulatory approach are all positive drivers. 16.66 For the purposes of our IFPR rulemaking, the most relevant other country or territory where in our opinion internationally active investment firms could choose to be based or carry on activities jurisdiction is the EU. It is the other major jurisdiction currently introducing a prudential regime for investment firms, shares broadly the same time zone, has deep capital markets, and a labour pool with the relevant financial services skill set. 16.67 We are adopting the same approach as we did for CP20/24, by using the EU’s IFR/ IFD as the baseline for the UK’s IFPR. As we mentioned in that CP, our intention is to achieve the same overall prudential outcomes with IFPR as that of the IFR/IFD. This, in

119 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms part, reflects the level of input we had on the design of the EU’s regime. This approach, we believe, will have a positive impact on the relative standing of the UK in the eyes of internationally active investment firms. 16.68 There are specific areas where having regard to the UK’s relative standing has affected the choices made in our rules in this CP, to ensure they are aligned with the needs of the UK market and take into account the business models of firms located here. These are: MIFIDPRU6 – Our approach to assessing basic liquidity requirements 16.69 We propose that firms meet the basic liquidity requirement using a narrower range of assets than the more detailed provisions under the CRR that the EU’s regime cross‑refers to in its rules. 16.70 The assets that we propose can meet these basic liquidity requirements are those we would reasonably expect all FCA investment firms to hold. They do not require any reduction (or ‘haircut’) given their certainty of value. 16.71 When drafting this rule, we were conscious that by setting out a narrower range of permitted assets, we were taking a stricter approach than the EU, and that this in isolation could have an impact on international firms’ views of the UK. 16.72 We do not consider high standards to be necessarily detrimental to internationally active firms. In many cases it can be the contrary. In this specific case, our proposals were driven by two considerations: i. Under our proposals the basic liquid assets requirement is a baseline that firms must always hold to ensure that they can start to wind‑down in an orderly way, should that be necessary. Having a narrower band of the most liquid assets provides us, and the wider market, with greater confidence that this will be the case. ii. We believe strong market stability to be an important consideration for internationally active investment firms. 16.73 We are also conscious of a key objective of our IFPR proposals – to simplify the regime, particularly for the benefit of smaller and less well‑resourced firms. This supports our competition objective. 16.74 Our proposals have achieved this by removing the need for cross‑referring to detailed CRR provisions (delegated regulations) on liquid assets applicable to banks. These permit various types of assets (eg covered bonds, securitisation positions) subject to very prescriptive and complex conditions. Our aim is to simplify these requirements, while ensuring they remain prudentially sound. 16.75 Overall, we believe that maintaining a strong and robust regulatory and supervisory system, and our commitment to achieving the highest international standards, go hand‑in‑hand with the UK’s competitiveness as a global financial centre. MIFIDPRU10 – Categorisation of clearing firms 16.76 We are proposing that FCA investment firms providing clearing services (either as direct clearing members of a CCP, or as indirect clearing members through other clearing members) should automatically be treated as non‑SNI. In our view, this reflects the fact that, given the nature of clearing activities, these firms are interconnected with other firms and the broader financial system.

120 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.77 Where an investment firm group is subject to prudential consolidation and contains one or more clearing firms, the UK parent entity of that group would need to comply with our rules on the basis that it is a non‑SNI investment firm on a consolidated basis. These requirements will apply equally to self‑clearers, ie firms that provide clearing services for their own trades. 16.78 Our approach to firms providing clearing services is designed to meet the specific needs of the UK market. Specialist non‑bank clearing firms provide important services in specific markets (such as interest rate or commodity derivatives) within the UK, where larger bank clearing firms may be unwilling to provide these services or may only do so at uncompetitive rates. 16.79 In the EU, some of these firms may be designated as systemically important and therefore, may be subject to the CRR/CRD. However, our discussions with industry have led us to conclude that subjecting these smaller, non‑bank clearing firms to the CRR/CRD would be disproportionate. In our view, the IFPR is a more proportionate regime to regulate these firms as our proposed standards are specifically designed with their needs in mind. 16.80 We are also proposing some additional capital requirements for clearing activities that go beyond those that would apply under the EU regime. In our view, these additional requirements are appropriate to address additional risks that may arise from the provision of clearing services. They are based on existing requirements in the UK CRR, but have been adapted to fit into the IFPR framework proportionately. 16.81 Our proposed rules should reflect the needs of the UK market, and therefore have regard to its relative standing, by ensuring our requirements account for the specific nature of activities and the business models of firms based in the UK. Remuneration requirements 16.82 SYSC 19G - We are proposing to introduce a single Remuneration Code for all FCA investment firms, the MIFIDPRU Remuneration Code. This will replace the IFPRU Remuneration Code and the BIPRU Remuneration Code. 16.83 Our proposed rules are designed to account for the specifics of the UK market and ensure that our regime remains internationally competitive. 16.84 For example, in Chapter 9 of our CP, we set out our proposals to apply our MIFIDPRU Remuneration Code to firms in a proportionate manner. The EU’s IFD does not apply any remuneration requirements to EU SNI firms, whereas we propose SNI firms comply with a small number of remuneration rules, the ‘basic remuneration requirements’ (see Chapter 10). As these rules are principles-based requirements there is a high degree of discretion in how to comply with them. 16.85 We have reflected on the impact of the UK’s relative standing in making this proposal. If we did not apply at least these basic remuneration requirements it could have a negative impact upon the standing of the UK investment firm sector, both in prudential and conduct terms. This is particularly the case given many SNI firms are currently in scope of the IFPRU or BIPRU Remuneration Codes that are more detailed than our proposals under the IFPR. We conclude that continuing to promote effective risk management and alignment between risk and individual reward in all FCA investment firms (see Chapter 9) may broaden the UK’s appeal as a destination for international firms to operate.

121 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Likely effect on equivalence decisions (as proposed by the FS Bill) 16.86 As part of the process of drafting our rules in this CP, we have discussed with the Treasury the likely effect on equivalence decisions. We are not expected under our new public accountability requirements to provide further detail on this. The need to use our resources in the most efficient and economical way 16.87 We have had regard to the need to use our resources in the most efficient and economical way as we developed our proposed rules. There are 2 areas where we have applied this principle in particular: our reporting requirements (MIFIDPRU9) and our rules around firms’ risk, governance management and ICARA (MIFIDPRU7). 16.88 As set out previously, we have designed our rules to be proportionate and to ensure there is a clearer link between our requirements and the outcomes we are seeking. We have also sought to align these with FCA investment firms’ size and complexity. This shift should make it less onerous to comply with our rules and enable us to be more efficient in how we undertake our supervisory work. 16.89 Our intention is to move our supervisory focus away from cyclical Supervisory Review and Evaluation Process (SREPs) for our larger firms, to concentrate our resources on those firms that pose the highest potential for harm, and to undertake sectoral analysis. While we intend to maintain a supervisory focus on the larger and more complex firms, we will assess the determinations and actions made as part of an FCA investment firm’s ICARA process through a data‑led, benchmarking‑based intervention approach. 16.90 Our decision to do this reflects our desire to make best use of our supervisory resources. Undertaking a SREPs is a resource‑intensive exercise. Our current approach of cyclical SREPs is not harm‑led, but reflects requirements set out by the European Banking Authority designed for banking regulators. By making this proposal we aim to re‑allocate resources to better deliver against our objectives. 16.91 Due to the number of FCA investment firms we regulate, we have focused on requesting the key information that supervisors need to make their assessment of harm. To support this, we have consulted on our proposals to retire the existing FSA019 form and replace it with a new, more streamlined ICARA questionnaire that all firms should complete. 16.92 Under our proposed approach, we ask focused questions which allow us to understand firms’ activities and help us establish intervention points for firms to monitor against for their own funds and liquid asset resources. We set out when we expect firms to take actions, and the types of actions we expect. We also set out the types of actions we are likely to take. 16.93 Where we identify issues, we will be clear on the actions we will have expected the firms to take, as set out in our rules and in the firm’s ICARA. We will have expected firms to act promptly on that basis.

122 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.94 This principle also applies to our proposed remuneration reporting requirements. In drafting our rules, we have determined which data items on remuneration are necessary for us to assess the effectiveness of firms’ remuneration policies, while also being mindful of the need to ensure our supervisory resources are used in the most efficient and economical way. The principle that a burden or restriction should be proportionate to the benefits 16.95 One of the underlying objectives of the IFPR is to ensure that prudential requirements are well aligned with FCA investment firms’ business and operating models, and the potential harms that they may pose to consumers and markets in carrying specific activities. 16.96 In introducing the IFPR, we are departing from regimes that do not have this link to risks of harm posed by FCA investment firms built‑in, for example the CRR/CRD, which was designed for systemically important banks. Currently, different investment firms of varying size and complexity operate under regimes that potentially place disproportionate requirements on them for the activities they carry out, or which do not capture all the potential risks they posed to their clients and the market. 16.97 The following examples highlight 3 areas where having regards to this principle has particularly influenced the design of our proposed rules: MiFIDPRU4 – K-factor own funds requirements 16.98 As discussed in Chapter 4 of this CP, the K‑factors are a mixture of activity and exposure‑based requirements. Only non‑SNIs will be required to calculate them. The K‑factors that apply to each firm will depend on the nature of their activities and services. 16.99 The K‑factors are one component that is used to determine the minimum own funds requirements for a non‑SNI FCA investment firm. The information needed to calculate these has been designed with business metrics in mind. The more straight‑forward formulae to calculate the requirement should, in principle, reduce the need for FCA investment firms to require external support. 16.100 We believe the K‑factors to be one of the most important innovations of the IFPR. This is because the risk categories they aim to cover better reflect the potential harm that an FCA investment firm can pose to consumers and markets. 16.101 However, we recognise this approach will require considerable initial effort and resources on behalf of FCA investment firms to get things right. For some firms, their requirements will be higher than in the previous regime. However, as explained previously, we will be providing transitional relief in some areas and additional guidance, to ensure the costs associated with compliance are reduced as far as reasonably possible. 16.102 Overall, we believe the potential additional initial burden placed on firms needing to comply with our new rules is proportionate to the benefits that will be delivered with time by the regime. This is because it will lead to a more prudentially sound set of requirements based on the potential risks arising from FCA investment firms’ specific activities.

123 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms MIFIDPRU6 – Liquidity 16.103 As set out previously, this is the first time that all FCA investment firms will have to comply with a basic liquidity requirement. 16.104 Our proposed rules are therefore likely to raise the requirements for a number of firms. However, we believe these requirements deliver considerable benefits, including that all firms should now have a ring‑fenced pool of liquid assets, which gives both their counterparties and the market confidence. 16.105 In this CP, we have consulted on introducing greater granularity in the types of liquid assets firms need to hold. We are proposing that for the purpose of fulfilling their basic liquidity requirements, each FCA investment firms should be self‑sufficient in terms of the amount of ‘core’ liquid assets they hold. 16.106 The basic requirement is based on a proportion of each firm’s fixed overhead requirements and any guarantees provided by clients. A firm may need to hold additional liquid assets if determined as part of its ICARA process. 16.107 However, we have introduced flexibility in our approach to account for circumstances in which it may be appropriate for FCA investment firms to rely on liquidity by other entities in the group. Where firms are subject to prudential consolidation, they may apply for an exemption from the application of liquidity requirements on an individual basis. 16.108 Overall, we believe that the potential costs of complying with our proposed liquidity requirement are outweighed by the benefits they are designed to deliver. While the standards are being raised for some firms, overall these are proportionate to their size and complexity. MiFIDPRU7 – Risk Management, Governance, ICARA & SREP 16.109 Our MIFIDPRU7 rules are designed to help both firms and us identify where harm may arise and put in place the measures necessary to mitigate this. 16.110 We expect all firms through the ICARA process to undertake business model planning, forecasting, stress‑testing, recovery planning and wind‑down planning. This is likely to be the first time that some FCA investment firms have completed such a detailed risk, governance and management assessment. 16.111 However, we believe the benefits outweigh the costs. Through the process firms will be better positioned to mitigate risks that they face and harms they pose to consumers and markets. The data that results from this provided in ICARA questionnaire will allow us to move to a more data‑led and less SREP‑reliant approach to supervision. The ICARA itself will allow us to have a more comprehensive conversation with FCA investment firms about what constitutes adequate financial resources given their operating and business model and their risk appetite. 16.112 Our approach is designed to be proportionate to firms’ size and complexity. We also set out comprehensive guidance for larger or more complex firms to ensure the process is not too cumbersome. For example, when it comes to smaller, less complex FCA investment firms we only expect the ICARA process to be reviewed every 12 months (as opposed to 6 months, which may be appropriate for larger or for more complex FCA investment firms). We also set out much lighter expectations for

124 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms stress and scenario testing, including that we do not expect non‑complex firms to undertake reverse stress‑testing. Equally, we do not expect FCA investment firms to undertake the same level of analysis on the sources of harm not covered by the basic requirements. 16.113 Overall, we expect our proposed rules to lead to a more resilient and prudentially sound regime, as it will ensure FCA investment firms conduct a thorough assessment of the specific harms that they are exposed to, as well as those they pose to their clients and the market. The desirability of sustainable growth in the economy of the United Kingdom in the medium or long term 16.114 Given FCA investment firms’ importance to the functioning of the UK and global economy, it is important that they are held to prudential standards that are proportionate to the risks they pose to clients, other firms and the market. 16.115 We have consulted on a set of prudential requirements which we believe to be proportionate to the risks they pose, based on each FCA investment firm’s business and operating model. Our proposals are designed to support their resilience and therefore promote greater confidence in the industry’s stability. 16.116 For example, our own funds requirements ensure that FCA investment firms have to protect themselves from external shocks and can continue operating in times of stress They also ensure that they avoid harm to their clients and the wider market by holding resources that can support an orderly wind down. 16.117 We have also consulted on rules that set new requirements around firms’ systems and controls to prevent risks from materialising, by establishing a comprehensive ICARA framework. Our proposed approach would require firms to set out in detail the steps they are taking to reduce potential harm. 16.118 Also set out in our proposed ICARA rules – we expect all FCA investment firms to undertake stress testing based on realistic forecasts to support risk mitigation and to enable them to better plan for the future. We believe this will, we believe, support sustainable growth as firms use their findings to make realistic and appropriate strategic growth decisions. 16.119 We believe these measures support sustainable economic growth, as they minimise the disruption that FCA investment firms may pose to the wider economy during times of financial stress. The general principle that consumers should take responsibility for their decisions 16.120 The proposals are primarily prudential and about reducing the potential harm that an FCA investment firm may cause to its clients and markets. Consumers typically do not have any influence over these.

125 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms The responsibilities of senior management 16.121 Under the IFPR, we are proposing to draw a clearer obligation for senior management to take responsibility for the oversight and sign‑off of FCA investment firms’ risk management and governance procedures. 16.122 As discussed in Chapter 7 of this CP, we are proposing that all FCA investment firms are responsible for recognising, monitoring, controlling and mitigating the risks to which they are exposed and potential for harm their activities pose to consumers and markets. 16.123 The ICARA process makes sure that each firm’s assessment and the necessary steps to mitigate harm are well documented. Because we view the ICARA process as a key requirement of the regulatory system for investment firms, we expect that Senior Managers will take an active role in contributing to the required analysis, embedding the requirements in their business areas and approving the conclusion. The desirability of recognising differences in the nature of, and objectives of, businesses carried on by different persons including mutual societies and other kinds of business organisation 16.124 Our proposals are designed to support the resilience of FCA investment firms, many of which operate on a global scale and play an important role in the efficient allocation of capital, which is key to economic growth. 16.125 We have discussed throughout this CP, and previously, the specific characteristics of the regime that means it is more appropriate for FCA investment firms and proposes prudential and risk management obligations that are proportionate to the size and complexity of each firm. 16.126 For example, in CP 20/24 we set out how we consider the differentiation between SNIs and non‑SNIs should ensure that smaller firms are not subject to requirements that are disproportionate to their size and the risks that they pose. 16.127 Below, we set out the areas where having regards to the differences in the types of business carried out by investment firms has particularly influenced our proposed rules: MIFIDPRU4 – Own funds requirements 16.128 We are proposing to introduce K‑factor requirements that apply to all non‑SNIs and which are based on the specific activities that firms carry out. The amount of own‑funds requirements for each non‑SNI firm will therefore vary depending on the level of risk they pose‑and are exposed to‑because of their business model. MIFIDPRU6 – Liquidity 16.129 We are proposing that all FCA investment firms should be self‑sufficient in terms of holding liquid assets to meet the liquid assets requirement on an individual basis. However, we understand there are circumstances in which it may be appropriate for firms that are subject to prudential consolidation to apply for an exemption.

126 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 16.130 We are also proposing to provide transitional relief of up 5 years to meet this requirement for commodity and emission allowance dealers, to account for their business model and needs, given the specialised nature of this sector. 16.131 In addition, as the liquid assets requirement is determined by reference to the FOR, other types of firm that benefit from transitional relief limiting their FOR will also have their basic liquid assets requirement correspondingly reduced during the transitional period. 16.132 The flexibility in our approach to these proposed liquidity requirements is therefore based on the recognition of the different needs of businesses based on their size and complexity. MIFIDPRU7 – Risk Management, Governance, ICARA & SREP 16.133 As set out previously in this chapter, the rules in MIFIDPRU7 address FCA investment firms’ approach to internal governance and risk management. It sets out the expectations and requirements we have of firms, our expectations for the ICARA, and how we will assess firms against this. 16.134 Under our proposed rules we make a clear distinction between our expectations for firms based on their size or complexity. Our proposed rules contain a set of core requirements that we expect of every FCA investment firm, but also set out additional guidance and requirements for larger or more complex firms. MIFIDPRU9 – Reporting requirements 16.135 We propose to reduce the quantity of data points that firms are required to provide as part of their reporting under the IFPR, focussing only on data which helps supervisors understand firm‑specific harms, perform portfolio and sectoral analysis and ensure compliance with our new rules. 16.136 The amount and type of data we request from each FCA investment firm will therefore depend on their size and activities, with added proportionality for SNIs. 16.137 For example, in Chapter 13 of this CP, we have set out our proposals to tailor reporting requirements depending on a firm’s size and whether it is subject to basic, standard or extended remuneration requirements. 16.138 Under our proposals, SNIs would only report to us basic information about the total number of staff they have and how much fixed and variable remuneration they awarded in the relevant year. In contrast, small non‑SNI firms subject to standard remuneration requirements would need to split this information between material risk takers (MRTs) and non‑MRTs and provide information on ex‑post adjustments made to variable remuneration. 16.139 The largest non‑SNI firms subject to extended remuneration requirements would need to provide the above information as well as the remuneration awarded to their highest 3 earners.

127 CP21/7 Chapter 16 Financial Conduct Authority A new UK prudential regime for MiFID investment firms The desirability of publishing information relating to persons subject to requirements imposed under FSMA, or requiring them to publish information 16.140 Information about FCA investment firm authorisation status will generally be published on the FS register, except for when that information is particularly sensitive. This includes where a firm is using an alternative treatment (such as K‑CMG, rather than K‑NPR) or has been granted a waiver. The purpose of this is to ensure there is full disclosure of firms’ status, to promote transparency and trust in the market. The principle that we should exercise our functions as transparently as possible 16.141 Our consultation processes are intended to transparently set out the thinking behind our proposals and clearly explain what we expect to achieve. We will continue to engage with industry and other stakeholders to get feedback during the consultation process to ensure transparency and clarity in our approach. 16.142 In formulating these proposals, we have had regard to the importance of taking action intended to minimise the extent to which it is possible for a business carried on (i) by an authorised person or a recognised investment exchange; or (ii) in contravention of the general prohibition, to be used for a purpose connected with financial crime (as required by s. 1B(5)(b) FSMA). We do not consider this relevant to our proposals.

128 CP21/7 Annex 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 1 Questions in this paper Q1: Do you agree that CPMIs should apply MIFIDPRU requirements to their MiFID business? If not, please provide details of an appropriate prudential regime for the MiFID business of a CPMI. Q2: Do you have any specific comments on our proposed approach to the calculation of the fixed overheads requirement (FOR) and the specific items of expenditure that may be deducted from total expenses? If yes, what items would you suggest are/are not deducted, and why? Q3: Do you agree with our proposals for calculating K‑ASA and that this should address the potential risk of harm from an FCA investment firm’s direct safeguarding responsibilities, including where it is safeguarding assets delegated to it by another entity ASA? If you disagree, please explain why. Q4: Are our proposals on the calculation of K‑CMH, especially when amounts of CMH should be treated as being in a segregated account, sufficiently clear? If not, what specific suggestions do you have for improvement? Q5: Do you agree with our proposals on how the value of assets should be calculated, and for when formal delegation takes place, when calculating K‑AUM? If not, please explain any alternative suggestions you may have. Q6: Do you agree with our proposals for calculating K‑COH? Especially for measuring the value of cash trades, and for when certain transactions may be excluded from the measurement of COH? If not, please explain why and provide evidence to support any alternative suggested treatments. Q7: Are our proposals that cover the interaction between K‑AUM and K‑COH clear and prudent? If not, what specific suggestions do you have to improve this? Q8: Do you foresee any issues with our proposals for how to calculate an adjusted coefficient for use in times of stressed market conditions? If so, how might we address them, or what alternative practical suggestions do you have for achieving the desired outcome without unnecessary complexity?

129 CP21/7 Annex 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Q9: Do you agree with our proposed treatment of FCA investment firms when acting as clearing members and indirect clearing firms? If not, what alternatives could be used to calculate the own funds requirements for such activity? Are there any other circumstances in which FCA investment firms may have exposures to a CCP that should be captured by K-TCD? Q10: Do you agree with our proposals for a basic liquid asset requirement, to be met by holding core liquid assets? If not, please explain what alternative proposal you would suggest and why. Q11: Are our expectations of firms regarding the ICARA and meeting the OFAR sufficiently clear? If not, which areas would benefit from further clarification? Q12: Is the rationale for and explanation of the own funds and liquid assets wind‑down trigger sufficiently clear? If not, which areas would benefit from further clarification? Q13: Do you agree with our proposal to use an early warning indicator? Q14: Do you agree with our proposed approach to the ICARA for firms forming part of a group? Q15: Do you have any comments on our proposals for high‑level rules on internal governance and controls? Q16: Do you agree with our proposals to require certain non‑SNI firms to have a risk committee, remuneration committee and nomination committee? Q17: Do you agree with our proposal for firms to apply the new MIFIDPRU Remuneration Code from the start of their next performance year beginning on or after 1 January 2022? Q18: Do you agree that SNI firms should be subject to the ‘basic remuneration requirements’? If not, please explain why not. Q19: Do you agree that only certain non‑SNI firms should be required to apply the remuneration rules on deferral, pay‑out in instruments and discretionary pension benefits? Do you have any comments on the thresholds we propose? Q20: Do you have any comments on our proposed approach to identifying material risk takers?

130 CP21/7 Annex 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Q21: Do you agree with our proposals for exempting certain individuals from the rules on deferral, pay‑out in instruments and discretionary pension benefits? Do you have any evidence that may assist us in defining the scope of the exemption? Q22: Do you have any other comments on the proposed scope and application of the remuneration rules? Q23: Do you have any comments on the specific remuneration rules which we propose to apply to all FCA investment firms (‘basic remuneration requirements’)? Q24: Do you have any comments on the specific remuneration rules we are proposing to apply to all non‑SNI firms (‘standard remuneration rules’)? Q25: Do you agree with our proposal to extend the existing non‑Handbook guidance on ex post risk adjustment to FCA investment firms? Q26: Do you agree with our proposals for rules on paying out variable remuneration in shares, other instruments or using alternative arrangements? Q27: Do you have any comments on our proposals on deferral, vesting and retention? Q28: Do you have any feedback on our reporting proposals? Please particularly provide details of any areas where you consider additional guidance on how to complete them is needed. Q29: Do you agree with our proposals for consequential changes to our other prudential sourcebooks? If not, please identify which specific provisions you believe are not consequential changes that are needed. Q30: Do you agree with our proposal for a three‑year transitional provision (set out in MIPRU TP 2) to give former exempt‑CAD firms time to comply with any new requirements in MIPRU 3.2? If not, what alternative proposal would you suggest? Q31: Have you identified any specific cross‑references that we may have missed where a consequential amendment could be needed to ensure the relevant provision still operates once IFPR is implemented? If so, please provide details.

131 CP21/7 Annex 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Q32: Do you have any feedback on the applications and notifications forms covered in this chapter, including our proposals for any supporting information or documentation? Please indicate the specific form or forms your feedback relates to. Q33: If you think you might want to apply for any of the permissions that need to be determined before 1 January 2022, please indicate which ones. Q34: Do you agree it is fair and appropriate that we charge fees for the applications in certain circumstances where we have deemed it justifiable to do so? Please suggest what you believe would be an appropriate charge for the applications we have listed in section 11.19. Please indicate which permissions from that list you might be applying for. Q35: Do you agree with our proposed approach to publishing MIFIDPRU permissions on the FS Register?

132 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 2 Cost benefit analysis Introduction

1. FSMA, as amended by the Financial Services Act 2012, requires us to publish a CBA of our proposed rules. Specifically, section 138I requires us to publish a cost benefit analysis (CBA) of proposed rules, defined as ‘an analysis of the costs, together with an analysis of the benefits that will arise if the proposed rules are made and an estimate of those costs and those benefits’.
2. This analysis presents estimates of the significant impacts of our proposal. We provide monetary values for the impacts where we believe it is reasonably practicable to do so. For others, we provide estimates of outcomes in other ways.
3. The scope of this CP and corresponding CBA focus on a subset of own funds requirements (namely the Fixed Overheads Requirement (FOR), the Permanent Minimum Capital Requirement (PMR) and those K‑factor requirements (KFR) not covered in CP20/24), liquidity, the ICARA process, Remuneration/Governance, and Reporting. A subsequent, third consultation will cover the remaining elements of the Investment Firm Prudential Regime (IFPR) and will include a relevant CBA. We intend in the third consultation to present our view on the overall impact of our rules over all three consultations. This ensures the total costs and benefits are considered in their entirety given the interlinked nature of many of the requirements which have been considered separately over CP20/24, this CP and our third CP.
4. This CBA has the following structure: a. Section 1 outlines the problem and rationale for our proposed intervention. b. Section 2 presents our baseline and key assumptions. c. Section 3 lays out our estimates and analysis of the costs and benefits. Problem and rationale for proposed intervention
5. FCA investment firms are an important element of a well‑functioning economy. They help ensure capital is allocated efficiently and appropriately to help individuals make the most of their savings and investments. If FCA investment firms are not financially resilient, their failure, if it occurs in a disorderly manner, could bring disruption to clients or the markets in which they operate. This means it is necessary for such firms to be held to appropriate prudential standards.
6. Furthermore, decisions and choices of individual market participants can lead to negative externalities. These are side effects on third parties, such as consumers, other firms, the taxpayer, or the wider economy, that are not necessarily considered by individual market participants. This can lead to a suboptimal (low) level of capital held.

133 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Where FCA investment firms fail, this can have knock‑on effects on the markets or the economy, for example higher FSCS levies. 7. Our proposed intervention aims to achieve a better balance between avoiding the excessive social cost from firm failure and ensuring that excess costs are not ultimately paid by end‑consumers. The proposed regime is expected to generate benefits to FCA investment firms and the market. We expect that firms subject to the proposed regime would find the new prudential framework more appropriate and proportionate to their business model and less burdensome than the current requirements. Prudential requirements that better align with an FCA investment firm’s business model should also help improve the financial stability in the sector overall. This should have positive implications for consumer protection and particularly for clients of these firms, either because it reduces the potential for firm failure itself, or because it reduces the potential for disorderly failure if a firm does fail, increasing the likelihood of restoring consumers back into the position they should have been in. The proposed changes should help reduce costs and distress associated with discontinuity of service and economic losses in drawn‑out insolvency proceedings; as well as placing less reliance on investor compensation schemes, avoiding consequent impacts on other firms to top‑up these schemes to handle pay‑outs. Overall confidence, investor sentiment and market stability should also benefit.1 8. The proposed regime will be closely aligned with the new EU regime – the IFD/IFR, while taking into consideration the specifics of the UK market. The details of the EU’s new prudential regime for investment firms can be found in our June 2020 Discussion Paper – DP20/2.2 Baseline and key assumptions Baseline – current regulatory regime 9. It is necessary to establish a baseline against which to assess the costs and benefits of an intervention to ensure that only those attributable to the intervention are considered. 10. The EU’s framework legislation for its new prudential regime for investment firms was published at the end of 2019. This has been supplemented by additional technical standards published by the European Banking Authority, in consultation with the European Securities and Markets Authority. As the UK is no longer a member of the EU, we are not obliged to implement the EU’s rules. We will instead be subject to an obligation to implement a domestic regime under the FS Bill currently in Parliament. As set out in both CP20/24 and this CP we believe that for our ‘have regard’ to the relative standing of the UK, the EU’s IFD/IFR is the baseline for the IFPR. Nevertheless, recognising that parts of the overall regime are still based upon the UK CRR, we consider that it is sensible to go beyond and consider the existing levels of regulatory requirements and the current market conditions as an appropriate baseline for the purposes of our CBA. 1 EU impact assessment of the IFPR 2 DP20/2 - A new UK prudential regime for MiFID investment firms

134 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 11. We will compare our proposals against the current prudential framework that either specifies direct requirements for UK investment firms or defines the scope of the FCA’s discretion to apply other prudential requirements i.e., the on‑shored CRDIV and the CRR regime.3 Where an IFPR requirement impacts a firm in a materially different way to these regimes this will be set out in this analysis. Where our proposals will be aligned with the EU, we will also consider any case made by the EU in making its proposals where we consider it relevant to do so. Scope and affected firms 12. This CBA will only assess costs and direct benefits of proposals covered by this consultation. The IFPR will apply to a maximum of around 3,600 investment firms regulated by the FCA. This is based on the number of firms with relevant permissions on the FCA Services Register. However, we recognise that some Exempt‑CAD firms may decide not to opt‑in to MIFID and thus not become subject to the IFPR. For the purposes of the CBA, we have still used the upper bound of 3,600 investment firms for our costings. 13. As in CP20/24 we have defined categories of investment firms for the purpose of this CBA to calculate the costs and benefits. This current CP is covering a wide range of IFPR elements (part of own funds requirements, liquidity, the ICARA process, Remuneration and Governance, and further reporting aspects). The existing baseline for each of these elements can vary considerably because the firms in scope of the relevant existing rules (and how the existing rules may apply to them) differs for each element. For example, the ICARA process is akin to the ICAAP that currently applies to IFPRU and BIPRU firms only, whereas only a few firms are currently subject to any quantitative liquid assets requirement (under BIPRU 12). Equally, IFPRU and BIPRU firms are subject to different Remuneration Codes. 14. To provide as accurate an analysis of the costs and benefits as possible of each IFPR element consulted on in CP2 we have applied different categorisations to different IFPR elements. We outline below how we have done this. Own Funds Requirements; Liquidity; and Reporting 15. In CP20/24 we divided investment firms into 3 categories. These were Small, Medium and Large. Large firms were those designated for prudential supervision by the PRA and so are not subject to any of the rules proposed in this CP. Since our first consultation, firms’ responses to our data survey mean that we have been able to refine our estimates for the number of small and medium firms and in our third consultation, where we will present our view on the overall impact of our IFPR rules over all three consultations, we will take account of any refinement in numbers. 16. For the purposes of analysing: i) own funds requirements; ii) the basic liquid assets requirement; and iii) the reporting proposals, in this CP we make the distinction between SNI and non‑SNI FCA investment firms. We estimate that the total FCA investment firm population would break down by around 70% SNIs and 30% Non‑SNIs (provided that all existing investment firms remained under MiFID). 3 References to the “CRR” in this CBA are to the on-shored version of the CRR as it applies in UK domestic law by virtue of the European Union (Withdrawal) Act 2018 (as amended) and any subordinate legislation.

135 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 17. The following explains how the own funds requirements, liquidity standards and reporting proposals apply to SNI and non‑SNIs. 18. SNIs – The own funds requirement of these firms will be driven by either the PMR or the FOR. The basic liquidity requirement is a new prudential standard for all IFPR firms irrespective of size. 19. All FCA investment firms will be required to submit regulatory returns under IFPR, although we would expect SNIs not to have to report some of the information. We assess the impact of our streamlined reporting proposals based on whether a firm is SNI or Non‑SNI. 20. Non‑SNIs – The own funds requirement of these firms will be the higher of the PMR, FOR and KFR. For many, it is expected that it will be the K‑factors that drive own funds requirements (not the PMR or FOR). 21. The KFR, although applicable for all non‑SNI firms when calculating own funds requirements, is not expected to be greater than the FOR or PMR for smaller non‑SNIs. This is because some smaller firms will be categorised as non‑SNI investment firms, due only to breaching one or more of the SNI thresholds by a small amount or because they have permission to deal on own account. 22. As explained above, the basic quantitative liquidity requirement is a new prudential standard for all IFPR firms irrespective of size; and all firms will be required to submit regulatory reporting to help monitor their compliance with the regime. The ICARA process 23. We have defined four categories of investment firm for the purposes of the ICARA process. First, we have categorised firms based on whether they have been subject to the existing ‘Pillar ‘2 approach or not. Pillar 2 is essentially where a firm is required to assess the adequacy of its financial resources and following our supervisory review many be required to hold additional own funds (or liquidity, or be subject to other measures). 24. Firms that have been subject to Pillar 2 will already be familiar with a lot of the concepts in the ICARA process and are likely to have existing processes in place that can be relatively easily repurposed to the ICARA process. This will be existing IFPRU and BIPRU firms. 25. All other firms subject to IFPRU will be new to the requirements in the ICARA process, and so the implementation costs will be relatively higher. Although many of these will be SNIs with smaller, less complex business models. 26. We have further split each of those two categories into SNI and non‑SNI. This reflects the fact that the ICARA process includes some proportionality when firms undertake their ICARA assessment.

136 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 27. Based on these criteria we determine the percentage of firms in each of the four categories as: SNI Non‑SNI Firm subject to existing Pillar 2 approach 36% 28% Firm not subject to existing Pillar 2 approach 33% 3% Total 69% 31% Remuneration/Governance 28. We have defined six categories of investment firm for the purposes of the implementation of our remuneration proposals. First, we have categorised firms based on whether they are subject to an existing Remuneration Code. Firms subject to existing Remuneration Codes are IFPRU and BIPRU firms. CPMI firms already apply the AIFM Remuneration Code or the UCITS Remuneration Code to the non‑MiFID parts of their businesses. 29. All other IFPR firms will be newer to remuneration requirements, though many already comply with the principle‑based requirements on the remuneration of sales staff and advisers (SYSC 19F) and so will be familiar with establishing and implementing remuneration policies. The implementation costs will be relatively higher for these firms. 30. We have further split each of those two categories into three cohorts based on the proportionality provisions in our proposed remuneration rules. For example, many of the more detailed provisions on variable remuneration would not apply to SNIs. 31. Furthermore, the provisions on deferral and pay‑out in shares or instruments would apply only to the largest non‑SNIs. We are proposing to apply these only to non‑SNI firms with: • total on‑ and off‑balance sheet assets of more than £300m, or • total on‑ and off‑balance sheet assets of more than £100m but less than £300m, and either trading book business of over £150m, or derivatives book business of over £100m 32. Consequently, we have further allocated firms to categories based on whether they are SNIs and whether they meet these criteria if they are non‑SNIs. 33. Using these criteria, we estimate the percentage of firms in each of the six categories to be: SNIs Non‑SNIs not subject to deferral and pay‑out rules Non‑SNIs subject to deferral and pay‑out rules Firm subject to an existing Remuneration Code 36% 26% 2% Firm not subject to an existing Remuneration Code 33% 2% 1% Total 69% 28% 3%

137 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 34. The following table brings all the different categorisations together, which we have applied above, to illustrate what percentage of the IFPR firm population are in the different categories. Firm SNI Non‑SNI Binding own funds requirement is FOR or PMR Binding own funds requirement is K‑Factor approach Assets < £300m Assets

£300m Assets < £300m Assets £300m Firm subject to an existing ICARA or Remuneration Code 36% 15% 1% 10% 1% Firm not subject to an existing ICARA or Remuneration Code 33% 2% <1% <1% <1% Data

35. We conducted this analysis of the costs and benefits of the consultation proposals using two sources of data. We used data held by the FCA including data provided through firms’ regulatory returns, such as a firms’ balance sheet data and liquid assets data.
36. The IFPR includes requirements that rely on non‑financial data (e.g. staff numbers and business volumes) and some financial data (e.g. assets under management) that is not routinely reported to us by all firms or in the format required, and which we need to receive to inform our policy making and cost our proposals. Therefore, we separately issued a data request to collect such data from firms to support this, and our later, consultation. We surveyed 2,476 firms, a subset of the population as the data request was not relevant to all investment firms and received a very high response rate (57%). For this CBA we used the Remuneration data to inform the impact of Remuneration policies, and some of the business model metrics to determine which own funds requirement methodology was binding for each firm. We will use more of the survey data for our CP3 CBA.

138 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Costs and Benefits Summary of costs and benefits 37. In the sections below, we have assessed the implementation costs, the costs arising from the proposed prudential standards and the expected benefits. The following table sets out a summary of the estimated implementation costs, which are one‑off costs. We do not include ongoing implementation costs, which are wrapped up within firms’ day‑to‑day activities. Type of cost One‑off implementation costs Familiarisation costs £3.5m Gap analysis £25.2m Costs of changes to the firms’ methodology for own funds and liquidity requirements and ICARA and remuneration material £45.5m Costs of making changes to the IT systems £30.1m Costs of providing staff training/disseminating information about the new rules £27.3m Total £131.6m 38. The estimated total one‑off implementation costs imply average cost of around £65k and £23k per non‑SNI and SNI respectively. The per‑firm average estimated values do not represent the costs we expect each firm of a given size or type to incur as a result of the proposals in this CP. Rather, these are averages published for the purposes of transparency for our calculations of the costs of these interventions. As we articulated in the previous section, the categories we have used to try and allocate firms are broad and each encompasses a range of firm sizes and types, which in turn would have a range of compliance costs above or below the averages we have included. 39. We also summarise below what we believe to be the one‑off implementation costs, presented by each area of the regime. 40. We stress that all implementation cost estimates have been calculated based on separate teams being set up for each part of the regime. We recognise that in practice firms are likely to set up teams that will implement more than one aspect of the regime concurrently leading to implementation cost synergies. As a result, our approach to estimate implementation costs is likely to overstate the true implementation cost and be an upper bound. Equally, for some IFPR elements, such as Reporting and own funds requirements, where we consulted on rules in CP20/24 as well, we are likely to be duplicating some implementation costs in our estimates in this CBA. IFPR element One‑off implementation costs Familiarisation costs (which are not rule area specific) £3.5m Own funds requirements £17.1m Liquidity £14.7m Reporting £15.3m ICARA process £43.3m Remuneration and Committees £37.7m Total £113.86

139 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 41. In the tables below we assess how SNI and Non‑SNI FCA investment firms will be impacted by the proposed changes to the prudential regime. Each table summarises the net impact of each of the key policy changes according to any categorisation criteria explained above. Own funds requirements; Liquidity and reporting Item Impact on firms SNI Non‑SNI Fixed Overheads requirement (FOR) Rules, draft MIFIDPRU 4 Most firms can meet the requirement before the benefit of 5‑year transitional provisions. Where this is not the case, SNIs appear less likely to be able to meet the requirement compared to non‑SNIs. [see paragraphs 62‑71 for details]. Yes Yes Permanent Minimum Capital requirement (PMR) Rules, draft MIFIDPRU 4 Most firms can meet the requirement before the benefit of 5‑year transitional provisions. The PMR is more relevant for SNIs than for non‑SNIs. [see paragraphs 62‑71 for details]. Yes Yes K‑Factor requirements (KFR) Rules, draft MIFIDPRU 4 Just over half the firms can meet the requirement before the benefit of 5‑year transitional provisions. [see paragraphs 62‑71 for details]. Not applicable Yes Basic liquid assets requirement Rules, draft MIFIDPRU 6 Most firms can meet the requirement today. Furthermore, transitional provisions are likely to lessen impacts for some firms that cannot meet the requirement immediately. [see paragraphs 59‑61 for details]. Yes Yes Reporting requirements Rules, draft MIFIDPRU 9 and connected amendments to SUP16.12 Cost saving to firms due to significant reduction in the number of data items to be reported. [see paragraphs 87‑91 for details]. Yes Yes Clearing Rules, draft MIFIDPRU 10 Most firms can meet the own funds requirements for clearing. [see paragraphs 92‑94 for details]. Not applicable Yes The ICARA process Item Impact on firms Firm subject to existing “Pillar 2” approach Firms new to setting additional requirements SNI Non‑SNI SNI Non‑SNI Risk Management, ICARA, SREP Rules, draft MIFIDPRU 7 There will be net implementation costs, particularly for those firms new to setting additional own funds or liquidity requirements. There will be benefits in the short to medium term for all firms through improvements to firms’ risk management practices, and a heightened focus on mitigating harms to consumers and markets. [see paragraphs 72‑75 for more details]. Yes

140 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Remuneration and Governance Item Impact on firms [see paragraphs 76 to 86 for details] Firms subject to an existing Remuneration Code Firms not subject to an existing Remuneration Code SNI Non‑SNI below thresholds Non‑SNI above thresholds SNI Non‑SNI below thresholds Non‑SNI above thresholds Gender neutrality of remuneration policies and practices Rules, draft SYSC 19G No incremental cost as new rules reflect current legal position in UK Yes Ex post risk adjustment (malus and clawback) Rules, draft SYSC 19G Net implementation cost as new provision for many firms No Yes Yes No Yes Yes Identifying MRTs Rules, draft SYSC 19G Net implementation cost for firms new to remuneration rules, and reduction in burden for firms already subject to a Remuneration Code Yes No Yes Yes Deferral and pay‑out in shares or instruments Rules, draft SYSC 19G Net implementation cost for firms as will be new requirements for most firms in scope No No Yes No No Yes Creating committees Rules, draft MIFIDPRU 7 Net implementation cost for firms as will be new requirements for some firms in scope, e.g., firms which are not currently ‘significant IFPRU firms’ No No Yes (but not if currently significant IFPRU firm) No No Yes 42. In addition, FCA investment firms might be eligible to opt in for a transitional arrangement (contained in the draft MIFIDPRU transitional provision annexes) or a phase‑in period, which may last for up to five years. Examples relevant to this CP are the transitional provisions for the FOR and the PMR.4 These are designed to reduce the immediate impact of the new prudential requirements for (potentially smaller) firms that might find transition challenging and should thus help to mitigate some costs in the short term. 4 Note, the transitional provisions for FOR and PMR were included in CP1 however were not included in the CBA at that time, because the FOR content was not finalised.

141 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 43. In summary, the benefits of the proposed rules assessed in this CBA are: • All investment firms carrying out the same investment activity are treated in a simpler and more consistent manner. This removes any differences within markets and hence competitive distortions created by the existing mix of standards. • More proportionate regulatory reporting requirements thereby lowering compliance costs. • The IFPR is creating a tighter alignment and calibration of prudential requirements to business models and the potential for a firm to cause harm to their consumers/ clients and the markets they operate in. This should raise awareness that running a business prudently includes assessing the degree to which their activities are posing harm to others and mitigating those harms. • The linking of requirements to firm’s business models and risk of harm should allow FCA supervisors and FCA investment firms, during the ICARA and SREP processes, to focus on mitigating the risks of harm in a way that aligns to how investment firms think about their business. This should also strengthen firm’s internal risk management practices. • By establishing an objective link in the ICARA between the financial resources an investment firm holds under its IFPR requirements, and its threshold conditions we will make it easier for firms to plan for how we expect them to respond in a certain situation, including whether they should commence wind‑down. • The introduction of a minimum liquidity requirement for all investment firms should improve overall confidence in the financial resilience of investment firms among customers, counterparties and, where relevant, shareholders. This should reduce the potential for firm failure itself or reducing the potential for disorderly failure if a firm does fail or exit the market. • Reducing the social cost of firm failure by reducing the reliance on investor compensation schemes and avoiding consequent impacts on other firms to top‑up these schemes to handle pay‑outs. Consumers will avoid the distress and search costs of finding a new investment firm to service their business. 44. We do not consider it reasonably practicable to quantify these benefits. We will return to the benefits of the IFPR, including the broader impact of the whole regime on capital requirements and any other potential unintended consequences in our third consultation. 45. We believe that our proposals in this CP will have a net cost in the short to medium term. Most of the costs are one‑off implementation costs; while the benefits (such as reducing the potential for disorderly failure) are ongoing and will likely build over time. Implementation, IT and Training Costs 46. Implementation costs include the time and resources spent by firms familiarising themselves with the proposals and performing a gap analysis to identify necessary changes as a result. Firms may also incur training and IT costs. These costs will be one‑off in nature to prepare for the introduction of the IFPR. 47. We use standard assumptions to estimate firm compliance costs based on the standardised costs model, of which further details can be found in the FCA publication

142 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms “How we analyse the costs and benefits of our policies”.5 As we explained above, we are introducing a range of different policy areas in this CP which will impact different categories of investment firms differently depending on the rules under consideration. Therefore, for the purposes of the CBA we categorised firms differently depending on which policy area we are analysing. This is so we can factor in longer implementation time and costs for those firms where a particular set of standards are entirely new, and thus provide a more accurate implementation estimate. 48. Given the overlap between some of the policy proposals in this CP and CP20/24, some of the implementation costs associated with the proposals would have already effectively been costed in the previous CP (for example, the own funds calculation methodologies). However, to be prudent we have included an estimate of those costs again.6 49. Familiarisation: To familiarise themselves with our proposals, we expect that all firms will read the consultation, which contains 167 pages some of which will not be relevant to all firms. We assume that the number of compliance staff who would need to read the consultation will on average be 5 people at a medium firm and 2 at a small firm. We use an average salary of a compliance function and apply these estimates to the different categories of firms we have created for the different sets of policies we are proposing in this CBA. 50. We estimate the total cost of familiarisation to be around £3.5m for the rules consulted on in this CP. 51. Gap analysis: To meet the proposed requirements, firms are expected to conduct a gap analysis of the amount of own funds and liquid assets required, among other things, and compare it against the current regime. The standardised cost model assumes it will take 2 and 1 legal and compliance professionals at a medium and a small firm respectively to review 242 pages of legal text, plus 73 pages of different rule specific consultation text, to assess our proposals. For those prudential standards that are entirely new to a firm, such as the additional own funds and liquid assets requirements in the ICARA process, they will require deeper familiarisation to establish firm impacts. Consequently, for those standards and firms where this is the case, we have refined our cost estimates to assume a slightly longer time to review the legal text. 52. We estimate the total cost of the gap analysis to be around £25.2m for the rules consulted on in this CP. 53. Methodology changes: Firms are likely to have to make changes to their own funds calculation, introduce a new liquid assets calculation and embed revised (or in the case of some firms new) ICARA processes or remuneration policies and practices (for example firms may need to revise employment contracts for those individuals to whom malus and clawback provisions apply or have to set up a risk, remuneration or nomination committee). These will require firms to have a small project management team and the main costs relate to the opportunity cost of staff time. Our model assumes that a medium firm will spend 14 person days to implement a change, while a small firm will spend 3 person days. We also assume that this change will need to be reviewed by Senior Managers at each firm. Again, for firms where the standards are entirely new, we have factored in a slightly longer time to reflect the deeper implementation required. The total cost of this change is expected to be around £45.5m. 5 How we analyse the costs and benefits of our policies 6 In CP3 we will provide an estimated implementation cost for the whole IFPR regime.

143 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 54. IT changes: In addition to the costs set out above, firms will need to make some changes to their IT systems to reflect amendments to their own funds calculation methodologies, introduce new liquidity standards and amend or introduce ICARA processes and amended remuneration policies and practices. Firms will also need to update their systems to comply with updated reporting requirements. Our estimates assume that medium firms have an in‑house IT capability and will spend 8 person days to implement this change, while small firms are likely to rely on external consultants and spend the equivalent of 4 person days to implement the IT change. Like for other implementation costs we have factored in slightly longer time for those cohorts where particular standards will be entirely new. We expect the total cost of this change to be around £30.1m. 55. Training: Finally, we expect firms to incur some training costs especially where the standards are entirely new to a firm. Training will range from formal staff learning through to disseminating information via informal memos and e‑mail updates. We assume that a medium firm will brief 10 employees and a small firm will brief 2 employees, comprising of compliance staff and investment advisors. We assume that attending the training, reading any briefings and acting on the information will take a full day for each affected employee, and costed a higher weighting where standards are completely new. Again, we have factored in slightly longer time for those cohorts where particular standards will be entirely new. This would result in a total training cost of £27.3m. Rule‑specific net costs to firms 56. This section covers costs and benefits that firms would incur from each of the rules proposed in this consultation: • Liquidity – Basic liquid assets requirement • Own funds requirements – FOR, PMR and K‑Factors • Risk management – The ICARA process • Remuneration/Committees • Reporting requirements • Clearing members • Interaction with other prudential regimes • PII policies for exempt‑CAD firms also subject to MIPRU 57. Many of the costs associated with the rule‑specific proposals are implementation costs. For the avoidance of doubt, where the following rule‑specific sections mention implementation costs these costs have already been estimated in the implementation costs section above. Liquidity – Basic liquid assets requirement 58. The IFPR introduces for the first time minimum quantitative liquidity requirements for all FCA investment firms. The requirement is to hold an amount of core liquid assets equivalent to at least one third of the amount of their FOR. These requirements aim to ensure that investment firms have some resilience to sudden liquidity shocks. This should help them to continue to function or otherwise exit the market without disruption, through funding their overheads for a given period, thus reducing the harm they may cause to consumers and markets.

144 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 59. We have compared the most recently reported liquidity position of firms to their expected basic liquid assets requirement, to assess the impact of a quantitative liquidity standard on firms. The findings are below: Non‑SNI SNI % of non‑SNI firms with an excess of core liquid assets compared to basic liquid assets requirement % of Non‑SNI firms with a shortfall in core liquid assets compared to basic liquid assets requirement % of SNI firms with an excess of core liquid assets compared to basic liquid assets requirement % of SNI firms with a shortfall in core liquid assets compared to basic liquid assets requirement 88% 12% 86% 14% 60. Around 14% of firms (the percentage is very similar for SNIs and non‑SNIs) would be unable to meet their basic liquid assets requirement. However, this is a worst‑case scenario: these numbers have been calculated assuming a firm’s FOR value before the application of any transitional provisions. Equally, we do not know how many SNIs, or Non‑SNIs that do not deal on own account, have trade debtors that are due in less than 30 days, a value that can contribute to core liquid assets and thus lower any calculated shortfall. In practice, and as explained below in the own funds requirement section, some of IFPR transitional provisions have been designed to reduce the immediate impact of the FOR on (potentially smaller) firms that might find transition challenging. The metric underlying the Basic liquid assets requirement calculation is the FOR, so where available, FOR transitional provisions should carry over to the liquidity requirements. Transitional provisions provide time to help firms comply, but there will be costs of acquiring liquid assets to remedy any shortfall. We aim to deal with such costs overall in the CBA that will accompany our third consultation paper. Own funds requirements – FOR, PMR and K‑factors 61. In CP20/24 we consulted on different elements of the K‑factor requirement for trading firms and the PMR. We explained that it wasn’t practicable to prepare a meaningful estimate of the costs or benefits arising from the proposals relating to the PMR. This is because the PMR will not necessarily determine the overall own funds requirements of an FCA investment firm. Instead, we proposed that the PMR will become the operative requirement only where it is higher than the FOR and (for firms that are non‑SNIs investment firms) the KFR of the relevant firm. 62. Until we published proposals in this CP specifying the calculation of the FOR and the remaining K‑factors (see Chapter 4 of this CP) it wasn’t possible to determine the effect of the PMR or FOR or KFR on the population of FCA investment firms. 63. We have now been able to estimate for SNIs which of the PMR or FOR is the binding requirement, and for non‑SNIs which of the PMR, FOR and KFR is the binding requirement.

145 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 64. The table below illustrates the findings of which own funds requirement calculation is the binding requirement (assuming a firm’s PMR and FOR value at the end of any transitional provision). Firm type % of firms where the binding requirement is: Total percentage of firms PMR FOR KFR SNI 31% 38% Not applicable 69% Non‑SNI 3% 16% 12% 31% Total 34% 54% 12% 100% 65. The table shows that around 90% of firms that we think will be subject to the IFPR will have a binding requirement that is either the PMR or the FOR at the end of the transitional period. 66. For those firms where the PMR or FOR is the binding requirement we have compared their IFPR own funds requirement (at the end of any transitional period) to their existing level of own funds. This is to assess the worst‑case marginal impact of the PMR or FOR on firms. The table below reports the findings: Firm type The binding requirement is: % of firms where own funds > binding requirement (PMR or FOR) % of firms where own funds < binding requirement (PMR or FOR) Total SNI PMR 24% 11% 35% FOR 35% 9% 44% Non‑SNI PMR 2% 1% 3% FOR 15% 3% 18% Total 76% 24% 100% 67. We find that around 24% of firms have a shortfall in own funds compared to the requirements they would have at the end of the five‑year transitional period. In both cases, we find that SNIs are more likely to have a shortfall compared to non‑SNIs. Of course, we would expect firms with any shortfall to use the period of any available transitional requirement to build up their own funds from the current level, for example through retention of earnings. There will be costs of raising own funds to remedy any shortfall, but we aim to deal with such transition costs overall in the CBA that will accompany our third consultation paper. 68. For those firms where the KFR is the binding requirement we have compared their IFPR own funds requirement (at the end of any transitional period) to their existing level of own funds. This is to assess the worst‑case marginal impact of the KFR. We find that around 56% of firms would have sufficient own funds now to meet their KFR at the end of the five‑year transitional period. Again, we would expect investment firms with any initial shortfall to use a transitional period to build up its own funds. And we will aim to deal with such transition costs overall in the CBA that will accompany our third consultation paper.

146 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 69. IFPR transitional arrangements (or a phase‑in period) such as those consulted on in CP20/24 for the PMR, FOR and KFR are designed to reduce the immediate impact of the IFPR own funds requirements for (potentially smaller) firms that might find transition challenging. These arrangements would give FCA investment firms up to five years to comply after the IFPR’s introduction, and so provide a potential benefit. Although above we have identified how many firms may have own funds shortfalls under the new regime compared to the level of FOR, PMR and KFR required at the end of the transitional arrangements, we do not consider it reasonably practicable to give an estimate of the reduction in costs that the transitional arrangement provide firms. This is because there is uncertainty about how many firms will make use of this transitional arrangement given it will ultimately depend upon the specific situation of each firm. 70. The interactions between different parts of the own funds requirements calculations, as well as the transitional provisions, mean that in the third consultation we will present our view on the overall impact of our rules and the basis on which we have drafted them over all three consultations. Risk Management – the ICARA process 71. The IFPR is introducing the ICARA process as a new requirement for all FCA investment firms. Firms must have processes in place to assess the amount of additional own funds and liquid assets that they should hold to cover the harms they may cause to consumers and markets, and which have not been adequately mitigated for by other risk mitigation tools. 72. Additional own funds and liquid assets requirements due to firm‑specific risks are identified by firms themselves through the ICARA process and/or supervisory review process. We do not prescribe a particular quantitative methodology in our rules for these purposes and the resulting requirements will depend upon other factors, such as the systems and controls operated by individual firms to mitigate potential risks. It is therefore not reasonably practicable to quantify the impact of these requirements. As a result, we have not produced an estimate of the costs and benefits of any such firm‑specific prudential requirements arising from the ICARA. 73. We envisage that the ICARA process will primarily lead to one‑off implementation costs, particularly for those firms that are new to a regime where they must carry out an assessment to determine if they should hold additional own funds and/or liquid assets resources. There will be a large proportion of firms for whom an assessment of residual risks will be something they are used to under an existing prudential regime. And all investment firms should already be aware of FG20/21 when assessing the adequacy of their financial resources. As a result, those firms are likely to already have a notable proportion of the requisite processes in place to pivot to the ICARA process. The exception will be the inclusion of additional liquid assets requirements, which most firms will not have had to carry out previously. The implementation impacts of introducing the ICARA have already costed in the implementation costs section above. 74. In terms of benefits, the ICARA process will establish a clear link between the financial resources an FCA investment firm holds under its IFPR requirements and its threshold conditions. This should strengthen firm’s internal risk management practices including a heightened focus on mitigating the harms firms’ business models may cause to consumers and the markets in which they operate.

147 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Remuneration/Committees 75. The key direct costs associated with implementing the rules in the new MIFIDPRU Remuneration Code are likely to be implementation costs. The existing IFPRU and BIPRU Remuneration Codes will be replaced by a single Remuneration Code applicable to all MIFIDPRU firms. The marginal impact of the new remuneration provisions is complex to map. This is because some IFPR firms are currently subject to one or two existing Remuneration Codes, while others are subject to none. On top of that, to accommodate the diverse range of business models and activities captured under the IFPR, the proposed MIFIDPRU Remuneration Code contains several proportionality provisions. 76. As a consequence, firms are coming from various starting points (depending on their existing firm classification) and moving to different end points in the MIFIDPRU Remuneration Code depending on whether they are an SNI or not, and their balance sheet size. 77. Given the above, for the purposes of the remuneration aspects of the CBA, we grouped investment firms into six categories (I.e. three categories with two sub‑ categories each) to try and best understand the marginal impact for each category, and from that try to more accurately estimate the implementation cost for each of the six categories. 78. The key summary impacts for those six categories is below. As these are implementation impacts, we have already costed them in the implementation costs section above. 79. SNIs: For those SNIs that have not implemented remuneration rules before, they will incur implementation costs to familiarise themselves with the rules, review and amend their current remuneration policies and practices, provide training to relevant staff and make any consequential changes to IT systems. 80. For those SNIs that are existing IFPRU and BIPRU firms they will be subject to fewer rules than currently, which means there will be a net cost benefit to them. Any changes that these firms decide to make would be their own choice due to them being subject to more flexible rules than in the past. 81. Non‑SNIs not subject to deferral and pay‑out rules: For those non‑SNIs that have not implemented remuneration rules before, they will incur implementation costs to familiarise themselves with the rules, review and amend their current remuneration policies and practices, provide training to relevant staff and make any consequential changes to IT systems. In this non‑SNI category new firms will also incur the cost of identifying Material Risk Takers (MRTs). 82. For many firms in this category (irrespective of whether they are subject to remuneration rules now or not), there will be the cost of implementing ex post risk adjustment provisions for the first time (e.g. modifying employment contracts for impacted individuals). 83. For firms subject to existing remuneration rules, the new MRT provisions may be a reduced burden compared to status quo. 84. Non‑SNIs subject to deferral and pay‑out rules: For those non‑SNIs who have not implemented remuneration rules before, they will incur implementation costs to familiarise themselves with the rules, review and amend their current remuneration

148 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms policies and practices, provide training to relevant staff and make any consequential changes to IT systems. Clawback and MRT provisions will also apply to this group of firms. 85. There are costs for most firms to implement deferral and pay‑out in shares/ instruments for the first time. Additionally, there are costs for some firms to establish Remuneration Committees, Risk Committees, Nomination Committees and potentially recruiting additional Non‑Executive Directors. Reporting requirements 86. In CP20/24 we explained that we are proposing to introduce a more proportionate and risk‑based reporting regime for FCA investment firms. This will be achieved by: a. Having a single suite of IFPR reporting forms. Currently, there are different sets of regulatory returns depending on which prudential sourcebook firms fall under and if they are subject to COREP or FINREP. This has proven to be unduly complex for firms to navigate, especially if there is a change in permissions. b. Reducing the number of data items reported, while maintaining sufficient information to adequately supervise firms. c. Requiring firms to report information to us with a frequency that is appropriate to the information being requested. 87. The overwhelming majority of reporting form proposals were covered in CP20/24. In this CP we are consulting on the reporting forms that accompany our policy proposals for: a. Remuneration b. ICARA c. and CPMIs. 88. To enable the FCA to effectively supervise firms, we will continue to reserve the right to require firms to provide additional information if required. 89. The reporting requirements that we are consulting on will be a scaled down version of existing reporting requirements, with the added benefit that they will slot into our dedicated single suite of reporting forms making navigating the requirements far easier. Notwithstanding some initial one‑off cost in becoming acquainted with what reporting requirements have been removed or clarified, this should be overall beneficial to firms. 90. With the reporting proposals in this CP we have now presented the full suite of reporting templates from CP20/24 and this CP. We will bring together the total costs and benefits of the IFPR reporting obligations compared to the current mix of reporting requirements in our third CP. Clearing members 91. Since CP20/24, our discussions with stakeholders have shown that some FCA investment firms play a part in the overall provision of clearing services to other FCA investment firms. As a result, in Chapter 10 of this CP we are consulting on proposals for firms that act as clearing members or are indirect clearing firms.

149 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 92. Our proposals account for the fact that FCA investment firms may provide clearing services, by incorporating clearing activities into the calculation of capital requirements for counterparty credit risk (by including it in the trading counterparty default (TCD) calculation) and operational risk (by including it in the daily trading flow (DTF) calculation). We also propose to exclude firms who provide clearing services from becoming SNIs because of their inter‑connectivity with other investment firms and CCPs. Our approach recognises that FCA investment firms perform vital clearing services for other FCA investment firms, whilst maintaining prudential standards in a proportionate manner. There are only a small number of IFPR investment firms that act as clearers. 93. The benefits arise in terms of maintaining lower market access/transaction costs – when FCA investment firms are clearing they are providing this service for other smaller FCA investment firms competitively (compared to the charges large clearing banks might potentially quote otherwise to smaller clients) – especially in specialised product sectors. In terms of regulatory capital, we would not expect the total requirements proposed under IFPR to be materially different from what the UK CRR requires currently from the same firms acting as clearers. We ask that firms that may be impacted by these proposals respond to the consultation and provide further details on how they believe they may be impacted. Interaction with other prudential sourcebooks 94. In this CP we have set out how MIFIDPRU is intended to interact with other prudential sourcebooks in our Handbook. This will mainly be relevant to FCA investment firms that also carry out non‑MiFID regulated business and so may currently be subject to more than one prudential sourcebook at the same time. Our overall approach in this CP to other prudential sourcebooks affected by the introduction of MIFIDPRU is to make only the consequential amendments that are needed to: i) delete provisions that are no longer required; and ii) ensure that the interactions between them and MIFIDPRU work in practice We have not proposed any material changes in underlying policy now as part of our initial implementation of MIFIDPRU. As a result, we have not included this in our CBA analysis. PII policies 95. One consequence of the removal of the existing prudential category of exempt‑CAD firm is where any such firms are also conducting insurance distribution or home finance business in addition to their MiFID investment business. Where this is the case, such firms will become subject to the provisions of MIPRU 3 (rather than either IPRU INV 9 or 13) for holding professional indemnity insurance (PII). 96. The PII provisions of MIPRU 3 contain more detailed requirements on PII than IPRU INV. As a result, we propose a three‑year transitional provision, during which those firms concerned may continue to meet their PII requirements as long as they comply with the relevant parts of IPRU INV 9 and 13. We believe the impact of this transitional will be minimal, allowing any firms concerned time to adjust their policies to the terms of MIPRU 3.

150 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Benefits 97. As for the CBA in CP1 we believe that the benefits of our proposals will be delivered in the form of improved consumer protection and particularly for clients of FCA investment firms, either because it reduces the potential for firm failure itself, or because it reduces the potential for disorderly failure in the event that a firm does fail. The proposed changes should help reduce economic losses in drawn out insolvency proceedings or reduce social costs through lessening reliance on investor compensation schemes, and thus avoiding consequent impacts on other firms to top‑up these schemes to handle pay‑outs. Consequently, over confidence, investor sentiment and market stability should also benefit. Consumers are also saved the costs and distress of having to find alternative investment firms to conduct business with. 98. FCA investment firms will benefit from more proportionate, simpler, risk‑based reporting that is available in a single suite of forms. This is expected to considerably reduce their administrative and compliance burdens. Furthermore, these reporting forms will not change if there is a change in MIFID permissions reducing complexity further. 99. All investment firms carrying out the same investment activity are treated in a simpler and more consistent manner. This removes any differences within markets and hence competitive distortions created by the existing mix of standards. 100. We are establishing, in the ICARA process, an objective link between the financial resources an investment firm holds under its IFPR requirements, and its threshold conditions. This is supported by specific guidance and clear intervention points detailing what we expect of firms when they run into difficulties, and what they can expect from us. This will make it easier for firms to plan for how we expect them to respond in a certain situation, including whether they should commence wind‑down. 101. We are introducing a minimum liquidity requirement for all investment firms. This should improve overall confidence in the financial resilience of investment firms among customers, counterparties and, where relevant, shareholders. This should also reduce the potential for firm failure itself or reducing the potential for disorderly failure if a firm does fail. 102. Remuneration is a key driver of behaviour for all firms and individuals. Appropriate remuneration policies and practices help to support prudential soundness and risk management in firms. But they also ensure appropriate outcomes for customers and markets, and so reduce the likelihood of harm. In this way, our remuneration rules for FCA investment firms have both prudential and conduct‑related objectives. Our approach aims to: promote effective risk management in the long‑term interests of the firms and its customers; ensure alignment between risk and individual reward; support positive behaviours and healthy firm cultures; and discourage behaviours that can lead to misconduct and poor customer outcomes. 103. The IFPR is creating a tighter alignment and calibration of prudential requirements to business models and the potential for a firm to cause harm to their consumers/clients and the markets they operate in. The aim is to ensure that firms are more aware that running a business prudently includes assessing the degree to which their activities are posing harm to others and mitigating those harms.

151 CP21/7 Annex 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms 104. This alignment between prudential requirements and harms to consumers and markets is further strengthened through the new ICARA process. Firms must embed risk management practices to focus on mitigating the risks of harm to consumers and markets, identify how to mitigate those harms if they are not adequately captured through our basic requirements and apply additional own funds and liquid assets requirements where those harm mitigation mechanisms are insufficient. In so doing the IFPR is creating a better alignment between regulatory prudential requirements, business model risk and management strategy. This should also raise the standard of risk management in FCA investment firms. 105. Also, the linking of requirements between business model and risk of harm will allow FCA supervisors and FCA investment firms to focus during the ICARA and SREP processes on mitigating the risks of harm in a way that aligns to how investment firms think about their business and strengthens their internal risk management practices for the benefits of their consumers and the markets they interact with. 106. Finally, the ICARA is heightening awareness of firms having credible and accountable wind‑down planning. We consider this to be an important feature of investment firms internal risk management processes so that they can embed and implement credible wind‑down actions sooner were they to get into difficulty. 107. We will look at all the benefits again as part of our consolidated CBA in CP3.

152 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 3 The own funds threshold requirement and intervention points Introduction

1. In this annex we illustrate how FCA investment firms will assess the own funds threshold requirement necessary to meet the overall financial adequacy rule (OFAR). We also illustrate the calculation of the early warning indicator and the wind‑down trigger. The early warning indicator, a breach of the own funds threshold requirement and the wind‑down trigger are levels of own funds that let us know the FCA investment firm, and/or the FCA, may need to act.
2. Further information on everything in this annex is in Chapter 7 of this CP. The relevant rules are in MIFIDPRU 7. Intervention points Early warning indicator
3. The early warning indicator will ordinarily be 110% of an FCA investment firm’s own funds threshold requirement. We reserve the right to set this at a higher level. Own funds threshold requirement breach
4. FCA investment firms will set their own funds threshold requirement as the higher of the i) PMR, ii) own funds needed to cover risks from ongoing business operations, or iii) own funds needed for wind‑down. Diagram x in Chapter 7 of this CP shows the process for calculating the own funds threshold requirement. We reserve the right to set this at a higher level. Wind‑down trigger
5. The wind‑down trigger is the level of own funds an FCA investment firm will need for an orderly wind‑down.

153 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 1 – Non‑SNI firm Non -SNI – example #1 PMR KFR FOR Own funds resources Early warning indicator Own funds resources decrease Threshold requirement Wind-down trigger Additional requirements MIFIDPRU 4 requirements A B C D Example 1 – Non‑SNI firm 6. An FCA investment firm has determined that its K‑factor requirement (KFR) is not enough to cover all the risks of harm posed by its ongoing operations. It is holding additional own funds to meet the OFAR. Total own funds to cover the risks from ongoing operations is (A). 7. It has also determined that it will need additional own funds to its FOR to allow for an orderly wind‑down. Total own funds for wind‑down is (B). The KFR plus the additional own funds required (A) is more than both the PMR and (B). 8. (A) becomes its own funds threshold requirement. 9. (C) is 110% of its threshold requirement and becomes its early warning trigger. 10. (D) is its wind‑down trigger and is equal to its FOR.

154 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 2 – Non‑SNI firm Non -SNI – example #2 PMR KFR FOR Own funds resources Early warning indicator Own funds resources decrease Threshold requirement Wind-down trigger MIFIDPRU 4 requirements A B C D Additional requirements Example 2 – Non‑SNI firm 11. An FCA investment firm has determined that its KFR is enough to cover all the risks of harm posed by its ongoing operations (A). 12. It has determined that it will need additional own funds to its FOR to allow for an orderly wind‑down. The total own funds required for wind‑down is (B). The KFR (A) is more than both the PMR and (B). 13. (A) becomes its own funds threshold requirement. 14. (C) is 110% of its threshold requirement and becomes its early warning trigger. 15. (D) is its wind‑down trigger and is equal to its FOR.

155 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 3 – Non‑SNI firm Non -SNI – example #3 PMR KFR FOR Own funds resources Early warning indicator Own funds resources decrease Threshold requirement MIFIDPRU 4 requirements A B Wind-down trigger C D Additional requirements Example 3 – Non‑SNI firm 16. An FCA investment firm has determined that its K‑factor requirement (KFR) is not enough to cover all the risks of harm posed by its ongoing operations. It is holding additional own funds to mitigate this. Total own funds to cover the risks from ongoing operations is (A). 17. It has also determined that it will need a significant amount of additional own funds beyond the FOR to allow for an orderly wind‑down. The total own funds required for wind‑down is (B). In this case the KFR plus the additional own funds (A) is lower than the FOR plus additional own funds (B). 18. (B), the wind‑down amount, becomes its own funds threshold requirement. 19. (C) is 110% of its threshold requirement and becomes its early warning trigger. 20. (D) is its wind‑down trigger and is equal to its FOR.

156 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 4 – SNI firmSNI – example #4 PMR Harms FOR Own funds resources Early warning indicator Own funds resources decrease MIFIDPRU 4 requirements C A Threshold requirement AND wind-down trigger D B Additional requirements Example 4 – SNI firm 21. An FCA investment firm has determined there is a proportion of risk from harm from its ongoing operations that it is only able to mitigate through financial means. It has determined that (A) is the appropriate amount of additional own funds to hold to mitigate this harm. 22. It has also determined that its FOR is enough to allow for an orderly wind‑down (B). Its FOR is more than both the PMR and the ‘Harms’ own funds requirements (A) 23. (B) becomes its own funds threshold requirement. 24. (C) is 110% of its threshold requirement and becomes its early warning trigger. 25. (D) is its wind‑down trigger. In this case it is the same as (B) as the wind‑down trigger is always equal to the FOR, unless we specify a higher amount.

157 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 5 – SNI firm SNI – example #5 PMR Harms FOR Own funds resources Early warning indicator Own funds resources decrease MIFIDPRU 4 requirements C B A Wind-down D trigger Additional requirements Threshold requirement Example 5 – SNI firm 26. An FCA investment firm has determined there is a proportion of risk from harm from its ongoing operations that it is only able to mitigate through financial means. It has determined that (A) is the appropriate amount of additional own funds to hold to mitigate this harm. 27. It has also determined that its FOR is enough to allow for an orderly wind‑down (B). The ‘Harms’ own fund requirement (A) is greater than both the PMR and the FOR. 28. (A) becomes its own funds threshold requirement. 29. (C) is 110% of its threshold requirement and becomes its early warning trigger. 30. (D) is its wind‑down trigger and is equal to its FOR.

158 CP21/7 Annex 3 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 6 – SNI firm SNI – example #6 PMR Harms FOR Own funds resources Early warning indicator Own funds resources decrease Threshold requirement MIFIDPRU 4 requirements D B A Wind-down trigger C E Additional requirements Example 6 – SNI firm 31. An FCA investment firm has determined there is a only a minimal amount of risk from harm from its ongoing operations that it is only able to mitigate through financial means (A). 32. It has also determined that its FOR is enough to allow for an orderly wind‑down (B). 33. Its PMR (E) is higher than its FOR (B). 34. (E) becomes its own funds threshold requirement. 35. (C) is 110% of its threshold requirement and becomes its early warning trigger. 36. (D) is its wind‑down trigger. In this case it is the same as (B) as the wind‑down trigger is always equal to the FOR, unless we specify a higher amount.

159 CP21/7 Annex 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 4 The liquid assets threshold requirement and intervention points Introduction

1. In this annex we illustrate how FCA investment firms will assess the liquid assets threshold requirement necessary to meet the overall financial adequacy rule (OFAR). A breach of the liquid asset threshold requirement or the wind‑down trigger are levels of liquid assets that let us know the FCA investment firm, and/or the FCA, may need to act.
2. FCA investment firms can only use core liquid assets to meet the basic liquid asset requirement. They can use a mixture of core and non‑core liquid assets to meet the additional amount of liquid assets needed to meet the liquid assets threshold requirement.
3. Further information on everything in this annex is in Chapter 7 of this CP. The relevant rules are in MIFIDPRU 7. Intervention points Liquid assets threshold requirement breach
4. FCA investment firms will set their liquid assets threshold requirement as the higher of the liquid assets needed to i) wind‑down, or ii) liquid assets needed for ongoing business needs. Diagram x in Chapter 7 of this CP shows the process for calculating the liquid assets threshold requirement. We reserve the right to set this at a higher level. Wind‑down trigger
5. The wind‑down trigger is the same as the basic liquid asset requirement.

160 CP21/7 Annex 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 1 – ongoing business needs funding exceed additional wind‑down funding Example #1 – ongoing business needs funding exceeds additional wind -down funding Basic liquid asset requirement Additional Wind-down funding stock Ongoing business needs funding stock Actual excess stock held Core liquid assets Core liquid assets and non-core liquid assets Threshold requirement Liquid asset wind-down trigger Total core and non-core liquid assets held by the firm A B C Example 1 – Ongoing business needs funding exceeds additional wind‑down funding 6. An FCA investment firm has assessed the total liquid assets it needs for ongoing business (A) and the total liquid assets required for starting to wind‑down (B). 7. In this case (A) is greater than (B). 8. (A) becomes its liquid asset threshold requirement. 9. (C), the basic liquid asset requirement is its liquid asset wind‑down trigger.

161 CP21/7 Annex 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 2 – additional wind down funding needs exceeds the ongoing business funding needs Example #2 – additional wind -down funding stock exceed ongoing business needs Basic liquid asset requirement Additional Wind-down funding stock Ongoing business needs funding stock Actual excess stock held Core liquid assets Core liquid assets and non-core liquid assets Threshold requirement Liquid asset wind-down trigger Total core and non-core liquid assets held by the firm A B C Example 2 – additional wind down funding needs exceeds the ongoing business funding needs 10. An FCA investment firm has assessed the total liquid assets it needs for ongoing business needs (A) and the total liquid assets needed for starting to wind‑down (B). 11. In this case (B) is greater than (A). 12. (B) becomes its liquid asset threshold requirement. 13. (C), the basic liquid asset requirement is its liquid asset wind‑down trigger.

162 CP21/7 Annex 4 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Example 3 – the FCA has set a higher liquid assets wind‑down trigger Example #3 – FCA sets a higher liquid assets wind -down trigger Basic liquid asset requirement Additional Wind-down funding stock Ongoing business needs funding stock Actual excess stock held Core liquid assets Core liquid assets and non-core liquid assets Threshold requirement FCA-set wind￾down trigger Total core and non-core liquid assets held by the firm This example is the same as example #2 except that the FCA has set the firm a liquid assets wind - down trigger (D) that is higher than the basic liquid asset requirement (E) . As with the basic requirement, this additional amount can only be met with core liquid assets (F) . D E F Example 3 – the FCA has set a higher liquid assets wind‑down trigger 14. An FCA investment firm has assessed the total liquid assets it needs for ongoing business and the total liquid assets required for starting wind‑down. 15. The FCA has set it a liquid assets wind‑down trigger (D) that is higher than the basic liquidity requirement (E). 16. (D) can only be met with core liquid assets (F).

163 CP21/7 Annex 5 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 5 Application of remuneration requirements Criteria for application of standard / extended remuneration requirements Apply standard remuneration requirements Apply extended remuneration requirements Apply extended remuneration requirements Apply extended remuneration requirements Apply standard remuneration requirements Yes No Yes No Yes No Yes No Is the value of the trading book

£150m? Is the value of the on- and off￾balance sheet assets >£300m? (average over the last 4 years) Is the value of the on- and off￾balance sheet assets >£100m? (average over the last 4 years) Is the value of the derivatives book £100m?

164 CP21/7 Annex 6 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 6 Compatibility statement Expected effect on mutual societies

1. The FCA does not expect the proposals in this paper to have a significantly different impact on mutual societies. Equality and diversity
2. We are required under the Equality Act 2010 in exercising our functions to ‘have due regard’ to the need to eliminate discrimination, harassment, victimisation and any other conduct prohibited by or under the Act, advance equality of opportunity between persons who share a relevant protected characteristic and those who do not, to and foster good relations between people who share a protected characteristic and those who do not.
3. As part of this, we ensure the equality and diversity implications of any new policy proposals are considered. The outcome of our consideration in relation to these matters in this case is stated in paragraph 2.11 of this Consultation Paper. Legislative and Regulatory Reform Act 2006 (LRRA)
4. We have had regard to the principles in the LRRA for the parts of the proposals that consist of general policies, principles or guidance. We consider that they will help firms to understand and meet the regulatory requirements associated with our new capital requirements framework. This will lead to better outcomes for firms and their clients. We also think our proposals are proportionate and take into consideration the variety of firms in scope.
5. We have had regard to the Regulators’ Code for the parts of the proposals that consist of general policies, principles or guidance. We consider that they do not create an unnecessary burden on firms, or adversely affect competition.

165 CP21/7 Annex 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Annex 7 Abbreviations used in this paper Abbreviation Description AIFMD Alternative Investment Fund Management Directive ASA Assets safeguarded and administered AT1 Additional Tier 1 capital AUM Assets under management BCBS Basel Committee of Banking Supervisors BIPRU Prudential sourcebook for banks, building societies and investment firms BRRD Bank Recovery and Resolution Directive CASS Client assets sourcebook CBA Cost benefit analysis CCP Central counterparty CET1 Common Equity Tier 1 capital COH Client orders handled COREP Common reporting CP Consultation paper CPMI Collective Portfolio Management Investment firm CRD Capital Requirements Directive CRR Capital Requirements Regulation EBA European Banking Authority ESG Environmental, Social and Governance EU European Union FCA Financial Conduct Authority

166 CP21/7 Annex 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Abbreviation Description FICOD Financial Conglomerates Directive FINREP Financial reporting FOR Fixed overheads requirement FS Bill Financial Services Bill FS Register Financial Services Register FSB Financial Stability Board FSMA Financial Services and Markets Act GEN General Provisions sourcebook GENPRU General Prudential sourcebook ICAAP Internal capital adequacy assessment process ICARA Internal Capital Adequacy and Risk Assessment IFD Investment Firm Directive IFPR Investment firm prudential regime IFPRU Prudential sourcebook for investment firms IFR Investment Firm Regulation IPRU-INV Interim prudential sourcebook for investment business K-ASA K-factor requirement related to the activity of administering and safeguarding assets K-AUM K-factor requirement related to the activity of managing assets K-CON K-factor requirement based on concentration risk K-COH K-factor requirement related to the activity of handling client orders K-DTF K-factor requirement related to the daily trading flow K-NPR K-factor requirement related to market risk K-TCD K-factor requirement related to the risk from the default of a trading counterparty KFR K-factor requirement

167 CP21/7 Annex 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Abbreviation Description MiFID Markets in Financial Instruments Directive MIFIDPRU New Prudential sourcebook for solo regulated MiFID investment firms MIPRU Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries MRT Material Risk Taker OFAR Overall financial adequacy rule OIREQ Own initiative requirement PMR Permanent minimum requirement PRA Prudential Regulation Authority PS Policy Statement QMMF Qualifying money market fund RPS Remuneration Policy Statement SM&CR Senior Managers & Certification Regime SMF Senior management function SNI Small and non-interconnected investment firm SREP Supervisory review and evaluation process SUP Supervision sourcebook SYSC Systems and controls sourcebook T2 Tier 2 capital TCD Trading counterparty default UCITS Undertakings for Collective Investment in Transferable Securities Directive VREQ Voluntary requirement

168 CP21/7 Annex 7 Financial Conduct Authority A new UK prudential regime for MiFID investment firms We make all responses to formal consultation available for public inspection unless the respondent requests otherwise. We will not regard a standard confidentiality statement in an email message as a request for non-disclosure. Despite this, we may be asked to disclose a confidential response under the Freedom of Information Act 2000. We may consult you if we receive such a request. Any decision we make not to disclose the response is reviewable by the Information Commissioner and the Information Rights Tribunal. All our publications are available to download from www.fca.org.uk. If you would like to receive this paper in an alternative format, please call 020 7066 7948 or email: publications_graphics@fca.org.uk or write to: Editorial and Digital team, Financial Conduct Authority, 12 Endeavour Square, London E20 1JN Sign up for our news and publications alerts

CP21/7 Appendix 1 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Appendix 1 Draft Handbook text

FCA 2021/XX INVESTMENT FIRMS PRUDENTIAL REGIME (CONSEQUENTIAL AMENDMENTS TO OTHER PRUDENTIAL SOURCEBOOKS) INSTRUMENT 2021 Powers exercised A. The Financial Conduct Authority (“the FCA”) makes this instrument in the exercise of the following powers and related provisions: (1) the following sections of the Financial Services and Markets Act 2000 (“the Act”): (a) section 137A (The FCA’s general rules); (b) section 137T (General supplementary powers); (c) section 138D (Actions for damages); (d) section 139A (Power of the FCA to give guidance); (e) section 247 (Trust scheme rules); (f) section 261I (Contractual scheme rules); and (2) regulation 6(1) of the Open-Ended Investment Companies Regulations 2001 (SI 2001/1228). B. The rule-making provisions listed above are specified for the purposes of section 138G(2) (Rule-making instruments) of the Act. Commencement C. This instrument comes into force on [date]. Revocation of the Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) D. The Prudential sourcebook for Banks, Building Societies and Investment Firms (BIPRU) is revoked. Amendments to the Handbook E. The modules of the FCA’s Handbook of rules and guidance listed in column (1) below are amended in accordance with the Annexes to this instrument listed in column (2). (1) (2) Glossary of definitions Annex A General Prudential sourcebook (GENPRU) Annex B Prudential sourcebook for Investment Firms (IFPRU) Annex C Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU) Annex D Interim Prudential sourcebook for Investment Businesses (IPRU-INV) Annex E

FCA 2021/XX Page 2 of 45 F. The FCA confirms and remakes in the Glossary of definitions any defined expressions used in the modules of the FCA’s Handbook of rules and guidance referred to in paragraph E where such defined expressions relate to any UK legislation that has been amended since those defined expressions were last made. Notes G. In the annexes to this instrument, the “notes” (indicated by “Note:” or “Editor’s note:”) are included for the convenience of readers, but do not form part of the legislative text. Citation H. This instrument may be cited as the Investment Firms Prudential Regime (Consequential Amendments to Other Prudential Sourcebooks) Instrument 2021. By order of the Board [date]

FCA 2021/XX Page 3 of 45 Annex A Amendments to the Glossary of definitions [Editor’s note: This Annex makes the changes to Glossary terms that are necessary to explain how the relevant FCA prudential sourcebooks will apply alongside MIFIDPRU. The FCA intends to consult on the remaining consequential changes to the Glossary in a subsequent consultation paper. The text in this Annex takes into account the changes suggested by CP20/24: A new UK prudential regime for MiFID investment firms as if they were made.] In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. Amend the following definitions as shown. capital resources (1) in relation to a BIPRU firm dormant account fund operator, the firm’s capital resources as calculated in accordance with the capital resources table relevant regulatory requirements; or … capital resources requirements an amount of capital resources that: (1) a BIPRU firm must hold as set out in the main BIPRU firm Pillar 1 rules; or a dormant account fund operator must hold in accordance with the relevant regulatory requirements; or … category B1 firm a category B firm personal investment firm whose permission includes dealing in investments as principal. category B2 firm a category B firm personal investment firm whose permission does not include dealing as principal; and is not subject to a requirement preventing the holding or controlling of client money or custody assets. category B3 firm a category B firm personal investment firm: (a) whose permission includes only insurance distribution activity in relation to non-investment insurance contracts, home finance mediation activity, assisting in the administration and performance of contracts of insurances, arranging transactions in life policies and other insurance contracts, advising on investments (except P2P agreements) and receiving and transmitting, on behalf of investors, orders in relation to securities and

FCA 2021/XX Page 4 of 45 units in collective investment schemes, advising on P2P agreements; and (b) which is subject to a requirement not to hold or control client money or custody assets. investment management firm a firm whose permitted activities include designated investment business, which is not an authorised professional firm, bank, IFPRU investment firm, BIPRU firm, MIFIDPRU investment firm, collective portfolio management firm, credit union, energy market participant, friendly society, ICVC, insurer, media firm, oil market participant or service company, whose permission does not include a requirement that it comply with IPRU-INV 3 or IPRU￾INV 13 (Personal investment firms) and which is within (a), (b) or (c): … large exposure (1) (in BIPRU) the exposure of a firm to a counterparty, or a group of connected clients, whether in the firm’s non￾trading book or trading book or both, which in aggregate equals or exceeds 10% of the firm’s capital resources. [deleted] (2) (except in (1)) has the meaning in article 392 of the UK CRR (Definition of a large exposure), as it applied on [Editor’s note: insert date immediately before the earlier of the date that the MIFIDPRU sourcebook begins to apply or the date that the CRR 2 amendments to the UK CRR take effect]. local firm has the meaning in article 4(1)(4) of the UK CRR as it applied on [Editor’s note: insert date immediately before the earlier of the date that the MIFIDPRU sourcebook begins to apply or the date that the CRR 2 amendments to the UK CRR take effect]. overall financial adequacy rule (1) (in GENPRU and BIPRU) GENPRU 1.2.26R (Requirement for certain firms to have adequate financial resources). (2) (in IFPRU) IFPRU 2.2.1R (Adequacy of financial resources) (for a dormant account fund operator) GENPRU 1.2.26R as in force at 31 December 2015. own funds … (2A) (in IPRU(INV) 11) has the meaning in article 4(1)(118) of the UK CRR. [deleted] …

FCA 2021/XX Page 5 of 45 (4A) (in MIFIDPRU) has the meaning in MIFIDPRU 3.2.1R. (5) (except in (1) to (4)) has the meaning in MIFIDPRU 3.2.1R. (except in (1) to (4A)) has the meaning in article 4(1)(118) of the UK CRR, as it applied on [Editor’s note: insert date immediately before the earlier of the date that the MIFIDPRU sourcebook begins to apply or the date that the CRR 2 amendments to the UK CRR take effect]. personal investment firm a firm whose permitted activities include designated investment business, which is not an authorised professional firm, bank, IFPRU investment firm, BIPRU firm, MIFIDPRU investment firm, building society, collective portfolio management firm, credit union, energy market participant, ICVC, insurer, media firm, oil market participant or service company, whose permission does not include a requirement that it comply with IPRU(INV) 3 (Securities and futures firms) or 5 (Investment management firms), and which is within (a), (b) or (c): … securities and futures firm a firm whose permitted activities include designated investment business, which is not an authorised professional firm, bank, BIPRU firm (unless it is an exempt BIPRU commodities firm), IFPRU investment firm (unless it is an exempt IFPRU investment firm), MIFIDPRU investment firm, building society, collective portfolio management firm, credit union, friendly society, ICVC, insurer, media firm or service company, whose permission does not include a requirement that it comply with IPRU(INV) 5 (Investment management firms) or 13 (Personal investment firms), and which is within (a), (b), (c), (d), (e) , (f), (g) or (ga): … (g) an exempt BIPRU commodities firm [deleted] (ga) an exempt IFPRU investment firm [deleted] … Delete the following definitions. The text is not shown struck through. category B firm a personal investment firm, other than an exempt CAD firm.

FCA 2021/XX Page 6 of 45 Annex B General Prudential sourcebook (GENPRU) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. GENPRU 1.2 and 1.3 are deleted in their entirety. The deleted text is not shown but the sections are marked [deleted] as shown below. GENPRU 2 is deleted in its entirety. The deleted text is not shown but the chapter is marked [deleted] as shown below. 1 Application 1.1 Application 1.1.1 G There is no overall application statement for GENPRU. Each chapter or section has its own application statement. 1.1.2 G Broadly speaking however, GENPRU applies (except as provided in GENPRU 1.1.2-AAG) to: … (4) a BIPRU firm; and [deleted] (5) groups containing such firms. [deleted] 1.1.2-AA G [Editor’s note: Amendments to this provision will be published in a subsequent consultation paper.] 1.1.2-B G GENPRU applies to a collective portfolio management investment firm that is a BIPRU firm in parallel with IPRU-INV 11 (see IPRU-INV 11.6). [deleted] 1.1.2A G A firm should refer to GEN 2.2.13AR (cross-references in the Handbook) and GEN 2.2.23R to GEN 2.2.25G (cutover: application of provisions made by both the FCA and the PRA) when applying the rules and guidance in GENPRU. [deleted] … 1.2 Adequacy of financial resources [deleted] 1.3 Valuation [deleted]

FCA 2021/XX Page 7 of 45 Amend the following as shown. GENPRU TP 8, TP8A, TP 8B, Sch 1, Sch 2 and Sch 3 are deleted in their entirety. The deleted text is not shown but the chapters are marked [deleted] as shown below. 2 Capital [deleted] 3 Cross sector groups [Editor’s note: Amendments to this section will be published in a subsequent consultation paper.] TP 8 Miscellaneous capital resources definitions for BIPRU firms [deleted] TP 8A Further miscellaneous capital resources definitions for BIPRU firms [deleted] TP 8B Miscellaneous capital resources definitions for BIPRU firms: Core tier one capital [deleted] Sch 1 Record keeping requirements [deleted] Sch 2 Notification and reporting requirements [deleted] Sch 3 Fees and other requirement payments [deleted]

FCA 2021/XX Page 8 of 45 Annex C Prudential sourcebook for Investment Firms (IFPRU) IFPRU 1, 2, 3, 4, 5, 6, 7, 8, 9 and 10 are deleted in their entirety. The deleted text is not shown but the chapters are marked [deleted] as shown below. Amend the following as shown. IFPRU TP 1, TP 4, TP 5, TP 8 and TP 9 are deleted in their entirety. The deleted text is not shown but the chapters are marked [deleted] as shown below. 1 Application [deleted] 2 Supervisory processes and governance [deleted] 3 Own funds [deleted] 4 Credit risk [deleted] 5 Operational risk [deleted] 6 Market risk [deleted] 7 Liquidity [deleted] 8 Prudential consolidation and large exposures [deleted] 9 Public disclosure [deleted] 10 Capital buffers [deleted] 11 Recovery and resolution [Editor’s note: Amendments to this section will be published in a subsequent consultation paper.] TP 1 GENPRU and BIPRU waivers: transitional [deleted] TP 4 Deductions from own funds [deleted] TP 5 Own funds: other transitionals [deleted] TP 8 Countercyclical capital buffer: transitional [deleted] TP 9 Large exposures limits [deleted]

FCA 2021/XX Page 9 of 45 Annex D Prudential sourcebook for Mortgage and Home Finance Firms, and Insurance Intermediaries (MIPRU) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 1 Application and general provisions … 1.3 Remuneration and property valuation requirements for MCD creditors … 1.3.3 G For the purposes of MIPRU 1.3.2R: (1) reliable standards for the valuation of residential immovable property include internationally recognised valuation standards, in particular those developed by the International Valuation Standards Council (IVSC), the European Group of Valuers’ Associations (EGoVA) or the Royal Institution of Chartered Surveyors (RICS), as well as the standards in BIPRU 3.4.77R to BIPRU 3.4.80R MIPRU 1.3.3AG or, where applicable, MIPRU 4.2F.27R to MIPRU 4.2F.29R. [Note: recital 26 of the MCD] (2) the MCD creditor is not limited to on-site inspections where it is possible to demonstrate that any risks posed have been adequately assessed through the overall collateral management process. 1.3.3A G For the purposes of MIPRU 1.3.3G(1), reliable standards for the valuation of residential immovable property also include the following standards: (1) the property must be valued by an independent valuer at or less than the market value. In the UK where rigorous criteria for the assessment of the mortgage lending value exist in statutory or regulatory provisions property may instead be valued by an independent valuer at or less than the mortgage lending value; (2) market value means the estimated amount for which the property should exchange on the date of valuation between a willing buyer and a willing seller in an arm’s length transaction after proper marketing wherein the parties had each acted knowledgeably, prudently and without

FCA 2021/XX Page 10 of 45 compulsion. The market value must be documented in a transparent and clear manner; (3) mortgage lending value means the value of the property as determined by a prudent assessment of the future marketability of the property taking into account long-term sustainable aspects of the property, the normal and local market conditions, the current use and alternative appropriate uses of the property. Speculative elements must not be taken into account in the assessment of the mortgage lending value. The mortgage lending value must be documented in a transparent and clear manner; and (4) the value of the collateral must be the market value or mortgage lending value reduced as appropriate to reflect the results of any required monitoring and to take account of any prior claims on the property. … 3 Professional indemnity insurance 3.1 Application and purpose 3.1.1 R … (5) This chapter does not apply to … (c) a firm to which IPRU(INV) 13.1.5R(1)4 (Financial resource requirements for personal investment firms: requirement to hold professional indemnity insurance) applies.; or (d) an exempt CAD firm to which IPRU(INV) 9.2.5R (Initial capital and professional indemnity insurance requirements - exempt CAD firms that are also IDD insurance intermediaries) applies. [deleted] … … 4 Capital resources 4.1 Application and purpose … Application: banks, designated investment firms, building societies, insurers and friendly societies

FCA 2021/XX Page 11 of 45 4.1.4 R This chapter does not apply to: … (1A) a designated investment firm; or … … Application: firms carrying on designated investment business only … 4.1.7 G A firm which carries on designated investment business, and no other regulated activity, may disregard this chapter. For example, a firm with permission limited to dealing in investments as agent in relation to securities is only carrying on designated investment business and may be subject to the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU) or the Interim Prudential sourcebook for Investment Businesses (IPRU(INV)), as appropriate. the Interim Prudential sourcebook for investment businesses or the Prudential sourcebook for Banks, Building Societies and Investment Firms, as appropriate, will apply. However, if its permission is varied to enable it to arrange motor insurance as well, this activity is not designated investment business so the firm will be subject to the higher of the requirements in this chapter and those sourcebooks (see MIPRU 4.2.5R). … 4.2 Capital resources requirements … Capital resources requirement: firms carrying on regulated activities including designated investment business 4.2.5 R The capital resources requirement for a firm (other than a credit union) carrying on regulated activities, including designated investment business and to which IPRU(INV) does not apply, is the higher of: (1) the requirement which is applied by this chapter according to the activity or activities of the firm (treating the relevant rules as applying to the firm by disregarding its designated investment business); and (2) the financial resources requirement which is applied by the Prudential sourcebook for Investment Firms and the UK CRR or the General Prudential sourcebook and the Prudential sourcebook for Banks, Building Societies and Investment

FCA 2021/XX Page 12 of 45 After TP1 ‘Transitional Provisions’ insert the following new transitional provision. The text is not underlined. (1) (2) Material to which the transitional provision applies (3) (4) Transitional provision (5) Transitional provision: dates in force (6) Handbook provision: coming into force 2.1 MIPRU 3.2 R This rule applies to a MIFIDPRU investment firm that was classified as an exempt CAD firm subject to Until [Editor’s note: insert the date three years after the day on [Editor’s note: insert the date on which MIFIDPRU Firms Prudential sourcebook for MiFID Investment Firms (MIFIDPRU). … 4.4 Calculation of capital resources The calculation of a firm’s capital resources 4.4.1 R (1) … (2) If the firm is subject to the Interim Prudential sourcebook for investment businesses, the Prudential sourcebook for Investment Firms and the UK CRR, the General Prudential sourcebook, the Prudential sourcebook for Banks, Building Societies and Investment Firms or the Credit Unions sourcebook, the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU) or the Interim Prudential sourcebook for investment businesses (IPRU(INV)), the capital resources are the higher of: (a) the amount calculated under (1); and (b) the financial resources calculated under those sourcebooks and regulations. … TP 2 Transitional Provisions for former exempt CAD firms 2.1 R

FCA 2021/XX Page 13 of 45 IPRU-INV 9 on [Editor’s note: insert the date immediately before the day on which MIFIDPRU begins to apply]. Instead of complying with the requirements relating to professional indemnity insurance in MIPRU 3.2, a firm may comply with the professional indemnity insurance requirements set out in IPRU-INV 9.2.4R(1)(b) (except that the minimum limits of indemnity are at least EUR 1,250,000 for a single claim and EUR 1,850,000 in aggregate), together with IPRU-INV 9.2.7R and IPRU-INV 9.4. which MIFIDPRU begins to apply] begins to apply] 2.2 MIPRU 3.2 R This rule applies to a MIFIDPRU investment firm that was classified as an exempt CAD firm and was Until [Editor’s note: insert the date three years after the day on [Editor’s note: insert the date on which MIFIDPRU

FCA 2021/XX Page 14 of 45 subject to IPRU￾INV 13 on [Editor’s note: insert the date immediately before the day on which MIFIDPRU begins to apply]. Instead of complying with the requirements relating to professional indemnity insurance in MIPRU 3.2, a firm may comply with IPRU-INV 13.1.5R; IPRU￾INV 13.1.7R to 13.1.10R; and IPRU-INV 13.1.15R to 13.1.29G. which MIFIDPRU begins to apply] begins to apply] 2.3 MIPRU 3.2 R References in this transitional provision to IPRU-INV are to the version of IPRU-INV that applied on [Editor’s note: insert the date immediately before the day on which MIFIDPRU begins to apply]. Until [Editor’s note: insert the date three years after the day on which MIFIDPRU begins to apply] [Editor’s note: insert the date on which MIFIDPRU begins to apply]

FCA 2021/XX Page 15 of 45 References to an exempt CAD firm in IPRU-INV are to the firm to which this transitional provision applies. 2.4 MIPRU 3.2 G Exempt CAD firms that carried on activities in scope of MIPRU 3.2 were exempt from the requirements in MIPRU 3.2, on the basis that they were subject to similar professional indemnity insurance requirements in IPRU-INV 9 or 13. The category of exempt CAD firm ceases to exist on [Editor’s note: insert the date on which MIFIDPRU begins to apply]. These firms will no longer be subject to IPRU￾INV, and instead will become subject to prudential requirements in MIFIDPRU. MIFIDPRU does Until [Editor’s note: insert the date three years after the day on which MIFIDPRU begins to apply] [Editor’s note: insert the date on which MIFIDPRU begins to apply]

FCA 2021/XX Page 16 of 45 not require the holding of professional indemnity insurance. Former exempt CAD firms that carry on activities in scope of MIPRU 3.2 will therefore have to comply with the requirements to hold professional indemnity insurance in MIPRU 3.2 for the first time, consistent with other investment firms that have always had to comply with MIPRU 3.2. The purpose of this transitional provision is to give former exempt CAD firms time to comply with any new requirements in MIPRU 3.2. In particular, former exempt CAD firms should note that the minimum limit of indemnity for claims in aggregate can be higher under MIPRU 3.2.7R(2)(b) than

FCA 2021/XX Page 17 of 45 under the relevant provisions in IPRU-INV. MIPRU 3.2 also contains material relating to excess levels that differs from the material in IPRU-INV. IPRU-INV 9.4.4R requires that professional indemnity insurance policies must not be subject to unreasonable limits. IPRU-INV 13.1.9R requires that policies must incorporate terms which are appropriate. The FCA therefore expects former exempt CAD firms to have regard to the requirements in MIPRU 3.2 when renewing their professional indemnity insurance whilst this transitional applies.

FCA 2021/XX Page 18 of 45 Annex E Interim Prudential sourcebook for Investment Businesses (IPRU-INV) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 1 Application and General Provisions 1.1 Purpose … 1.1.3A R G This sourcebook does not apply to BIPRU firms except: (1) it does apply to certain exempt BIPRU commodities firms; and (2) [deleted] This sourcebook does not apply to a MIFIDPRU investment firm (unless it is a collective portfolio management investment firm). 1.1.3B R This sourcebook does not apply to IFPRU investment firms except it does apply to exempt IFPRU commodities firms. [deleted] … 1.2 Application … 1.2.2 R (1) IPRU-INV applies to: (a) a members’ adviser; (b) an investment management firm; (c) a personal investment firm; (d) an authorised professional firm; (e) a securities and futures firm; (f) a service company; (g) the Society of Lloyd’s (in relation to underwriting agents); (h) [deleted] (i) a credit union which is a CTF provider; and

FCA 2021/XX Page 19 of 45 (j) an exempt CAD firm; and [deleted] (k) a collective portfolio management firm; and (l) a collective portfolio management investment firm. (2) IPRU-INV does not apply to: (a) a lead regulated firm; or (b) a media firm; or (c) a BIPRU firm (unless it is an exempt BIPRU commodities firm); or. a MIFIDPRU investment firm (unless it is a collective portfolio management investment firm). (d) an IFPRU investment firm (unless it is an exempt IFPRU commodities firm). [deleted] … … 1.2.5 R Table This table belongs to IPRU (INV) 1.2.4R Authorised professional firm Chapters 1 and 2 Securities and futures firm (which is not a MiFID investment firm) Chapters 1 and 3 Securities and futures firm (which is an exempt BIPRU commodities firm or an exempt IFPRU commodities firm) Chapters 1 and 3 The Society of Lloyd’s (in relation to underwriting agents) and members’ advisers Chapters 1 and 4 Investment management firm Chapters 1 and 5 An exempt CAD firm or a local firm Chapters 1 and 9 Service company Chapters 1 and 6 Collective portfolio management firm Chapters 1 and 11

FCA 2021/XX Page 20 of 45 Collective portfolio management investment firm Chapters 1 and 11 Personal investment firm Chapters 1 and 13 Credit union which is a CTF provider Chapters 1 and 8 … 2 Authorised professional firms 2.1 Application … 2.1.2 R (1) An authorised professional firm of a kind falling within (2) must comply with such of IPRU-INV 3, 5, 9 or 13 which in accordance with IPRU-INV 2.1.4R, most appropriately correlates to the type and scale of the business which it conducts. (2) The type of authorised professional firm to which (1) applies is one: (a) which is also an exempt CAD firm; [deleted] (b) which acts as a market maker; (c) which acts as a stabilising manager; (da ) which acts as a small authorised UK AIFM or a residual CIS operator; (db ) which acts as a depositary; (e) which acts as a broker fund adviser or otherwise participates in a broker fund arrangement; (f) whose main business, having regard to (3), is not the practice of its profession or professions; (g) whose permission includes a requirement that it acts in conformity with the financial resources rules applicable to another type of firm; or (h) whose permission includes establishing, operating or winding up a personal pension scheme. …

FCA 2021/XX Page 21 of 45 (4) An authorised professional firm which, in accordance with (1), is required to comply with IPRU-INV 3, 5, 9 or 13 must immediately give notification of that fact to the FCA in accordance with SUP 15.7 (Forms and method of notification). … 2.1.4 R This table belongs to IPRU-INV 2.1.1R TYPE OF BUSINESS ACTIVITY CHAPTER OF SOURCEBOOK (i) managing investments other than for retail clients; or Investment management firm - IPRU￾INV 5 (ii) OPS activity; or Investment management firm (which is an exempt CAD firm) - IPRU-INV 5 and 9 (iii) [deleted] (iv) [deleted] (iva) acting as trustee or depositary of a UK UCITS; or (ivb) managing an AIF; or (ivc) acting as trustee or depositary of an AIF; or (v) acting as a residual CIS operator; or (va) establishing, operating or winding up a personal pension scheme; or (vi) safeguarding and administering investments; (i) advising on, or arranging deals in, packaged products; or (ii) managing investments for retail clients; Personal investment firm - IPRU-INV 13 (i) a regulated activity carried on as a member of an exchange; or Securities and futures firm (which is an exempt CAD firm) - IPRU-INV 9

FCA 2021/XX Page 22 of 45 (ii) acting as a market maker in securities or derivatives; or Securities and futures firm (which is not a MiFID investment firm) - IPRU￾INV 3 (iii) corporate finance business; or (iv) dealing or arranging deals in securities or derivatives, other than interprofessional investments; or (v) the provision of clearing services as a clearing firm; or (vi) spread betting; … 3 Financial resources for Securities and Futures Firms which are not MiFID Investment Firms or which are Exempt BIPRU Commodities Firms or Exempt IFPRU Commodities Firms … 3.-1 R This chapter applies to a securities and futures firm which: (a) is not a MiFID investment firm; (b) is an exempt CAD firm that carries on any regulated activity other than MiFID business; or (c) an exempt BIPRU commodities firm; or (d) is an exempt IFPRU commodities firm. 3.-1 G An exempt BIPRU commodities firm is subject to the non-capital requirements of GENPRU and BIPRU as indicated in BIPRU TP 15. An exempt IFPRU commodities firm is subject to the non-capital requirements of IFPRU and the EU CRR. [deleted] … 3.-1B R The provisions on concentrated risk in this chapter: (a) apply to an exempt BIPRU commodities firm if it satisfies the conditions in BIPRU TP 16 (Commodities firm transitionals: large exposures) in the version as at 31 December 2013; and

FCA 2021/XX Page 23 of 45 (b) do not apply to an exempt IFPRU commodities firm which applies the large exposure requirements Part Four (articles 387 to 403) of the EU CRR. [deleted] 3.-1B G Part Four (articles 387 to 403) of the EU CRR applies to an exempt IFPRU commodities firm, unless it qualifies for exemption under article 493(1) of the EU CRR. [deleted] 3.-1C G The table in IPRU(INV) 3-1DG sets out the parts of the Handbook and the EU CRR containing provisions on large exposure or concentrated risk which apply to a securities and futures firm. [deleted] 3.-1D G Table Applicability of the provisions to securities and futures firms This table belongs to IPRU(INV) 3-1CG [deleted] (1) [deleted] (2) (3) Type of securities and futures firm Whether conditions in article 493(1) of the EU CRR are satisfied Part of Handbook and EU CRR applicable for large exposure or concentrated risk requirements Energy market participant (which is an exempt IFPRU commodities firm) with a waiver from IPRU(INV) 3 Yes Not applicable No Part Four (articles 387 to 403) of the EU CRR applies Energy market participant (which is exempt IFPRU commodities firm) to which IPRU(INV) 3 applies Yes IPRU(INV) 3 applies No Part Four (articles 387 to 403) of the EU CRR applies Oil market participant (which is an exempt IFPRU commodities firm) if it is a member of a recognised investment exchange or a designated investment exchange which is, under the rules of that exchange, entitled to trade with other Yes IPRU(INV) 3 applies No Part Four (articles 387 to 403) of the EU CRR applies

FCA 2021/XX Page 24 of 45 members to which IPRU(INV) 3 applies Other oil market participant (which is an exempt IFPRU commodities firm) to which IPRU(INV) 3 does not apply Yes Not applicable No Part Four (articles 387 to 403) of the EU CRR applies Exempt IFPRU commodities firm which is not an energy market participant or oil market participant Yes IPRU(INV) 3 applies No Part Four (articles 387 to 403) of the EU CRR applies Securities and futures firm (which is not a MiFID investment firm) Not applicable IPRU(INV) 3 applies … Exempt CAD firms 3.-60(8) R Rules 3-61 to 3-182 do not apply to an exempt CAD firm, unless it carries on any regulated activity other than MiFID business. [deleted] Exempt BIPRU commodities firms 3.-60(9) G An exempt BIPRU commodities firm should determine whether it is a broad scope firm or one of the other categories in this rule. [deleted] Exempt IFPRU commodities firm 3.-60(10) G An exempt IFPRU commodities firm should determine whether it is a broad scope firm or one of the other categories in this rule. [deleted] … Obligation to calculate PRR* … 3.-80(2) G Notwithstanding the methods available for calculating the PRR, a firm may, in respect of any individual position, calculate a PRR which is more conservative than that calculated under the appropriate rule. However, in that case, the firm will need to be able to demonstrate that, in all circumstances, the calculation being employed does give rise to a higher PRR for the position.

• For guidance notes as to which methods to apply, see Appendix 20

FCA 2021/XX Page 25 of 45 IPRU-INV 3 Appendix 20 is deleted in its entirety. The deleted text is not shown but the chapter is marked [deleted] as shown below. … Models approach 3.-169A G A firm may seek a modification or waiver from the FCA to use a VaR model as the basis for calculating the PRR on its commodity positions. The FCA will grant a modification or waiver permitting the use of a VaR model only where a number of qualitative and quantitative standards are met. In assessing the VaR model the FCA will have regard to the matters set out in BIPRU 7.10 as it applied on [ Editor’s note: insert date immediately before the date that the MIFIDPRU sourcebook begins to apply]. … Appendix 1 Glossary of terms for IPRU(INV) 3 … qualifying debt security means a debt security which: … (3) (for the purposes of rule 3-173B) meets the following conditions: … (d) it is a mortgage backed security relating to residential real estate of the type referred to in BIPRU 3.4.94R(1)(d)(i) which meets the requirements about legal certainty referred to in BIPRU 3.4.62R; or [deleted] … … … 3 Appendix 20 GUIDANCE NOTES ON RECONCILIATION OF FIRM’S BALANCES WITH A COUNTERPARTY WHICH IS A MEMBER OF AN EXCHANGE (RULE 3-11(1)(D)) AND IPRU(INV) 9.6.1R (FOR AN EXEMPT CAD FIRM)) [deleted]

FCA 2021/XX Page 26 of 45 Amend the following as shown. 4 Lloyd’s Firms … 4.2 PURPOSE … 4.2.4 R A members’ adviser is not regulated by the Society and accordingly this chapter specifies the financial resource and accounting requirements to be met. Firms which fall within the scope of this chapter will be firms with permission only to advise persons on syndicate participation at Lloyd’s. The nature of that advisory business is akin to corporate finance advice and so the applicable requirements are those in IPRU-INV 3 relevant to firms giving corporate finance advice. Firms with other permissions will fall within the scope of other chapters of IPRU(INV), GENPRU, BIPRU, IFPRU (and the UK CRR) MIFIDPRU or INSPRU. … 5 Financial resources 5.1 Application 5.1.1 R (1) (a) This chapter applies to an investment management firm, other than: (i) [deleted] (ii) a MiFID investment firm (unless it is an exempt CAD firm for the purpose of calculating its own funds and if it carries on any regulated activity other than MiFID business). (aa) This chapter applies, as set out in IPRU-INV 5.1.2R, to: (i) exempt CAD firms; [deleted] (ii) OPS firms; (iii) non-OPS Life Offices and non-OPS Local Authorities; and (iv) individuals admitted to membership collectively. 5.1.2 R Exempt CAD firms OPS firms (see Non-OPS Life Offices and Non￾Individuals admitted to membership collectively

FCA 2021/XX Page 27 of 45 Note 1 below) OPS Local Authorities Financial resources rules IPRU￾INV 5.2.1R to 5.7.3R No (see Note 3 below) No No Yes Individuals whose sole investment business is giving investment advice to institutional or corporate investors Firms subject to “lead regulator arrangements” All other firms Financial resources rules IPRU￾INV 5.2.1R to 5.7.3R No No Yes (see Note 2 below) Accounting records rules IPRU￾INV 5.3.1R(1 ) to 5.3.1R(6 ) No Yes Yes Note 1. Firms are referred to the specific compliance reports for OPS firms required by Chapter 16 of the Supervision Manual manual. Note 2. A firm subject to “lead regulator arrangements” whereby a body other than the FCA is responsible for its financial regulation shall comply with the corresponding financial resources rules and financial returns rules of that body, and a breach of such rules shall be treated as a breach of the rules of the FCA. Note 3. The financial and non-financial resources rules for an exempt CAD firm are set out in IPRU-INV chapter 9. However, IPRU-INV 5.2.1R

FCA 2021/XX Page 28 of 45 to 5.7.3R apply to an exempt CAD firm for the purpose of calculating its own funds (see IPRU-INV 9.2.9R(2)(a)) (although the Category A items of Tier 1 capital as set out in IPRU-INV 5.8.1R are replaced by all the items in IPRU-INV 9.3.1R) and if it carries on any regulated activity other than MiFID business (see IPRU-INV 9.2.3R). … 5.1.5 R Any reference in IPRU-INV 5 to the UK CRR is to the UK CRR in the form in which it stood at [Editor’s note: insert date immediately before the earlier of the date that the MIFIDPRU sourcebook begins to apply or the date that the CRR 2 amendments to the UK CRR take effect]. … 5.3 Financial resources … 5.3.2 R For a firm that has a Part 4A permission for acting as trustee or depositary of a UK UCITS, own funds has the meaning in article 4(1)(118) of the EU CRR UK CRR. … 5.4 Financial resources requirement … Exceptions from the liquid capital requirement 5.4.2 R The financial resources requirement is an own funds requirement determined in accordance with IPRU-INV 5.4.3R for a firm if its permitted business does not include establishing, operating or winding up a personal pension scheme and which where: (i) is an exempt CAD firm which is also a residual CIS operator or a small authorised UK AIFM and that scheme or AIF only invests in venture capital investments for non-retail clients; or [deleted] (ii) is not an exempt CAD firm if: (a) the firm’s permitted business does not include the holding of customers’ monies or assets and it neither executes transactions (or otherwise arranges deals) in investments nor has such transactions executed for itself or its customers; or (b) the firm’s permitted business includes the activities as in (a) above, but only in respect of venture capital investments for non-retail clients; or

FCA 2021/XX Page 29 of 45 (c) the firm is a trustee of an authorised unit trust scheme whose permitted business consists only of trustee activities and does not include any other activity constituting specified trustee business or the firm is a depositary of an ICVC or ACS or a depositary appointed in line with FUND 3.11.12R (Eligible depositaries for UK AIFs) or a UK depositary of a non-UK AIF whose permitted business consists only of depositary activities. (d) the firm’s permitted business limits it to acting a residual CIS operator or a small authorised UK AIFM where the main purpose of the collective investment scheme or AIF (as applicable) is to invest in permitted immovables whether in the UK or abroad. … 5.4.6 G If a firm that is the depositary of a UCITS scheme is seeking to determine its own funds requirement on the basis of the standardised approach in article 317 EU CRR UK CRR, it should notify the FCA in advance. … 5.4.8 R A firm which is the depositary of a UCITS scheme must comply with the rules in IFPRU 2 as it applied on [Editor’s note: insert date immediately before the date that the MIFIDPRU sourcebook begins to apply], as if it were an IFPRU investment firm that is not a significant IFPRU investment firm. 5.4.9 G A firm to which IPRU-INV 5.4.8R applies is, in particular, reminded of the rules in IFPRU 2 that determine whether a firm must apply the ICAAP rules on an individual basis or comply with them on a consolidated basis or sub-consolidated basis (see IFPRU 2.2.45R to IFPRU 2.2.49R). [deleted] … 5.8 Calculation of own funds and liquid capital 5.8.1 R A firm must calculate its own funds and liquid capital as shown below, subject to the detailed requirements set out in IPRU-INV 5.8.2R. Financial resources Category IPRU-INV 5.8.2R paragraph Tier 1 (1) Paid-up share capital (excluding preference shares) A

FCA 2021/XX Page 30 of 45 (1A) Eligible LLP members’ capital (2) Share premium account (3) Reserves 2A (4) Non-cumulative preference shares Less: (5) Investments in own shares B (6) Intangible assets (7) Material current year losses 4 (8) Material holdings in credit and financial institutions and, for exempt CAD firms only, material insurance holdings. 5 and 5A (8A) Excess LLP members’ drawings Tier 1 capital = (A-B) C Plus: TIER 2 1 (9) Revaluation reserves D (10) Fixed term cumulative preference share capital 1(a) (11) Long-term Qualifying Subordinated Loans 1(a); 6 (12) Other cumulative preference share capital and debt capital but, for exempt CAD firms, only perpetual cumulative preference share capital and qualifying capital instruments 6A (13) Qualifying arrangements 7 "Own Funds" = (C+D) E Plus: TIER 3 (14) Net trading book profits F 1(b)(i); 8

FCA 2021/XX Page 31 of 45 (15) Short-term Qualifying Subordinated Loans and excess Tier 2 capital 1(b)(ii); 1(c); 9 Less: (16) Illiquid assets G 10 Add: (17) Qualifying Property 11 "Liquid Capital" = (E+F+G) 5.8.2 R 1 Deductions and Ratios (Items 10, 11 and 15) (a) Notwithstanding IPRU-INV 5.8.1R and 5.8.2R for an exempt CAD firm, in calculating own funds, all of Item 8 must be deducted after the total of Tier 1 and Tier 2 capital and the following restrictions apply: [deleted] (i) the total of fixed term cumulative preference shares (item 10) and long-term qualifying subordinated loans (item 11) that may be included in Tier 2 capital is limited to 50 per cent of Tier 1 capital; (ii) Tier 2 capital must not exceed 100 per cent of Tier 1 capital. (b) A firm which is not an exempt CAD firm and which is subject to a liquid capital requirement under IPRU￾INV 5.4.1R may take into account qualifying subordinated loans in the calculation of liquid capital up to a maximum of 400% of its Tier 1 capital. … 5A Material insurance holdings (Item 8) (a) A material insurance holding means the holdings of an exempt CAD firm of items of the type set out in (b) in any: (i) insurance undertaking; or (ii) insurance holding company; that fulfils one of the following conditions: (iii) it is a subsidiary undertaking of that firm; or (iv) that firm holds a participation in it.

FCA 2021/XX Page 32 of 45 (b) An item falls into this provision for the purpose of (a) if it is: (i) an ownership share; or (ii) subordinated debt or another item of capital that forms part of the tier two capital resources that falls into GENPRU 2 or, as the case may be, INSPRU 7, or is an item of “basic own funds” defined in the PRA Rulebook: Glossary. … 6A Perpetual cumulative preference share capital Perpetual cumulative preference share capital may not be included in the calculation of own funds by an exempt CAD firm unless it meets the following requirements: (a) it may not be reimbursed on the holder’s initiative or without the prior agreement of the FCA; (b) the instrument must provide for the firm to have the option of deferring the dividend payment on the share capital; (c) the shareholder's claims on the firm must be wholly subordinated to those of all non-subordinated creditors; (d) the terms of the instrument must provide for the loss￾absorption capacity of the share capital and unpaid dividends, whilst enabling the firm to continue its business; and (e) it must be fully paid-up. 7 Qualifying arrangement s (Item 13) (a) An exempt CAD firm may only include a qualifying undertaking or other arrangement in item 13 if it is a qualifying capital instrument or a qualifying capital item. (b) A firm which is not an exempt CAD firm may only include qualifying undertakings in its calculation of liquid capital if: (i) it maintains liquid capital equivalent to 6/52 of its annual expenditure in a form other than qualifying undertakings; and

FCA 2021/XX Page 33 of 45 IPRU-INV 9 is deleted in its entirety. The deleted text is not shown but the chapter is marked [deleted] as shown below. Amend the following as shown. (ii) the total amount of all qualifying undertakings plus qualifying subordinated loans does not exceed the limits set out in paragraph (1)(b) above. 8 Net trading book profits (Item 14) For firms which are not exempt CAD firms unaudited Unaudited profits can be included at item 14. … … … 9 Financial resources requirements for an exempt CAD firm [deleted] 11 Collective Portfolio Management Firms and Collective Portfolio Management Investment Firms 11.1 INTRODUCTION Application … 11.1.2 G A collective portfolio management firm that manages an AIF is an internally managed AIF or an external AIFM. If the firm is a full-scope UK AIFM this affects the firm’s base capital resources requirement (see IPRU-INV 11.3.1R). An internally managed AIF that is a full-scope UK AIFM is not permitted to engage in activities other than the management of that AIF, whereas an external AIFM that is a full-scope UK AIFM may manage AIFs and/or UCITS, provided it has permission to do so. A full￾scope UK AIFM that is an external AIFM and/or a UCITS management company may undertake any of the additional investment activities permitted by article 6(4) of AIFMD or article 6(3) of the UCITS Directive (as applicable), provided it has permission to do so, but if so it is classified as a collective portfolio management investment firm, as opposed to a collective portfolio management firm.

FCA 2021/XX Page 34 of 45 A collective portfolio management investment firm is also a MIFIDPRU investment firm, and so is subject to the requirements of either (i) GENPRU and BIPRU or (ii) IFPRU of MIFIDPRU in addition to the requirements of IPRU-INV 11, as explained in IPRU-INV 11.6.2G IPRU￾INV 11.6.3G. 11.1.2A G A small authorised UK AIFM that is not also a UCITS management company is not a collective portfolio management firm or a collective portfolio management investment firm and is therefore not subject to IPRU-INV 11. This type of firm is subject to IPRU-INV 5 if it is an investment management firm, GENPRU and BIPRU if it is a BIPRU firm or IFPRU if it is an IFPRU investment firm or MIFIDPRU if it is a MIFIDPRU investment firm. … Purpose 11.1.4 G (1) … (2) This original purpose of this chapter was to implement relevant requirements of AIFMD and the UCITS Directive, which included imposing capital and professional indemnity insurance requirements on a full-scope UK AIFM and a UCITS management company. AIFMD and the UCITS Directive incorporate references to provisions of the Banking Consolidation Directive and the Capital Adequacy Directive in relation to initial capital, own funds and fixed overheads. However, in line with article 163 of the CRD, the Banking Consolidation Directive and the Capital Adequacy Directive were repealed from 1 January 2014 and references to these directives were replaced with references to the CRD and the UK CRR in line with the correlation table set out in Annex II to the CRD and in Annex IV to the UK CRR. [deleted] 11.2 MAIN REQUIREMENTS Collective portfolio management firm 11.2.1 R A firm must: (1) … (2) at all times, maintain own funds which equal or exceed: (a) the higher of: (i) the funds under management requirement (in line with IPRU-INV 11.3.2R); and

FCA 2021/XX Page 35 of 45 (ii) the amount specified in article 97 of the UK CRR (Own funds based on fixed overheads) (as replicated in IPRU-INV 11.3.3AUK)) IPRU-INV 11.3.3AR; plus … (3) at all times, hold liquid assets (in line with IPRU-INV 11.3.17R) which equal or exceed: (a) the higher of: (i) the funds under management requirement (in line with IPRU-INV 11.3.2R) less the base own funds requirement (in line with IPRU-INV 11.3.1R); and (ii) the amount specified in article 97 of the UK CRR (Own funds based on fixed overheads) IPRU-INV 11.3.3AR; plus … … 11.3 DETAIL OF MAIN REQUIREMENTS … Own Funds based on Fixed Overheads 11.3.3A UK R (1) In accordance with Articles 95 and 96, an investment firm and firms referred to in point (2)(c) of Article 4(1) that provide the investment services and activities listed in points the UK legislation that implemented (2) and (4) of Section A of Annex I to Directive 2004/39/EC shall hold eligible capital A firm must hold own funds of at least one quarter of the fixed overheads of the preceding year. (2) Where there is a change in the business of an investment firm since the preceding year that the competent authority considers to be material, the competent authority may adjust the requirement laid down in paragraph 1. A firm must calculate its fixed overheads using the methodology for calculating relevant expenditure in MIFIDPRU 4.5 (Fixed overheads requirement). (3) Where an investment firm has not completed business for one year, starting from the day it starts up, an investment firm shall hold eligible capital of at least one quarter of the fixed overheads projected in its business plan, except where the competent authority requires the business plan to be adjusted. A firm that has not been in business for one year may use its projected fixed

FCA 2021/XX Page 36 of 45 overheads in accordance with the approach in MIFIDPRU 4.5.11R. [Note: article 97(1) to (3) of the UK CRR] EU CRR] … 11.6 ADDITIONAL REQUIREMENTS FOR COLLECTIVE PORTFOLIO MANAGEMENT INVESTMENT FIRMS 11.6.1 G A collective portfolio management investment firm is required to comply with the applicable requirements of either of the following sourcebooks in addition to complying with IPRU-INV 11: MIFIDPRU in addition to IPRU-INV 11. (1) GENPRU and BIPRU if it is a BIPRU firm; or (2) IFPRU if it is IFPRU investment firm. 11.6.2 G (1) A collective portfolio management investment firm may undertake the following MiFID business: portfolio management; investment advice; safekeeping and administration in relation to shares or units of collective investment undertakings; and (if it is an AIFM investment firm) reception and transmission of orders in relation to financial instruments. (2) Subject to the conditions that the firm is not authorised to provide safekeeping and administration in relation to shares or units of collective investment undertakings and is not permitted to hold client money or client assets in relation to its MiFID business (and for that reason may not place itself in debt with those clients) competent authorities may allow the firm to stay on the capital requirements that would be binding on that firm as at 31 December 2013 the UK legislation that implemented under the Banking Consolidation Directive and the Capital Adequacy Directive (in line with article 95(2) of the UK CRR). The FCA exercised this derogation and, as such, a firm meeting those conditions is a BIPRU firm. If the above conditions are not met, a collective portfolio management investment firm is an IFPRU investment firm. [deleted] 11.6.3 G A collective portfolio management investment firm is required to comply with the applicable requirements of the sourcebooks set out in IPRU-INV 11.6.1G MIFIDPRU, in parallel with its requirements under IPRU-INV 11. This means that a capital instrument or liquid asset may be used to meet either or both sets of requirements provided it meets the conditions set out in the relevant sourcebook. 11.6.4 G (1) When a collective portfolio management investment firm that is a BIPRU firm calculates the credit risk capital requirement and the market risk capital requirement for the purpose of calculating the

FCA 2021/XX Page 37 of 45 variable capital requirement under GENPRU 2.1.40R it must do so only in respect of designated investment business. For this purpose, managing an AIF or managing a UK UCITS is excluded from designated investment business. [deleted] (2) Generally, BIPRU only applies to a collective portfolio management investment firm that is a BIPRU firm in respect of its designated investment business (excluding managing an AIF and managing a UK UCITS). However, BIPRU 2.2 (Internal capital adequacy standards), BIPRU 2.3 (Interest rate risk in the non￾trading book), BIPRU 8 (Group risk - consolidation) and BIPRU 11 (Disclosure) apply to the whole of its business. [deleted] 11.6.5 G (1) When a collective portfolio management investment firm that is an IFPRU investment firm calculates the total risk exposure amount in article 92(3) of the UK CRR, the own funds requirements referred to in article 92(3)(a) (Risk weighted exposure amount for credit risk and dilution risk) and article 92(3)(b) (Risk weighted exposure amount for position risk) should include only those arising from its designated investment business. For this purpose, managing an AIF or managing a UK UCITS is excluded from designated investment business. [deleted] (2) Generally, IFPRU only applies to the designated investment business (excluding managing an AIF and managing a UK UCITS) of a collective portfolio management investment firm that is an IFPRU investment firm. However, IFPRU 2.2 (Internal capital adequacy standards) and IFPRU 2.3 (Supervisory review and evaluation process: Internal capital adequacy standards) apply to the whole of its business. [deleted] 11.6.6 G A collective portfolio management investment firm is not required to include its collective portfolio management activities when calculating its K-factor metrics under MIFIDPRU. … 11.7 CAPITAL REPORTING 11.7.1 G The reporting requirements of capital adequacy for a collective portfolio management firm and a collective portfolio management investment firm are set out in SUP 16.12 (Integrated regulatory reporting). In summary, the relevant capital adequacy forms for its business of managing an AIF or managing a UK UCITS are as follows: (1) a collective portfolio management firm is required to submit FIN066 (and FSA042 if it is a UCITS firm); and (2) a collective portfolio management investment firm that is an IFPRU investment firm is required to submit FIN067 (and FSA042

FCA 2021/XX Page 38 of 45 if it is a UCITS investment firm) and also report using COREP in accordance with MIFIDPRU 9. ; and (3) a collective portfolio management investment firm that is a BIPRU firm is required to submit FIN068 (and FSA042 if it is a UCITS investment firm) and FSA003. [deleted] … 13 Financial Resources Requirements for Personal Investment Firms 13.1 APPLICATION, GENERAL REQUIREMENTS AND PROFESSIONAL INDEMNITY INSURANCE REQUIREMENTS Application 13.1.1 R This chapter applies to a firm which is a personal investment firm as set out in the table below. Type of personal investment firm Application of this Chapter A personal investment firm which is an exempt CAD firm 13.1, 13.1A, 13.13 and 13.14 A personal investment firm which is a category B firm 13.1 and 13.13 to 13.15 … … Capital resources: general accounting principles 13.1.4A R (1) … (2) The accounting principles are referred to in: (a) the Notes for completion of the Retail Mediation Activities Return (RMAR) (under the heading “Accounting Principles”) in SUP 16 Annex 18BG for a category B firm; and (b) the Guidance notes for data items in FSA032 (under the heading “Defined terms”) in SUP 16 Annex 25AG for an exempt CAD firm. … Requirement to hold professional indemnity insurance …

FCA 2021/XX Page 39 of 45 13.1.6 R An exempt CAD firm is not required to effect and maintain professional indemnity insurance unless it chooses this option (see 13.1A). [deleted] … Limits of indemnity 13.1.10 R If the firm is an IDD insurance intermediary, whether or not it is also an exempt CAD firm, the appropriate minimum limits of indemnity per year are no lower than: (1) EUR 1,250,000 for a single claim against the firm; and (2) EUR 1,850,000 in the aggregate. [Note: articles 10(4) and 10(5) of the IDD] 13.1.11 R If the firm is an exempt CAD firm that maintains professional indemnity insurance under 13.1A.3(1)(b), the appropriate minimum limits of indemnity per year are no lower than: (1) EUR 1,000,000 for a single claim against the firm; and (2) EUR 1,500,000 in the aggregate. [deleted] [Note: article 31(1) of the CRD (see also IPRU-INV 13.1A.3R)] 13.1.12 R If the firm is both an IDD insurance intermediary and an exempt CAD firm that maintains professional indemnity insurance under IPRU(INV) 13.1A.4(1)(b), the appropriate additional limits of indemnity to IPRU(INV) 13.1.10R per year are no lower than: (1) EUR 500,000 for a single claim against the firm; and (2) EUR 750,000 in the aggregate. [deleted] [Note: article 31(2) of the CRD (see also IPRU-INV 13.1A.4R)] 13.1.13 R If the firm is not an IDD insurance intermediary or an exempt CAD firm, then the following limits of indemnity apply: (1) if the firm has relevant income of up to £3,000,000, no lower than £500,000 for a single claim against the firm and £500,000 in the aggregate; or (2) if the firm has relevant income of more than £3,000,000, no lower than £650,000 for a single claim against the firm and £1,000,000 in the aggregate. … Additional capital resources - exclusions

FCA 2021/XX Page 40 of 45 IPRU-INV 13.1A is deleted in its entirety. The deleted text is not shown but the section is marked [deleted] as shown below. Amend the following as shown. 13.1.23 R … Note 2 - The calculation of a firm’s capital resources is set out in sections 13.1A to 13.15 (see IPRU-INV 13.1.1R for application of these sections to an exempt CAD firm or a category B firm) IPRU-INV 13.13 to 13.15. … Additional capital resources - excess 13.1.27 R … Note 2 - The calculation of a firm’s capital resources is set out in sections 13.1A to 13.15 (see IPRU-INV 13.1.1R for application of these sections to an exempt CAD firm or a category B firm) IPRU-INV 13.13 to 13.15. … 13.1A Capital resources and professional indemnity insurance requirements for an exempt CAD firm [deleted] 13.13 CAPITAL RESOURCES REQUIREMENT FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM A PERSONAL INVESTMENT FIRM Application 13.13.1 R This section applies to a personal investment firm which is either: (1) an exempt CAD firm; or (2) a category B firm. Requirement 13.13.2 R (1) A firm to which MIPRU does not apply must calculate its capital resources requirement as in (2). (2) The firm must calculate its capital resources requirement as the higher of: (a) £20,000; and

FCA 2021/XX Page 41 of 45 (b) the amount equivalent to the applicable percentage of its annual income specified in table 13.13.2(2)(b), depending on the type of firm. Table 13.13.2(2)(b) This table forms part of IPRU-INV 13.13.2R. (A) (B) Type of firm (C) Applicable percentage of annual income (1) Exempt CAD firm 5% … … … … 13.14 CALCULATION OF ANNUAL INCOME FOR AN EXEMPT CAD FIRM AND A CATEGORY B FIRM A PERSONAL INVESTMENT FIRM Application 13.14.1 R This section applies to a personal investment firm which is either: (1) an exempt CAD firm; or (2) a category B firm. Annual income … 13.14.3 R … (3) The relevant reporting form under SUP 16.12 is: (a) the Retail Mediation Activities Return (RMAR) (Section B: Profit and Loss Account) for a category B firm; and (b) FSA030 (Income Statement) for an exempt CAD firm. … … 13.15 CALCULATION OF OWN FUNDS TO MEET THE CAPITAL RESOURCES REQUIREMENT FOR A CATEGORY B FIRM PERSONAL INVESTMENT FIRM

FCA 2021/XX Page 42 of 45 Application 13.15.1 R This section applies to a personal investment firm which is a category B firm. 13.15.2 G The calculation of own funds by an exempt CAD firm is in IPRU-INV 13.1A.14R. [deleted] … Subordinated loans – Category B firm 13.15.7 R A category B firm firm may include a short-term subordinated loan as capital resources (see table in IPRU-INV 13.15.3R), if all the conditions in IPRU-INV 13.15.8R are satisfied. … Restrictions 13.15.9 R A Category B firm firm must calculate: … 13.15.10 R A Category B firm firm must treat as a liability in the calculation or its capital resources any amount by which the sum of IPRU-INV 13.15.9R(1) exceeds the product of IPRU-INV 13.15.9R(2). 14 Consolidated Supervision for Investment Businesses 14.1 APPLICATION 14.1.1 R Subject to rule 14.1.2, consolidated supervision and this chapter apply to a firm which is a member of a group if: (1) It is: (a) a securities and futures firm, subject to the financial rules in Chapter 3, which is a broad scope firm but not a venture capital firm. ; and (2) It is neither a BIPRU firm nor an IFPRU investment firm. [deleted] … Cases where consolidated supervision under this chapter will not apply 14.1.2 R A firm is not subject to consolidated supervision under the rules in this Chapter where any of the following conditions are fulfilled:

FCA 2021/XX Page 43 of 45 (1) the firm is included in the supervision on a consolidated basis of the group of which it is a member by a competent authority other than the FCA; or (2) the firm is a member of a UK consolidation group already included in the supervision on a consolidated basis of the group of which it is a member by the FCA under BIPRU 8 MIFIDPRU 2.5 (prudential consolidation); or (3) the firm is a member of a group already included in the supervision on a consolidated basis of the group of which it is a member by the appropriate regulator under Part One, Title II, Chapter 2 of the UK CRR. the firm is subject, along with a MIFIDPRU investment firm, to the group capital test in MIFIDPRU 2.6 (the group capital test). … Exemption from consolidated supervision 14.1.4 R A firm need not meet the requirements in rules 14.3.1 and 14.3.2 if: … (2) no firm in the group deals in investments as principal, except where it is dealing solely as a result of its activity of operating a collective investment scheme, or where the firm’s positions fulfil the CAD Article 5 exempting criteria; … … 14.5 GROUP FINANCIAL RESOURCES REQUIREMENT … 14.5.2 R Financial resources requirements for individual entities in the group are: … (2A) for entities that are recognised third country credit institutions or recognised third country investment firms and which is are subject to the local regulatory capital requirement of that regulator, that local regulatory capital requirement; (2B) for entities not in (2A) that are regulated by a third country competent authority named in the table in BIPRU 8 Annex 3R 8 Annex 6R as it applied on [ Editor’s note: insert date immediately before the date that the MIFIDPRU sourcebook begins to apply]

FCA 2021/XX Page 44 of 45 and which is subject to the local regulatory capital requirement of that regulator, that local regulatory capital requirement; and … … 14 App 1 Interpretation App 1.1 G Glossary of defined terms for Chapter 14 … CAD Article 5 exempting criteria the following criteria in respect of the firm’s dealing positions:

• such positions arise only as a result of the firm’s failure to match investors orders precisely;
• the total market value of all such positions is subject to a ceiling of 15% of the firm’s initial capital; and
• such positions are incidental and provisional in nature and strictly limited to the time required to carry out the transaction in question. … Annex A Limited liability partnerships: Eligible members’ capital Annex A 1 Introduction … 1.5 G The following rules allow inclusion of members’ capital within a firm’s capital if it meets the conditions in this annex: Chapter IPRU(INV) rule How eligible LLP members’ capital should be treated for the purposes of the IPRU(INV) rule 3 Table 3-61 Eligible LLP members’ capital may be counted as Tier 1 capital under item “A” within Table 3-61. 5 Table 5.2.2 (1): Item (1A) Eligible LLP members’ capital may be counted

FCA 2021/XX Page 45 of 45 as Tier 1 capital within Category A of Table 5.2.2(1). 9 9.3.1 Eligible LLP members’ capital may be counted as initial capital with IPRU-INV 9.3.1 [deleted] 11 Table 11.4 Eligible LLP members’ capital may be counted as Item (5) in Table 11.4. 13 Table 13.15.3(1) 13.1A.6 Eligible LLP members’ capital may be counted as capital resources relating to companies in IPRU-INV 13.15.3(1).

Eligible LLP members’ capital may be counted as initial capital within IPRU-INV 13.1A.6. … Annex D Required Forms [Editor’s note: This section will be published in a subsequent consultation paper.]

FCA 2021/XX INVESTMENT FIRMS PRUDENTIAL REGIME (No. 2) INSTRUMENT 20211 Powers exercised A. The Financial Conduct Authority (“FCA”) makes this instrument in the exercise of the following powers and related provisions in the Financial Services and Markets Act 2000 (“the Act”): (1) section 137A (The FCA’s general rules); (2) section 137T (General supplementary powers); (3) section 138C (Evidential provisions); (4) section 138D (Actions for damages); (5) section 139A (Power of the FCA to give guidance); (6) section 143D (Duty to make rules applying to parent undertakings); (7) section 143E (Powers to make rules applying to parent undertakings)2 ; and (8) paragraph 23 of Schedule 1ZA (Fees). B. The rule-making provisions listed above are specified for the purposes of section 138G(2) (Rule-making instruments) of the Act. Commencement C. This instrument come into force on [Editor’s note: insert date one month before the application date specified in paragraph D] solely for the purpose of enabling a person to comply with the rules in Part 2 of Annex A to the Investment Firms Prudential Regime Instrument 2021. D. This instrument comes into force for all remaining purposes on [date]. 1 Editor’s note: In this consultation paper, the additional provisions being added to MIFIDPRU have been published in this separate draft instrument and are shown as amendments to the draft text published in the first consultation paper (CP20/24). The FCA has adopted this approach so that firms can identify the effect of the additional provisions more clearly. However, when the FCA publishes the policy statement for this second consultation paper, we intend to publish a single combined near-final legal instrument that shows the cumulative text from the first and second consultations together. This approach will provide a single, combined near-final MIFIDPRU text to which firms may refer (with the exception of limited parts of MIFIDPRU that will be contained in a third consultation paper). Any further amendments to the MIFIDPRU text in the third consultation paper will be published in a separate, draft legal instrument. 2 Editor’s note: The references to sections 143D and 143E of the Financial Services and Markets Act 2000 are to those provisions as they appear in the Financial Services Bill introduced in the House of Commons on 20 October 2020. The reference to the statutory powers and related provisions in this instrument may need to be reviewed and updated if the Bill is amended during the parliamentary process.

FCA 2021/XX Page 2 of 233 Amendments to the FCA Handbook E. The modules of the FCA’s Handbook of rules and guidance listed in column (1) below are amended in accordance with the Annexes to this instrument listed in column (2). (1) (2) Glossary of definitions Annex A Senior Management Arrangements, Systems and Controls sourcebook (SYSC) Annex B Prudential sourcebook for MiFID Investment Firms (MIFIDPRU) Annex C Supervision manual (SUP) Annex D F. The FCA confirms and remakes in the Glossary of definitions any defined expressions used in the modules of the FCA’s Handbook of rules and guidance referred to in paragraph E where such defined expressions relate to any UK legislation that has been amended since those defined expressions were last made. Notes G. In the annexes to this instrument, the “notes” (indicated by “Note:” or “Editor’s note:”) are included for the convenience of readers, but do not form part of the legislative text. Citation H. This instrument may be cited as the Investment Firms Prudential Regime (No. 2) Instrument 2021. By order of the Board [date] [Editor’s note: The text of the EU CRR is amended at the EU level by the EU texts of the Investment Firms Regulation (Regulation (EU) 2019/2033) (“IFR”) and Regulation (EU) 2019/876 amending the EU CRR (“CRR2”). All references to the UK CRR in this instrument are references to the onshored UK CRR in the form in which it would appear if it contained equivalent amendments, unless expressly stated otherwise. The FCA expects that such amendments will largely be made to the UK CRR by UK primary and secondary legislation. This is consistent with HM Treasury’s stated legislative approach in its ‘Prudential standards in the Financial Services Bill’ policy statement published in June 2020. However, the FCA may replace cross-references to the UK CRR in this consultation text with final rules that copy out provisions of the UK CRR in full (reflecting the necessary amendments) to the extent that it is necessary or desirable to do so to make the rules easier for firms to use.

FCA 2021/XX Page 3 of 233 Notes marked “Note:” in this instrument contain references to provisions of the EU IFR or EU Investment Firms Directive (Directive (EU) 2019/2034) (“IFD”). As the IFR and IFD will not apply in the UK, these references will not appear in the final Handbook text. They are provided in this draft instrument solely to assist firms in identifying EU provisions which have a broadly similar effect to the Handbook provision to which they relate. These references may assist firms and groups that operate on an international basis in understanding how the UK prudential regime for investment firms will achieve similar outcomes to the EU IFR and IFD and therefore may be useful for implementation purposes. References to the “Act” (i.e. the Financial Services and Markets Act 2000) are references to provisions of the Act as they are expected to appear following the enactment of the Financial Services Bill 2020-21.]

FCA 2021/XX Page 4 of 233 Annex A Amendments to the Glossary of definitions Insert the following new definitions in the appropriate alphabetical position. The text is not underlined. ASA assets safeguarded and administered. assets safeguarded and administered (in MIFIDPRU) the value of assets, as calculated in accordance with the rules in MIFIDPRU 4.9 (K-ASA requirement), belonging to a client that a firm holds in the course of MiFID business, irrespective of whether those assets appear on the firm’s own balance sheet or are deposited into accounts opened with third parties. assets under management (in MIFIDPRU) the value of assets, as calculated in accordance with the rules in MIFIDPRU 4.7 (K-AUM requirement), that a firm manages for its clients under the following arrangements, where such arrangements constitute MiFID business: (1) discretionary portfolio management; and (2) non-discretionary arrangements constituting investment advice of an ongoing nature. AUM assets under management. average ASA the rolling average of a firm’s ASA calculated in accordance with MIFIDPRU 4.9.8R. average AUM the rolling average of a firm’s AUM calculated in accordance with MIFIDPRU 4.7.5R. average CMH the rolling average of a firm’s CMH calculated in accordance with MIFIDPRU 4.8.13R. average COH the rolling average of a firm’s COH calculated in accordance with MIFIDPRU 4.10.19R. average DTF the rolling average of a firm’s DTF calculated in accordance with MIFIDPRU 4.15.4R. basic liquid assets requirement the requirement in MIFIDPRU 6.2.1R for a MIFIDPRU investment firm to hold a minimum amount of core liquid assets. business unit (in SYSC 19G) means any separate organisational or legal entities, business lines or geographical locations within a firm.

FCA 2021/XX Page 5 of 233 client money held (in MIFIDPRU) the amount of MiFID client money that a firm holds. client orders handled (in MIFIDPRU) the value of orders, as calculated in accordance with the rules in MIFIDPRU 4.10 (K-COH requirement), that a firm handles for clients when providing the following services, where such services constitute MiFID business: (1) reception and transmission of client orders; and (2) execution of orders on behalf of clients. CMH client money held. COH client orders handled. convertible instrument (in SYSC 19G) an instrument the terms of which require the principal amount of that instrument to be converted into instruments that qualify as common equity tier 1 capital if a trigger event occurs. core liquid asset has the meaning in MIFIDPRU 6.3. early warning indicator an amount of own funds equal to: (1) 110% of a firm’s own funds threshold requirement; or (2) such other amount as the FCA may specify in a requirement imposed on a firm. eligible instruments (in SYSC 19G) means instruments falling within SYSC 19G.6.18R. financial entity (in MIFIDPRU) any of the following: (1) a MIFIDPRU investment firm (including a collective portfolio management investment firm); (2) a collective portfolio management firm; or (3) an entity established in a third country that is subject to an assets under management-based financial resources requirement that is similar to the K-AUM requirement. group ICARA process an ICARA process operated by an investment firm group in accordance with MIFIDPRU 7.9.5R. ICARA document has the meaning specified in MIFIDPRU 7.8.8R(2)(b), which, in summary, is the documentation used to record the firm’s

FCA 2021/XX Page 6 of 233 review of the adequacy of its ICARA process under MIFIDPRU 7.8.2R. ICARA process has the meaning specified in MIFIDPRU 7.4.9R(4), which, in summary, is the systems, controls and procedures set out in MIFIDPRU 7.4.9R(1) to (3) operated by a MIFIDPRU investment firm to: (1) identify, monitor and, if proportionate, reduce all material potential harms that may result from the ongoing operation of, or winding down of, the firm’s business; and (2) assess whether the firm should hold additional own funds and/or liquid assets to address material potential harms. indirect clearing arrangements has the meaning in article 1(b) of the EMIR L2 Regulation. indirect clearing firm a client or an indirect client of a clearing member where that client or indirect client is providing indirect clearing arrangements. K-ASA requirement the part of the K-factor requirement calculated on the basis of the ASA of a MIFIDPRU investment firm in accordance with MIFIDPRU 4.9 (K-ASA requirement). K-AUM requirement the part of the K-factor requirement calculated on the basis of the AUM of a MIFIDPRU investment firm in accordance with MIFIDPRU 4.7 (K-AUM requirement). K-CMH requirement the part of the K-factor requirement calculated on the basis of the CMH of a MIFIDPRU investment firm in accordance with MIFIDPRU 4.8 (K-CMH requirement). K-COH requirement the part of the K-factor requirement calculated on the basis of the COH of a MIFIDPRU investment firm in accordance with MIFIDPRU 4.10 (K-COH requirement). K-factor average metric any of the following: (1) average ASA; (2) average AUM; (3) average CMH; (4) average COH; (5) average DTF;

FCA 2021/XX Page 7 of 233 (6) TM for the purposes of the K-CMG requirement, as calculated in accordance with MIFIDPRU 4.13.5R. liquid assets core liquid assets and non-core liquid assets. liquid assets threshold requirement the amount of liquid assets that a firm needs to hold to comply with the overall financial adequacy rule. liquid assets wind-down trigger is an amount of liquid assets that is equal to: (1) a firm’s basic liquid assets requirement; or (2) such other amount as the FCA may specify in a requirement imposed on a firm. Market Making RTS Part 1 (FCA) of the UK version of Regulation (EU) 2017/578 of 13 June 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council on markets in financial instruments with regard to regulatory technical standards specifying the requirements on market making agreements and schemes, which is part of UK law by virtue of the EUWA. material risk taker (in SYSC 19G) has the meaning given in SYSC 19G.5.1R. MiFID client money (in MIFIDPRU) money that a firm receives from, or holds for or on behalf of, a client in the course of, or in connection with, its MiFID business. For the purposes of MIFIDPRU, this includes: (1) where such money has been deposited into a client bank account (including, where applicable, any amounts of the firm’s own money or other money received in such an account as a result of applying prudent segregation, alternative approach mandatory prudent segregation or clearing arrangement mandatory prudent segregation); (2) where a firm has placed such money in a qualifying money market fund in accordance with CASS 7.13.3R(4); (3) any amount of such money which a firm has allowed a third party to hold in accordance with CASS 7.14. MIFIDPRU Remuneration Code as set out in SYSC 19G (MIFIDPRU Remuneration Code).

FCA 2021/XX Page 8 of 233 non-core liquid asset has the meaning specified in MIFIDPRU 7.7.8R, which is any of the following, except to the extent excluded by MIFIDPRU 7.7.8R(2): (1) short-term deposits at a credit institution that does not have a Part 4A permission in the UK to accept deposits; (2) assets representing claims on, or guaranteed by, multilateral development banks or international organisations; (3) assets representing claims on or guaranteed by any third country central bank or government; (4) financial instruments; and (5) any other instrument eligible as collateral against the margin requirement of an authorised central counterparty. non-segregated account (in MIFIDPRU) any account which is not a segregated account. own funds threshold requirement the amount of own funds that a firm needs to hold to comply with the overall financial adequacy rule. own funds wind-down trigger is an amount of own funds that is equal to: (1) the firm’s fixed overheads requirement; or (2) such other amount as the FCA may specify in a requirement applied to the firm. relevant expenditure (in MIFIDPRU 4 and IPRU(INV) 11) relevant expenditure as calculated under MIFIDPRU 4.5.3R. segregated account (in MIFIDPRU) an arrangement which satisfies the conditions in MIFIDPRU 4.8.8R. short-term MMF a regulated money market fund that meets the definition of a “short-term MMF” in article 2(14) of the Money Market Funds Regulation. third country MIFIDPRU investment firm an overseas firm that would be a MIFIDPRU investment firm if it: (1) were incorporated in, or had its principal place of business in, the United Kingdom;

FCA 2021/XX Page 9 of 233 Amend the following definitions as shown. (2) carried on all its business in the United Kingdom; and (3) had obtained any authorisations necessary under the Act to carry on its business. threshold requirement either of the following in relation to a MIFIDPRU investment firm: (1) the liquid assets threshold requirement; or (2) the own funds threshold requirement. trade receivables receivables from trade debtors (including fees or commissions). UK-authorised credit institution a credit institution with a Part 4A permission to accept deposits. wind-down trigger either of the following in relation to a MIFIDPRU investment firm: (1) the liquid assets wind-down trigger; or (2) the own funds wind-down trigger. write-down instrument (in SYSC 19G) an instrument the terms of which require the principal amount of that instrument to be written down on the occurrence of a trigger event. common platform firm (a) a BIPRU firm MIFIDPRU investment firm; or (aa) a bank; or (ab) a building society; or (ac) a designated investment firm; or (ad) an IFPRU investment firm; or [deleted] (b) an exempt CAD firm; or [deleted] (c) a MiFID investment firm which falls within the definition of ‘local firm’ in article 4(1)(4) of the UK CRR; or [deleted] (d) a dormant account fund operator.

FCA 2021/XX Page 10 of 233 control functions (1) (except in 2) has the meaning in article 3 of the Material Risk Takers Regulation 2020. (2) (in SYSC 19G) means a function (including, but not limited to, a risk management function, compliance function and internal audit function) that is independent from the business units it controls and that is responsible for providing an objective assessment of the firm’s risks, and for reviewing and reporting on those risks. discretionary pension benefit … (2) (in IFPRU, SYSC 19A (IFPRU Remuneration Code) and SYSC 19D (Dual-regulated firms Remuneration Code) and SYSC 19G (MIFIDPRU Remuneration Code)) has the meaning in article 4(1)(73) of the UK CRR. fixed overheads requirement (1) (except in IPRU(INV) and for the purposes of GENPRU (except GENPRU 3 and BIPRU (except BIPRU 12)) the part of the capital resources requirement calculated in accordance with GENPRU 2.1.53R (Calculation of the fixed overheads requirement). [deleted] (2) (in IPRU(INV)) the part of the own funds requirement calculated in accordance with IPRU(INV) 11.3.3R (Fixed overheads requirement). (3) (in MIFIDPRU) the part of the own funds requirement calculated in accordance with MIFIDPRU 4.5 (Fixed overheads requirement). managerial responsibility (1) (except in SYSC 19G) has the meaning in article 2 of the Material Risk Takers Regulation 2020. (2) (in SYSC 19G) means a situation in which a staff member heads a business unit or a control function and is directly accountable to the management body as a whole, a member of the management body or to senior management. overall financial adequacy rule (1) (in GENPRU and BIPRU) GENPRU 1.2.26R (Requirement for certain firms to have adequate financial resources). (2) (in IFPRU) IFPRU 2.2.1R (Adequacy of financial resources).

FCA 2021/XX Page 11 of 233 3 Drafting note: The FCA proposed to amend the existing Glossary definition of “trading book” in CP20/24. The amendments shown in this draft instrument to the definition assume that the proposed amended definition in CP20/24 has been adopted. the requirement in MIFIDPRU 7.4.7R(1) (Overall financial adequacy rule), which is the obligation for a MIFIDPRU investment firm to hold own funds and liquid assets which are adequate, both as to their amount and quality, to ensure that: (1) it is able to remain financially viable throughout the economic cycle, with the ability to address any material potential harm that may result from its ongoing activities; and (2) its business can be wound down in an orderly manner, minimising harm to consumers or to other market participants. supervisory review and evaluation process (1) the appropriate regulator’s assessment of the adequacy of certain firms’ capital, as more fully described in BIPRU 2.2.9G (BIPRU firms) and INSPRU 7.1.91G to INSPRU 7.1.99G (insurers). (2) the FCA’s assessment of the adequacy of an IFPRU investment firm’s capital, as more fully described in IFPRU 2.3 (Supervisory review and evaluation process) (in MIFIDPRU) the FCA’s assessment of the adequacy of a MIFIDPRU investment firm’s own funds and liquid assets, as more fully described in MIFIDRU 7.10. trading book3 (1) [deleted] (2) [deleted] (3) [deleted] (4) [deleted] (5) (in DTR) has the meaning in article 4.1(86) of UK CRR. (6) (in MIFIDPRU and SYSC 19G) all positions in financial instruments and commodities held by a MIFIDPRU investment firm that are: (a) positions held with trading intent; or (b) held in order to hedge positions held with trading intent.

FCA 2021/XX Page 12 of 233 Annex B Amendments to the Senior Management Arrangements, Systems and Controls (SYSC) sourcebook SYSC 19A (IFPRU Remuneration Code) and SYSC 19C (BIPRU Remuneration Code) are deleted in their entirety. The deleted text is not shown but the chapters are marked [deleted] as shown below. 19A IFPRU Remuneration Code [deleted] 19C BIPRU Remuneration Code [deleted] Insert the following new chapter after SYSC 19F (Remuneration and performance management). The text is not underlined. 19G MIFIDPRU Remuneration Code 19G.1 General application Application: non-SNI MIFIDPRU investment firms 19G.1.1 R (1) Subject to (2), the MIFIDPRU Remuneration Code applies to a non￾SNI MIFIDPRU investment firm. (2) The provisions in (4) do not apply to a non-SNI MIFIDPRU investment firm: (a) where the value of the firm’s on- and off-balance sheet assets over the preceding 4-year period is a rolling average of £100 million or less; or (b) where: (i) the value of the firm’s on- and off-balance sheet assets over the preceding 4-year period is a rolling average of £300 million or less; and (ii) the conditions in (3) are satisfied. (3) The conditions referred to in (2)(b)(ii) are: (a) that the size of the firm’s on- and off-balance sheet trading book business is equal to or less than £150 million; and (b) that the size of the firm’s on- and off-balance sheet derivatives business is equal to or less than £100 million.

FCA 2021/XX Page 13 of 233 (4) The provisions referred to in (2) are: (a) SYSC 19G.6.18R and SYSC 19G.6.19G (Shares, instruments and alternative arrangements); (b) SYSC 19G.6.20R and SYSC 19G.6.21G (Retention policy); (c) SYSC 19G.6.22R to SYSC 19G.6.27R (Deferral); and (d) SYSC 19G.6.33R(2) (Discretionary pension benefits). (5) For the purposes of paragraph (2), paragraph (6) applies where a non￾SNI MIFIDPRU investment firm does not have data covering the 4- year period referred to in that paragraph. (6) Where this rule applies, a non-SNI MIFIDPRU investment firm must calculate the rolling averages referred to in paragraph (2) over the period that it has data. 19G.1.2 G For the purposes of SYSC 19G.1.1R(5), the FCA expects a non-SNI MIFIDPRU investment firm to have insufficient data for a period only where it did not carry on any MiFID business during that period. 19G.1.3 R (1) The amounts referred to in SYSC 19G.1.1R must be calculated on an individual basis. (2) The value of the on- and off-balance sheet assets in SYSC 19G.1.1R(2)(a) and (b) must be an arithmetic mean of the assets over the preceding 4 years. 19G.1.4 R (1) When calculating the amounts referred to in SYSC 19G.1.1R, firms must use their total gross assets, total gross trading book assets and the total gross market value of their derivatives business. (2) Any amounts in foreign currencies must be converted into pound sterling using the relevant conversion rate. (3) A firm must determine the relevant conversion rate referred to in (2) by reference to an appropriate market rate and must record which rate was chosen. 19G.1.5 G The FCA considers that an example of an appropriate market rate for the purposes of SYSC 19G.1.4R(3) would be the relevant daily spot exchange rate against pound sterling published by the Bank of England. Application: SNI MIFIDPRU investment firms 19G.1.6 R (1) The provisions in (2) apply to a SNI MIFIDPRU investment firm. (2) The provisions referred to in (1) are:

FCA 2021/XX Page 14 of 233 (a) SYSC 19G.2 (Remuneration policies and practices); (b) SYSC 19G.3.1R to SYSC 19G.3.3R (Oversight of remuneration policies and practices); (c) SYSC 19G.3.6R to SYSC 19G.3.8G (Control functions); (d) SYSC 19G.4.1R to SYSC 19G.4.5R and SYSC 19G.4.7G(1) and (2) (Fixed and variable components of remuneration); (e) SYSC 19G.6.1R (Remuneration and capital); (f) SYSC 19G.6.2R (Extraordinary public financial support); and (g) SYSC 19G.6.4R to SYSC 19G.6.5G (Financial and non-financial criteria in performance assessment). Application: summary of application to MIFIDPRU investment firms 19G.1.7 G (1) The effect of the application provisions in SYSC 19G.1.1R to 19G.1.6R is summarised in the following table. Type of firm Applicable sections Non-SNI MIFIDPRU investment firm not falling within SYSC 19G.1.1R(2) The MIFIDPRU Remuneration Code Non-SNI MIFIDPRU investment firm falling within SYSC 19G.1.1R(2) The MIFIDPRU Remuneration Code except for: SYSC 19G.6.18R and SYSC 19G.6.19G (Shares, instruments and alternative arrangements); SYSC 19G.6.20R and SYSC 19G.6.21G (Retention policy); SYSC 19G.6.22R to SYSC 19G.6.27R (Deferral); and SYSC 19G.6.33R(2) (Discretionary pension benefits) SNI MIFIDPRU investment firm SYSC 19G.2 (Remuneration policies and practices); SYSC 19G.3.1R to SYSC 19G.3.3R (Oversight of remuneration policies and practices); SYSC 19G.3.6R to SYSC 19G.3.8G (Control functions);

FCA 2021/XX Page 15 of 233 SYSC 19G.4.1R to SYSC 19G.4.5R and SYSC 19G.4.7G(1) and (2) (Fixed and variable components of remuneration); SYSC 19G.6.1R (Remuneration and capital); SYSC 19G.6.2R (Extraordinary public financial support); and SYSC 19G.6.4R to SYSC 19G.6.5G (Financial and non-financial criteria in performance assessment) (2) Firms are reminded that MIFIDPRU 1.2 contains provisions regarding the classification of a firm as a SNI MIFIDPRU investment firm and non-SNI MIFIDPRU investment firm. Application: where the application of SYSC 19G.1.1R changes in relation to a firm 19G.1.8 R (1) This rule applies to a non-SNI MIFIDPRU investment firm that does not fall within either SYSC 19G.1.1R(2)(a) or (b) but subsequently satisfies the conditions to do so. (2) The provisions referred to in SYSC 19G.1.1R(2) cease to apply to the firm in (1) if: (a) the firm has met the necessary conditions to fall within either SYSC 19G.1.1R(2)(a) or (b) for a continuous period of at least 6 months (or such longer period as may have elapsed before the firm submits the notification in (b)); and (b) it has notified the FCA that it has met the conditions in (a). (3) The notification in (2)(b) must be submitted via the online notification and application system using the form in MIFIDPRU Annex 3R. 19G.1.9 G The effect of SYSC 19G.1.8R(2)(a) is that firms may move between meeting the conditions in SYSC 19G.1.1R(2)(a) and (b) during the 6-month period. 19G.1.10 R Where a non-SNI MIFIDPRU investment firm previously met the conditions necessary for it to fall within SYSC 19G.1.1R(2)(a) or (b) but no longer does so, it must comply with the provisions referred to in SYSC 19G.1.1R(2) within 12 months from the date on which the firm ceased to meet the conditions. 19G.1.11 R (1) Where a non-SNI MIFIDPRU investment firm ceases to meet the conditions necessary for it to fall within SYSC 19G.1.1R(2)(a) or (b), it must promptly notify the FCA.

FCA 2021/XX Page 16 of 233 (2) The notification in (1) must be submitted via the online notification and application system using the form in MIFIDPRU Annex 3R. 19G.1.12 G Where a firm ceases to meet the conditions necessary for it to fall under SYSC 19G.1.1R(2)(a) or (b), but subsequently meets the conditions again within a period of 6 months, the firm will still be subject to the provisions referred to in SYSC 19G.1.1R(2) 12 months after the date on which it first ceased to meet the conditions. The firm will only cease to be subject to the provisions referred to in SYSC 19G.1.1R(2) where it meets the conditions in SYSC 19G.1.8R(2). 19G.1.13 R The requirements in SYSC 19G.1.8R(2)(b) and SYSC 19G.1.11R(1) do not apply where a non-SNI MIFIDPRU investment firm has notified the FCA in accordance with the requirements of MIFIDPRU 7.1.9R(2)(b) or MIFIDPRU 7.1.12R(1) for the same event. Application: collective portfolio management investment firms 19G.1.14 R (1) The MIFIDPRU Remuneration Code applies to the MiFID business of a collective portfolio management investment firm. (2) Paragraph (3) applies where a staff member at a collective portfolio management investment firm is a material risk taker and also either AIFM Remuneration Code Staff or UCITS Remuneration Code Staff. (3) Where this paragraph applies, a collective portfolio management investment firm must apply to the relevant material risk taker the most stringent of the applicable remuneration requirements in: (a) the MIFIDPRU Remuneration Code; (b) the AIFM Remuneration Code; and (c) the UCITS Remuneration Code. Application: levels of application 19G.1.15 G SYSC 19G.1.1R to SYSC 19G.1.14R and SYSC 19G.1.16R explain when the MIFIDPRU Remuneration Code applies to a firm on an individual basis. SYSC 19G.1.17R to 19G.1.20R explain when the MIFIDPRU Remuneration Code applies on a consolidated basis, and what that means. 19G.1.16 R The MIFIDPRU Remuneration Code applies to a firm on an individual basis where the FCA has granted a firm permission under MIFIDPRU 2.4.17R and MIFIDPRU 2.4.18R to apply the group capital test. 19G.1.17 R (1) Where MIFIDPRU 2.5 applies to a UK parent undertaking, the MIFIDPRU Remuneration Code applies to that UK parent undertaking on a consolidated basis.

FCA 2021/XX Page 17 of 233 (2) For the purposes of SYSC 19G, application on a consolidated basis means on the basis of the situation that results from applying the requirements in the MIFIDPRU Remuneration Code to a UK parent undertaking as if that undertaking formed, together with all the investment firms, financial institutions, ancillary services undertakings and tied agents in the investment firm group, a single MIFIDPRU investment firm. (3) For the purposes of (2), the terms investment firm, financial institution, ancillary services undertaking and tied agent shall apply to undertakings established in third countries, which, were they established in the UK, would fulfil the definitions of those terms. (4) Where an undertaking in a third country is included in the consolidated situation of a UK parent undertaking as a result of (3), the MIFIDPRU Remuneration Code only applies in relation to material risk takers at that undertaking who oversee or are responsible for business activities that take place in the UK. 19G.1.18 G Where the MIFIDPRU Remuneration Code applies on a consolidated basis, the effect of SYSC 19G.1.17(2) is that the UK parent undertaking and all the investment firms, financial institutions, ancillary services undertakings and tied agents in the investment firm group are treated for these purposes as a single MIFIDPRU investment firm. This means, for example, treating a staff member of an undertaking within the investment firm group as if they were a staff member of the UK parent undertaking. 19G.1.19 R (1) Paragraph (2) applies where the MIFIDPRU Remuneration Code applies on a consolidated basis and where: (a) the professional activities of a material risk taker in one undertaking in the investment firm group (‘undertaking A’) have a material impact on the risk profile of: (i) another undertaking in the same investment firm group (‘undertaking B’), or on the assets it manages; or (ii) the whole investment firm group (‘group C’), or on the assets it manages; and (b) on an individual basis, undertaking B or any undertaking in group C is subject to remuneration requirements that differ from those that apply to undertaking A, as a result of the application of: (i) different provisions within the MIFIDPRU Remuneration Code; (ii) the AIFM Remuneration Code;

FCA 2021/XX Page 18 of 233 (iii) the Dual-regulated firms Remuneration Code; or (iv) the UCITS Remuneration Code. (2) Where this paragraph applies, the UK parent undertaking must apply to the relevant material risk taker: (a) where the professional activities of the material risk taker have a material impact on the risk profile of the whole of group C, or on the assets it manages, the most stringent of the remuneration requirements that, in accordance with (1)(b), apply to undertaking A, undertaking B or any other undertaking in group C; or (b) where the professional activities of the material risk taker have a material impact on the risk profile of any other undertaking in group C, or on the assets it manages, the most stringent of the remuneration requirements that, in accordance with (1)(b), apply to undertaking A or that other undertaking. 19G.1.20 G (1) The effect of SYSC 19G.1.19R is that where an investment firm group contains both a PRA-designated investment firm and an FCA investment firm (but not a credit institution), the UK parent undertaking must ensure the consolidated requirements of both the dual-regulated firms Remuneration Code and the MIFIDPRU Remuneration Code are applied. (2) Firms in a group that contains a credit institution should refer to the dual-regulated firms Remuneration Code. Application: staff 19G.1.21 G The term ‘staff’ should be interpreted broadly in the MIFIDPRU Remuneration Code so as to include employees of the firm itself, partners or members (in the case of partnership structures), employees of other entities in the group, employees of joint service companies, and secondees. Application: proportionality 19G.1.22 R A firm must comply with the MIFIDPRU Remuneration Code in a manner that is appropriate to its size and internal organisation and to the nature, scope and complexity of its activities. When? 19G.1.23 R A firm must apply the MIFIDPRU Remuneration Code from the start of its first performance year that begins on or after 1 January 2022. 19G.2 Remuneration policies and practices General requirements

FCA 2021/XX Page 19 of 233 19G.2.1 R A MIFIDPRU investment firm must establish, implement and maintain remuneration policies and practices. 19G.2.2 G The FCA expects that the remuneration policies and practices referred to in SYSC 19G.2.1R cover all aspects of remuneration within the scope of the MIFIDPRU Remuneration Code, and all staff. Proportionality 19G.2.3 R A firm’s remuneration policies and practices must be appropriate and proportionate to the nature, scale and complexity of the risks inherent in the business model and the activities of the firm. 19G.2.4 G The proportionality principle in SYSC 19G.2.3R means that the content and level of detail of a firm’s remuneration policy may depend on a number of factors. These may include the number of staff it employs, the different types of roles, the activities it carries out, and whether the firm is part of a group with a group-wide remuneration policy. Gender neutral remuneration policies and practices 19G.2.5 R A firm must ensure that its remuneration policy is a gender neutral remuneration policy and the practices referred to in SYSC 19G.2.1R are gender neutral. 19G.2.6 G Firms are reminded that the Equality Act 2010 prohibits discrimination on the basis of an individual’s protected characteristics both before and after employment is offered. The Act applies to pay and all other contractual terms, including variable remuneration. A firm is reminded of the need to ensure that its remuneration policy complies with the Equality Act 2010. Risk management, business strategy and avoiding conflicts of interest 19G.2.7 R A firm must ensure that its remuneration policies and practices are consistent with, and promote sound and effective, risk management. 19G.2.8 R A firm must ensure that its remuneration policies and practices are in line with the business strategy, objectives and long-term interests of the firm. 19G.2.9 G For the purposes of SYSC 19G.2.8R, the business strategy, objectives and long-term interests of the firm should include consideration of: (1) the firm’s risk appetite and strategy, including environmental, social and governance risk factors; (2) the firm’s culture and values; and (3) the long-term effects of the investment decisions taken. 19G.2.10 R A firm must ensure that its remuneration policy:

FCA 2021/XX Page 20 of 233 (1) contains measures to avoid conflicts of interest; (2) encourages responsible business conduct; and (3) promotes risk awareness and prudent risk taking. 19G.2.11 R A MIFIDPRU investment firm must not pay variable remuneration to members of the management body who do not perform any executive function in the firm. 19G.3 Governance and oversight Oversight of remuneration policies and practices 19G.3.1 R A MIFIDPRU investment firm must ensure that its management body in its supervisory function adopts and periodically reviews the remuneration policy and has the overall responsibility for overseeing its implementation. 19G.3.2 G (1) It is for each firm to assess the most appropriate frequency for the periodic reviews referred to in SYSC 19G.3.1R, taking into account all relevant factors. (2) The development and review of the remuneration policy should be supported by the control functions, including (where they exist) risk management, compliance, internal audit and human resources, and by business units. (3) The processes and decision-making around the development, review and amendment of remuneration policies and practices are subject to the general record-keeping requirements set out in SYSC 9. 19G.3.3 R A firm’s remuneration committee, where it has one, must oversee the implementation of the firm’s remuneration policies and practices established under SYSC 19G.2.1R. Control functions 19G.3.4 R A non-SNI MIFIDPRU investment firm must ensure that the implementation of its remuneration policy is, at least annually, subject to central and independent internal review by staff engaged in control functions. 19G.3.5 G (1) The review referred to in SYSC 19G.3.4R should be conducted by the internal audit function, where one exists. (2) The FCA expects a non-SNI MIFIDPRU investment firm to document appropriately the results of the review and the actions taken to remedy any findings. 19G.3.6 R A MIFIDPRU investment firm must ensure that staff engaged in control functions:

FCA 2021/XX Page 21 of 233 (1) are independent from the business units they oversee; (2) have appropriate authority; and (3) are remunerated in accordance with the achievement of the objectives linked to their functions, independent of the performance of the business areas they control. 19G.3.7 R A MIFIDPRU investment firm must ensure that the remuneration of the senior officers in risk management and compliance functions is directly overseen by the remuneration committee, or, if such a committee has not been established, by the management body in its supervisory function. 19G.3.8 G SYSC 19G.3.6R and SYSC 19G.3.7R are designed to manage the conflicts of interest which might arise if other business areas had undue influence over the remuneration of staff in control functions. Conflicts of interest can easily arise when staff members are involved in the determination of remuneration for their own business area. Where these could arise, they need to be managed by having in place independent control functions (in particular risk management and compliance) and human resources. 19G.4 Fixed and variable components of remuneration Categorising fixed and variable remuneration 19G.4.1 R A MIFIDPRU investment firm must ensure that the remuneration policy makes a clear distinction between criteria for setting fixed and variable remuneration. 19G.4.2 G (1) The effect of SYSC 19G.4.1R is that all remuneration paid to a staff member must be clearly categorised as either fixed or variable remuneration. (2) In allocating individual remuneration components to fixed or variable remuneration, it is the quality and purpose of the component that is decisive, not the label applied to it. (3) The FCA considers that: (a) fixed remuneration: (i) should primarily reflect a staff member’s professional experience and organisational responsibility as set out in the staff member’s job description and terms of employment; and (ii) should be permanent, pre-determined, non￾discretionary, non-revocable and not dependent on performance; and (b) variable remuneration:

FCA 2021/XX Page 22 of 233 (i) should be based on performance or, in exceptional cases, other conditions; (ii) where based on performance, should reflect the long￾term performance of the staff member as well as performance in excess of the staff member’s job description and terms of employment; and (iii) includes discretionary pension benefits. 19G.4.3 G (1) Returns made by staff on co-investment arrangements are shares in the profits as a pro rata return on an investment. The FCA does not usually consider such returns to be remuneration for the purposes of the MIFIDPRU Remuneration Code. However, the investment made by the individual should be with their own funds and not in the form of a loan from the firm. Where this is not the case, the FCA would expect the returns to be categorised as remuneration. (2) Payments made under carried interest arrangements represent a share in the profits of a fund managed by the firm’s staff. They are received by the firm for the benefit of the relevant staff as compensation for the management of the fund. In the FCA’s view, these payments should be considered as remuneration for the purposes of the MIFIDPRU Remuneration Code. 19G.4.4 G (1) In relation to remuneration received by a partner or a member in a limited liability partnership, the FCA’s view on how to categorise certain payments received by those individuals is as follows: (a) at the end of each year, the residual profits of a partnership or limited liability partnership are distributed among the partners or members. The level of ownership of each partner or member is reflected in the number of ownership shares they have. Residual profits are distributed according to the ownership shares, so are not linked to work or performance. In the FCA’s view, payments on this basis are not remuneration; (b) a partner or member may receive an amount fixed at the beginning of the year and subject only to the firm making a profit. These are often called fixed profit shares. A partner or member usually takes drawings on it throughout the year, often monthly. If profits at year-end are insufficient, drawings may have to be paid back. The FCA considers that drawings on fixed profit shares are usually fixed remuneration; (c) a partner or member may receive a discretionary share of the profit at the end of the year. These may be distributed to all partners or members but are usually dependent on the performance of the individual or their business unit. Awards may be at the discretion of the remuneration committee. The

FCA 2021/XX Page 23 of 233 FCA considers that payments made on this basis are usually variable remuneration. (2) A firm that is a partnership or limited liability partnership may use a benchmarking approach instead of, or in addition to, the approach in (1) to categorise payments made to partners or members of limited liability partnerships, for example by taking into account: (a) the remuneration structures of other individuals performing similar tasks or working in similar businesses as the partner or member in question; or (b) where the partner or member has invested in a fund or firm, the return expected in a similar investment context. (3) The FCA expects a material portion of the profit share of a partner or member of a limited liability partnership to be categorised as remuneration. What constitutes a material portion may depend on whether the partner or member works full-time or part-time. For example, if a partner or member works part-time and receives less remuneration than a partner or member who works full-time, the FCA would expect a smaller proportion of the part-time partner or member’s profit share to be classed as remuneration. Balance of fixed and variable components of total remuneration 19G.4.5 R A MIFIDPRU investment firm must ensure that: (1) the fixed and variable components of the total remuneration are appropriately balanced; and (2) the fixed component represents a sufficiently high proportion of the total remuneration so as to enable the operation of a fully flexible policy on variable remuneration, including the possibility of paying no variable remuneration component. 19G.4.6 R For the purposes of SYSC 19G.4.5R, non-SNI MIFIDPRU investment firms must set an appropriate ratio between the variable and the fixed component of the total remuneration in their remuneration policies. 19G.4.7 G (1) When determining what constitutes an appropriate balance and an appropriate ratio for the purposes of SYSC 19G.4.5R and SYSC 19G.4.6R respectively, firms should consider all relevant factors, including: (a) the firm’s business activities and associated prudential and conduct risks; and (b) the role of the individual in the firm and, in the case of material risk takers, the impact that different categories of staff have on

FCA 2021/XX Page 24 of 233 the risk profile of the non-SNI MIFIDPRU investment firm or of the assets it manages. (2) It may be appropriate for some staff to receive only fixed remuneration. The FCA does not consider it would be an appropriate balance for any individual to receive only variable remuneration. (3) A non-SNI MIFIDPRU investment firm may wish to set different ratios for different categories of staff. For example, the FCA considers that it will usually be appropriate to set a lower ratio for control functions than for the business units they control. (4) Ratios may differ from one performance year to the next. 19G.5 Application of remuneration requirements to material risk takers Identifying material risk takers 19G.5.1 R A material risk taker is a staff member at a non-SNI MIFIDPRU investment firm whose professional activities have a material impact on the risk profile of the firm or of the assets that the firm manages. 19G.5.2 R A firm falling under SYSC 19G.5.1R must assess at least once a year which of its staff members are material risk takers. 19G.5.3 R For the purposes of SYSC 19G.5.1R, a staff member is be deemed to have a material impact on a firm’s risk profile or the assets the firm manages if one or more of the following criteria are met: (1) the staff member is a member of the management body in its management function; (2) the staff member is a member of the management body in respect of the management body in its supervisory function; (3) the staff member is a member of the senior management; (4) the staff member has managerial responsibility for business units that are carrying on at least one of the following regulated activities: (a) arranging (bringing about) deals in investments; (b) dealing in investments as agent; (c) dealing in investments as principal; (d) managing investments; (e) making investments with a view to transactions in investments; (f) advising on investments (except P2P agreements); and/or

FCA 2021/XX Page 25 of 233 (g) operating an organised trading facility; (5) the staff member has managerial responsibilities for the activities of a control function; (6) the staff member has managerial responsibilities for the prevention of money laundering and terrorist financing; (7) the staff member is responsible for managing a material risk within the firm; (8) in a firm that has permission for carrying on at least one of the regulated activities in (4)(a) to (g), the staff member is responsible for managing one of the following activities: (a) information technology; (b) information security; and/or (c) outsourcing arrangements of critical or important functions as referred to in article 30(1) of the MiFID Org Regulation; and (9) the staff member has authority to take decisions approving or vetoing the introduction of new products. 19G.5.4 G The FCA considers the following are key indicators of an individual (X) being a staff member whose professional activities have a material impact on the risk profile of the firm or of the assets that the firm manages, for the purposes of SYSC 19G.5.1R: (1) there is no sufficiently senior and experienced material risk taker who supervises X on a day-to-day basis or to whom X reports; (2) X is responsible for key strategic decisions; and (3) X is responsible for significant revenue, material assets under management or for approving transactions. 19G.5.5 G The FCA expects individuals in the following roles would usually be categorised as material risk takers: (1) in relation to portfolio management business, heads of key areas including equities, fixed income, alternatives, private equity; (2) heads of investment research; (3) individuals responsible for a high proportion of revenue; (4) senior advisors where they can exert key strategic influence; (5) chief market strategists, where media profile is linked to reputational risk and risk to market integrity;

FCA 2021/XX Page 26 of 233 (6) heads of a trading or broking desk; and (7) all individuals with responsibility for information technology, information security and outsourcing where there is not a single person with responsibility for all three areas. For example, if there is a chief operating officer and a chief information technology officer who are both equally senior and have shared responsibility for these areas, then both should be identified as material risk takers. 19G.5.6 G (1) The FCA expects a firm to update its assessment under SYSC 19G.5.2R as necessary throughout the year. (2) The FCA considers that it is important that firms consider all types of roles that may have a material impact on the firm’s risk profile or on the assets it manages. The categories of staff referred to in SYSC 19G.5.3G are intended to be a starting point only. The FCA expects firms to develop their own additional criteria to identify further individuals based on the specific types of activities and risks relevant to the firm. (3) In identifying its material risk takers, a firm should consider all types of risks involved in its professional activities. These may include prudential, operational, market, conduct and reputational risks. (4) The decisive factor when identifying material risk takers is not the name of the function or role, but the authority and responsibility held by the individual. 19G.5.7 R (1) If a non-SNI MIFIDPRU investment firm is part of an FCA investment firm group to which prudential consolidation applies, its material risk takers must be identified at both solo and consolidated level. (2) The UK parent undertaking of a firm is responsible for the material risk taker identification process at a consolidated level and must assess which individuals have a material impact on the risk profile of the investment firm group. 19G.5.8 G The FCA considers it may be helpful for the UK parent undertaking to play a role in coordinating the process for identifying material risk takers across the group entities. Exemption for individuals 19G.5.9 R (1) The provisions in (2) do not apply in relation to a material risk taker (X), where X’s annual variable remuneration: (a) does not exceed £167,000; and (b) does not represent more than one-third of X’s total annual remuneration.

FCA 2021/XX Page 27 of 233 (2) The provisions referred to in (1) are: (a) SYSC 19G.6.18R and SYSC 19G.6.19G (Shares, instruments and alternative arrangements); (b) SYSC 19G.6.20R and SYSC 19G.6.21G (Retention policy); (c) SYSC 19G.6.22R to SYSC 19G.6.27R (Deferral); and (d) SYSC 19G.6.33R(2) (Discretionary pension benefits). 19G.5.10 G (1) SYSC 19G.5.9R is relevant only to material risk takers of non-SNI MIFIDPRU investment firms not falling within SYSC 19G.1.1R(2). (2) Non-SNI MIFIDPRU investment firms not falling within SYSC 19G.1.1R(2) should therefore assess whether staff members are material risk takers before applying the thresholds in SYSC 19G.5.9R. 19G.5.11 R When considering whether an individual that becomes a material risk taker at a point during the firm’s performance year falls within SYSC 19G.5.9R, firms must: (1) apply the full £167,000 variable remuneration threshold; (2) apply the requirement that the variable remuneration must not be more than one-third of the individual’s total remuneration to the relevant portion of the total remuneration paid for the part of the performance year that the individual is a material risk taker at that firm; and (3) include any guaranteed variable remuneration, for example a ‘sign-on bonus’, in the individual’s variable remuneration for the part of the performance year that the individual is a material risk taker at that firm. 19G.5.12 G (1) An individual may become a material risk taker at any point during the firm’s performance year, either by changing role within the firm or by joining the firm. (2) As an example of the effect of SYSC 19G.5.11R, an individual (‘X’), becomes a material risk taker 6 months into the firm’s performance year. X receives annual fixed remuneration of £900,000. This means X will receive £450,000 for the 6 months of the performance year for which X is a material risk taker. X receives variable remuneration of £100,000 in respect of the first 6 months. X falls below the thresholds in SYSC 19G.5.9R because X’s variable remuneration of £100,000 is: (a) less than the £167,000 threshold in SYSC 19G.5.9R(1), and

FCA 2021/XX Page 28 of 233 (b) less than one-third of the £450,000 fixed remuneration received (which would be £150,000) for the purposes of SYSC 19G.5.9R(2). 19G.6 Variable remuneration Remuneration and capital 19G.6.1 R A MIFIDPRU investment firm must ensure that variable remuneration does not affect the firm’s ability to ensure a sound capital base. Extraordinary public financial support 19G.6.2 R A MIFIDPRU investment firm that benefits from extraordinary public financial support must ensure that: (1) no variable remuneration is paid to members of its management body; and (2) variable remuneration is limited to a portion of net revenue when its payment to staff that are not members of its management body would be inconsistent with: (a) the maintenance of the firm’s sound capital base; and (b) its timely exit from extraordinary public financial support. Assessment of performance 19G.6.3 R A non-SNI MIFIDPRU investment firm must ensure that where variable remuneration is performance-related: (1) the total amount of the variable remuneration is based on a combination of the assessment of the performance of: (a) the individual; (b) the business unit concerned; and (c) the overall results of the firm; (2) it bases the assessment in (1) on a multi-year period, taking into account the business cycle of the firm and its business risks. 19G.6.4 R When assessing individual performance for the purpose of determining the amount of variable remuneration to be paid to an individual, a MIFIDPRU investment firm must take into account financial as well as non-financial criteria. 19G.6.5 G (1) For some firms it will be appropriate to give equal weight to financial and non-financial criteria for the purposes of SYSC 19G.6.4R. For other firms a slightly different split may be appropriate.

FCA 2021/XX Page 29 of 233 (2) In the FCA’s view, non-financial criteria under SYSC 19G.6.4R should: (a) form a significant part of the performance assessment process; (b) override financial criteria, where appropriate; (c) include metrics on conduct, which should make up a substantial portion of the non-financial criteria; and (d) include how far the individual adheres to effective risk management and complies with relevant regulatory requirements. (3) Examples of non-financial criteria under SYSC 19G.6.4R include: (a) measures relating to building and maintaining positive customer relationships and outcomes, such as positive customer feedback; (b) performance in line with firm strategy or values, for example by displaying leadership, teamwork or creativity; (c) adherence to the firm’s risk management and compliance policies; (d) achieving targets relating to: (i) environmental, social and governance factors; and (ii) diversity and inclusion. (4) Firms are reminded that they should ensure that when they assess individual performance, the assessment process and any variable remuneration awarded in accordance with SYSC 19G.6.3R does not discriminate on the basis of the protected characteristics of an individual in accordance with the Equality Act 2010. General requirements for awards of non-performance related variable remuneration 19G.6.6 R (1) A non-SNI MIFIDPRU investment firm must ensure that all guaranteed variable remuneration, retention awards, severance pay and buy-out awards falling under SYSC 19G.6.7R to SYSC 19G.6.13G are: (a) subject to malus and clawback; (b) in the case of non-SNI MIFIDPRU investment firms to which those rules apply:

FCA 2021/XX Page 30 of 233 (i) subject to the requirements in SYSC 19G.6.18R and SYSC 19G.6.19G (Shares, instruments and alternative arrangements), SYSC 19G.6.20R and SYSC 19G.6.21G (Retention policy), and SYSC 19G.6.22R to SYSC 19G.6.27R (Deferral); and (ii) included in the variable component of the fixed to variable ratio for the performance period in which the award is made. (2) A non-SNI MIFIDPRU investment firm must ensure that each decision it makes to award variable remuneration falling within the scope of (1) is appropriate, taking all relevant circumstances into account. Guaranteed variable remuneration 19G.6.7 R A non-SNI MIFIDPRU investment firm must not award, pay or provide guaranteed variable remuneration to a material risk taker unless: (1) it occurs in the context of hiring a new material risk taker; (2) it is limited to the first year of service; and (3) the firm has a strong capital base. 19G.6.8 G (1) Guaranteed variable remuneration is sometimes referred to as a ‘sign￾on bonus’ or ‘golden handshake’. (2) Guaranteed variable remuneration can be used as a way of compensating new staff members where they have lost the opportunity to receive variable remuneration by leaving their previous employment during the performance year. Such awards may be called ‘lost opportunity bonuses’. (3) The FCA expects non-SNI MIFIDPRU investment firms to award guaranteed remuneration only rarely and not as common practice. Retention awards 19G.6.9 R Retention awards must only be paid to material risk takers: (1) after a defined event; or (2) at a specified point in time. 19G.6.10 G (1) Retention awards are bonuses which are dependent on an individual remaining in role until a defined event or for a set period of time. For example, retention bonuses can be used under restructurings, in wind￾down or in the context of specific projects within a firm.

FCA 2021/XX Page 31 of 233 (2) The FCA expects non-SNI MIFIDPRU investment firms to make retention awards to material risk takers only rarely and not as common practice. Severance pay 19G.6.11 R (1) A non-SNI MIFIDPRU investment firm must ensure that payments to material risk takers relating to the early termination of an employment contract reflect the individual’s performance over time and do not reward failure or misconduct. (2) A non-SNI MIFIDPRU investment firm must set out in its remuneration policy whether severance payments may be paid, and any maximum amount or criteria for determining the amount. Buy-out awards 19G.6.12 R A non-SNI MIFIDPRU investment firm must ensure that remuneration packages for material risk takers relating to compensation for, or buy out from, a staff member’s contracts in previous employment: (1) align with the long term interests of the firm; and (2) remain subject to the same pay-out terms required by the previous employer, for example by following the same deferral and vesting schedule, and being subject to the same ex post risk adjustment arrangements, where relevant. 19G.6.13 G Buy-out awards involve a firm compensating a new staff member, or ‘buying out’ their previous contract with another employer, where the deferred variable remuneration of the staff member was reduced, revoked or cancelled by the previous employer. This could be because they terminated their contract or because the individual has to pay back some money, for example where the employer has paid for a training course or qualification for the individual that was attached to a retention clause. Risk adjustment 19G.6.14 R A non-SNI MIFIDPRU investment firm must ensure that any measurement of performance used as a basis to calculate pools of variable remuneration takes into account all types of current and future risks and the cost of the capital and liquidity required in accordance with MIFIDPRU. 19G.6.15 R A non-SNI MIFIDPRU investment firm must ensure that the allocation of variable remuneration components within the firm takes into account all types of current and future risks. 19G.6.16 R For the purposes of SYSC 19G.6.14R and SYSC 19G.6.15R, a non-SNI MIFIDPRU investment firm must:

FCA 2021/XX Page 32 of 233 (1) determine at what level the adjustments should be applied (for example at business unit, trading desk or individual level), which risks are relevant, and which risk adjustment techniques and measures are most appropriate; and (2) in considering all types of current and future risks, include both financial risks (for example economic profit or economic capital) and non-financial risks (for example reputation, conduct and customer outcomes, values and strategy). 19G.6.17 R A non-SNI MIFIDPRU investment firm must ensure that its total variable remuneration is generally considerably contracted, including through malus or clawback arrangements, where the financial performance of the firm is subdued or negative. Shares, instruments and alternative arrangements 19G.6.18 R A non-SNI MIFIDPRU investment firm to which this rule applies must ensure that at least 50% of the variable remuneration paid to a material risk taker in relation to a performance year consists of any of the following eligible instruments: (1) shares, or subject to the firm’s legal structure, equivalent ownership interests; (2) share-linked instruments, or subject to the firm’s legal structure, equivalent non-cash instruments; (3) instruments that comply with the requirements in SYSC 19G Annex 1R; or (4) non-cash instruments which reflect the instruments of the portfolios managed. 19G.6.19 G (1) Where a MIFIDPRU investment firm is unable to issue eligible instruments, the firm may apply to the FCA for a modification under section 138A of the Act to permit the firm to use alternative arrangements. The firm will need to provide a detailed explanation in its application of the alternative arrangements it is proposing to operate. (2) The FCA may grant a modification under section 138A of the Act for these purposes only where it is satisfied that: (a) compliance by the firm with the requirement to issue variable remuneration in eligible instruments would be unduly burdensome or would not achieve the purpose for which the rules were made; and (b) granting the modification would not adversely affect the advancement of any of the FCA’s objectives.

FCA 2021/XX Page 33 of 233 (3) As part of its assessment of whether the modification would adversely affect the advancement of its objectives, the FCA will consider whether the proposed alternative arrangements for variable remuneration achieve similar outcomes to the standard requirements applicable to eligible instruments. In particular, the FCA will normally consider the following non-exhaustive factors: (a) whether the proposed alternative arrangement ensures suitable alignment between the interests of the staff member and the long-term interests of the firm, its clients and creditors; (b) whether the proposed alternative arrangement is subject to a retention policy that is of sufficient length to align the incentives of the staff member with the long-term interests of the firm, its clients and creditors; (c) whether the proposed alternative arrangement is clear and transparent to the staff member and contains sufficient detail on the applicable conditions; (d) whether the firm will ensure that any amounts that are subject to deferral and retention arrangements cannot be accessed, transferred or redeemed by the staff member during the deferral and retention periods; (e) whether the proposed alternative arrangement would facilitate the appropriate application of malus and clawback requirements; (f) whether the proposed alternative arrangements adequately ensure that the value of the variable remuneration received does not increase during the deferral period through distributions or other payments on the instrument; and (g) where the proposed alternative arrangements allow for predetermined changes of the value received as variable remuneration during deferral and retention periods, based on the performance of the firm or the managed assets, whether the following conditions would be met: (i) the change of the value is based on predefined performance indicators that are based on the credit quality of the firm or the performance of the managed assets; (ii) where deferral and retention must be applied, value changes are calculated at least annually and at the end of the retention period;

FCA 2021/XX Page 34 of 233 (iii) the rate of possible positive and negative value changes is equally based on the level of positive or negative credit quality changes or performance measured; (iv) where the value change under (i) is based on the performance of assets managed, the percentage of value change should be limited to the percentage of value change of the managed assets; (v) where the value change under (i) is based on the credit quality of the firm, the percentage of value change should be limited to the percentage of the annual total gross revenue in relation to the firm’s total own funds. (4) The fact that a firm cannot issue eligible instruments because of its legal structure is likely to be a reason for the FCA to conclude that requiring the firm to comply with SYSC 19G.6.18R would not achieve the purpose for which that rule was made. Retention policy 19G.6.20 R A non-SNI MIFIDPRU investment firm to which this rule applies must establish an appropriate retention policy for eligible instruments that is designed to align the interests of the staff member with the longer-term interests of the firm, its creditors and clients. 19G.6.21 G (1) In considering what is an appropriate retention policy for the purposes of SYSC 19G.6.20R, firms should consider at least the following: (a) the length of the deferral period referred to in SYSC 19G.6.22R(1); (b) the length of the firm’s business cycle; (c) the types of risks relevant to the role of the staff member; and (d) how long it could take for the risks underlying the staff member’s performance to crystallise. (2) In the FCA’s view, the greater the impact of the material risk taker on the risk profile of the firm and of the assets managed, the longer the retention period should be. Different retention periods for different material risk takers may be appropriate, particularly where the applicable deferral periods differ. Deferral 19G.6.22 R (1) A non-SNI MIFIDPRU investment firm to which this rule applies must not award, pay or provide a variable remuneration component unless at least 40% is deferred over a period which is at least 3 years.

FCA 2021/XX Page 35 of 233 (2) Where the variable remuneration is a particularly high amount, and in all cases where the variable remuneration is £500,000 or more, at least 60% of the amount must be deferred. (3) Deferred variable remuneration must vest no faster than on a pro-rata basis. (4) The first deferred portion of the variable remuneration must not vest sooner than a year after the start of the deferral period. 19G.6.23 R (1) A non-SNI MIFIDPRU investment firm must take into account the factors in (2) when determining: (a) the amount of variable remuneration to be deferred under SYSC 19G.6.22R(1) and (2); (b) the length of the deferral period under SYSC 19G.6.22R(1); and (c) the speed of vesting of the variable remuneration for the purposes of SYSC 19G.6.22R(3). (2) The factors referred to in (1) are: (a) the firm’s business cycle, the nature of its business and its risk profile; (b) the activities and responsibilities of the staff member in question and how these may impact the risk profile of the firm or the assets the firm manages; (c) whether the deferred variable remuneration is paid out in instruments or cash; (d) the amount of the variable remuneration; and (e) the ratio of variable to fixed remuneration. 19G.6.24 G (1) Where appropriate, firms should tailor the proportion of deferred variable remuneration, the deferral period and the speed of vesting in different ways for different categories of material risk taker. (2) The FCA expects the variable remuneration of material risk takers whose roles and responsibilities mean they have a considerable impact on the risk profile of the firm or of the assets the firm manages (for example members of the management body or senior management), to be subject to a deferral period longer than the 3-year minimum. (3) It may be appropriate for firms to apply different proportions of deferred variable remuneration, deferral periods or vesting

FCA 2021/XX Page 36 of 233 arrangements to the portion of variable remuneration paid out in cash and the portion paid out in instruments. (4) In the FCA’s view, the higher the amount of the variable remuneration, and the higher the ratio of variable to fixed remuneration, the more appropriate it is likely to be to defer a greater proportion of the variable remuneration. (5) In certain circumstances variable remuneration below £500,000 may still be considered ‘particularly high’ and so subject to 60% deferral. We would expect a firm to take into account the average remuneration at the firm, the ratio of the variable to fixed remuneration of the material risk taker, and the amount of variable remuneration compared to that of other staff at the firm. (6) After the first deferred portion of the variable remuneration vests in accordance with SYSC 19G.6.22R(4), the FCA does not expect vesting to take place more often than once a year. 19G.6.25 R A non-SNI MIFIDPRU investment firm must pay out at least 50% of the variable remuneration deferred under SYSC 19G.6.22R in instruments falling within SYSC 19G.6.18R. 19G.6.26 G The FCA considers it good practice for the deferred portion to contain a higher proportion of instruments than the non-deferred portion. 19G.6.27 R A non-SNI MIFIDPRU investment firm must not pay to a material risk taker interest or dividends on variable remuneration in respect of the period it is deferred under SYSC 19G.6.22R. Performance adjustment 19G.6.28 R A non-SNI MIFIDPRU investment firm must ensure that any variable remuneration, including a deferred portion, is paid or vests only if it is sustainable according to the financial situation of the firm as a whole, and justified on the basis of the performance of the firm, the business unit and the individual concerned. 19G.6.29 R A non-SNI MIFIDPRU investment firm must: (1) ensure that all of the total variable remuneration is subject to in-year adjustments, malus or clawback arrangements; (2) set specific criteria for the application of malus and clawback; and (3) ensure that the criteria for the application of malus and clawback in particular cover situations where the material risk taker: (a) participated in or was responsible for conduct which resulted in significant losses to the firm; and/or

FCA 2021/XX Page 37 of 233 (b) failed to meet appropriate standards of fitness and propriety. 19G.6.30 R A non-SNI MIFIDPRU investment firm must: (1) set minimum malus and clawback periods as part of its remuneration policies; (2) ensure that malus can be applied until the award has vested in its entirety; and (3) ensure that the clawback period spans at least the combined length of the deferral and retention periods, where they exist. 19G.6.31 G (1) A non-SNI MIFIDPRU investment firm that is not required by SYSC 19G.6.22R to apply deferral will not be able to apply malus, so should foresee the use of in-year adjustments and clawback arrangements only. Alternatively, such a firm may choose to use deferral which would enable the use of malus arrangements. (2) A non-SNI MIFIDPRU investment firm should ensure that the malus and clawback periods it sets and applies allow sufficient time for any potential risks to crystallise. This may mean that different periods are set for different categories of material risk takers. (3) In setting appropriate malus and clawback periods, a non-SNI MIFIDPRU investment firm should take into account all relevant factors, including: (a) the nature of the material risk taker’s activities; (b) the material risk taker’s impact on the risk profile of the firm or of the assets it manages; and (c) the length of the business cycle that is relevant for the material risk taker’s role. (4) Firms are reminded that the FCA’s ‘General guidance on the application of ex-post risk adjustment to variable remuneration’ provides further detail of the FCA’s expectations on firms’ use of malus and clawback arrangements. 19G.6.32 G (1) In the FCA’s view, malus should be applied when, as a minimum: (a) there is reasonable evidence of staff member misbehaviour or material error; (b) the firm or the relevant business unit suffers a material downturn in its financial performance; or (c) the firm or the relevant business unit suffers a material failure of risk management.

FCA 2021/XX Page 38 of 233 (2) In the FCA’s view, clawback should, in particular, be applied in cases of fraud or other conduct with intent or severe negligence which led to significant losses. Discretionary pension benefits 19G.6.33 R (1) A non-SNI MIFIDPRU investment firm must ensure that: (a) any discretionary pension benefits it awards or pays to material risk takers are: (i) in line with its business strategy, objectives, values and long-term interests; and (ii) paid only in eligible instruments; (b) it applies malus and clawback arrangements to discretionary pension benefits in the same way as to other elements of variable remuneration. (2) A non-SNI MIFIDPRU investment firm to which this paragraph applies must ensure that: (a) where a material risk taker leaves the firm before retirement age, any discretionary pension benefits are held by the firm for a period of 5 years; and (b) where a material risk taker reaches retirement age, any discretionary pension benefits are subject to a 5-year retention period by that individual. Personal investment strategies 19G.6.34 R A non-SNI MIFIDPRU investment firm must take all reasonable steps to ensure that material risk takers do not use personal hedging strategies or remuneration- and liability-related contracts of insurance to undermine the remuneration rules in the MIFIDPRU Remuneration Code. 19G.6.35 G Actions a firm might take under SYSC 19G.6.34R include requesting an undertaking or declaration from its material risk takers and implementing policies regarding dealing in financial instruments. Avoidance of the MIFIDPRU Remuneration Code 19G.6.36 R A non-SNI MIFIDPRU investment firm must not pay variable remuneration through financial vehicles or methods that facilitate non-compliance with the MIFIDPRU Remuneration Code or MIFIDPRU. 19G.7 Remuneration committee

FCA 2021/XX Page 39 of 233 19G.7.1 G (1) Non-SNI MIFIDPRU investment firms are reminded of the requirement, where it applies to the firm, to establish a remuneration committee under MIFIDPRU 7.3.3R(1). (2) The FCA encourages non-SNI MIFIDPRU investment firms that are not required to establish a remuneration committee under MIFIDPRU 7.3.3R(1) to consider whether establishing and maintaining a remuneration committee would contribute to the better alignment of risk and individual reward across the firm. 19G Annex 1 Other instruments for use in variable remuneration Purpose 1.1 G SYSC 19G.6.18R requires that at least 50% of variable remuneration must be paid in eligible instruments. Under SYSC 19G.6.18R(3), eligible instruments include instruments that meet the requirements set out in this Annex. The instruments within the scope of this Annex include additional tier 1 instruments, tier 2 instruments and other instruments which can be fully converted to common equity tier 1 instruments, or written down, and that adequately reflect the firm’s credit quality. Requirements for instruments 1.2 R An instrument under SYSC 19G.6.18R(3) must satisfy the following requirements: (1) the instrument must be issued by the firm; (2) the instrument must not be secured or subject to a guarantee or any other arrangement that enhances the seniority of the claims of its holder in insolvency; (3) the terms of the instrument must provide that any distributions on the instrument will be paid on at least an annual basis and will be paid to the holder; (4) the instrument must be priced at its value at the time of issuance under the accounting framework applicable to the firm; (5) the valuation of the instrument in (4) must be subject to independent review;

FCA 2021/XX Page 40 of 233 (6) if the instrument is part of an issuance which has the sole purpose of being used for variable remuneration, the price at which the instrument is redeemed, called, repurchased or converted must be subject to an independent valuation in accordance with the accounting framework applicable to the firm; (7) if the instrument is not perpetual, at the time at which the instrument is awarded as variable remuneration, the remaining period before the maturity of the instrument must be at least equal to the sum of any deferral and retention periods that would apply to the staff member to whom the instrument is awarded; (8) the instrument must not be subject to redemption, call or repurchase during any deferral and retention periods that would apply to the material risk taker to whom the instrument is awarded; (9) any right to redeem, call or repurchase the instrument must be exercisable only at the sole discretion of the firm; (10) the holder of the instrument must have no rights to accelerate the future scheduled payment of interest or principal, except in the insolvency or liquidation of the firm; (11) the terms of the instrument must provide that the claim on the principal amount of the instrument is wholly subordinated to the claim of all non-subordinated creditors; (12) one of the requirements in SYSC 19G Annex 1.3R must be satisfied; and (13) the instrument must be either: (a) a convertible instrument, in which case the requirements in SYSC 19 Annex 1.4R and SYSC 19 Annex 1.5R must be satisfied; or (b) a write-down instrument, in which case the requirements in SYSC 19 Annex 1.6R must be satisfied. 1.3 R (1) An instrument under SYSC 19G.6.18R(3) must meet either the conditions in (2) or the conditions in (4). (2) The first set of conditions is as follows: (a) the instrument must be part of an issuance which has the sole purpose of being used as variable remuneration; and

FCA 2021/XX Page 41 of 233 (b) the terms of the instrument must ensure that any distributions payable on the instrument are paid at a rate which is: (i) consistent with market rates for similar issuances issued by other firms with comparable credit quality; and (ii) subject to (3), no higher than 8% above the Consumer Price Index 12-month rate as published by the UK Office of National Statistics from time to time. (3) If the instrument has been awarded to a member of staff whose professional duties are predominantly performed outside the UK and the instruments are denominated in a currency other than pound sterling, a firm may substitute another similar independently-calculated consumer price index for a relevant third country in place of the rate specified in (2)(b)(ii). (4) The second set of conditions is that, at the time at which the instrument was awarded as variable remuneration, at least 60% of that class of instrument in issuance was: (1) issued other than for use as variable remuneration; and (2) not held by any person who has close links to: (i) the firm; (ii) the firm’s group; or (iii) a connected undertaking included within the firm’s investment firm group. Additional requirements for convertible instruments 1.4 R A firm must satisfy the following requirements in relation to an instrument under SYSC 19G.6.18R(3) that is a convertible instrument: (1) the instrument must contain a trigger event which, if it occurs, results in the full principal amount of the instrument being converted into common equity tier 1 capital of the firm; (2) the trigger event in (1) must occur where the common equity tier 1 capital of the firm falls below a specified level that is no lower than 64% of the firm’s own funds requirement;

FCA 2021/XX Page 42 of 233 (3) to the extent necessary to give full effect to the required conversion following the trigger event in (1), the issuing firm must ensure the following at all times: (a) where applicable, the firm has sufficient authorised share capital; (b) the firm has all necessary permissions, authorisations and corporate authorities; and (c) there are no other restrictions in the firm’s constitutional documents, contractual arrangements or applicable national law that would prevent the firm from issuing the required common equity tier 1 capital instruments. 1.5 R The rate of conversion of the principal amount into common equity tier capital of the firm specified in the terms governing an instrument under SYSC 19G.6.18R(3) that is a convertible instrument must be set a level that ensures that the value of the common equity tier 1 capital received by the holder upon conversion: (1) would not be higher than the value of the instrument at the time that it was originally awarded as variable remuneration; and (2) if the convertible instrument is part of an issuance which has the sole purpose of being used as variable remuneration, would not be higher than the value of the instrument at the time of conversion. Additional requirements for write-down instruments 1.6 R A firm must satisfy the following requirements in relation to an instrument under SYSC 19G.6.18R(3) that is a write-down instrument: (1) the instrument must contain a trigger event which, if it occurs, results in the principal amount of the instrument being written down; (2) the trigger event in (1) must occur where the common equity tier 1 capital of the firm falls below a specified level that is no lower than 64% of the firm’s own funds requirement; (3) the aggregate principal amount of write-down instruments that must be written down following the trigger event in (1) must be at least equal to the lower of the following: (a) the amount required to ensure that the common equity tier 1 capital of the firm referenced in the trigger event is

FCA 2021/XX Page 43 of 233 restored to a level that is higher than the specified trigger; or (b) the full principal amount of the instrument; (4) any write-down in the principal amount of the instrument following the trigger event in (1) must: (a) apply on a pro rata basis across all write-down instruments that contain the same trigger event; (b) generate items that, under the accounting framework applicable to the firm, qualify as common equity tier 1 capital; (c) result in a proportional reduction in the holder’s entitlement to receive: (i) distributions paid in connection with the instrument; (ii) payment if the instrument is called or redeemed; and (iii) repayment in the insolvency or liquidation of the firm; (5) any write-down in the principal amount of the instrument following the trigger event in (1) may be permanent or temporary, but if it is temporary, any subsequent write-up must comply with the following requirements: (a) it cannot increase the principal amount of the instrument beyond its level before the write-down occurred; (b) it must be at the absolute discretion of the firm; (c) the firm must have a reasonable basis to conclude that the write-up is appropriate, having regard to the following factors, among others: (i) the importance of effectively aligning the interests of the recipient with the longer‐term interests of the firm, its clients and its creditors; (ii) the financial position of the firm and the effect of the write-up on the firm’s own funds; and (iii) if the firm or any member of its group has been subject to extraordinary public financial support,

FCA 2021/XX Page 44 of 233 whether the write-up is consistent with the objective of ensuring the timely exit from such support; (d) it must be applied on a pro rata basis between all recipients of instruments falling under SYSC 19G.6.18R(3) that are write-down instruments where such instruments have previously been subject to a write-down. … SYSC TP 10 MIFIDPRU Remuneration Code transitional provision Application 10.1 R SYSC TP 10 applies to an undertaking to whom SYSC 19G (MIFIDPRU Remuneration Code) will apply for the first time in the performance year beginning on or after [Editor’s note: insert date that SYSC 19G comes into force]. Duration of transitional 10.2 R SYSC TP 10 applies to remuneration awarded for performance or services provided in the performance year before the performance year to which SYSC 19G first applies. 10.3 G While SYSC 19G comes into force on [Editor’s note: insert date that SYSC 19G comes into force], it only applies to performance years that begin on or after that date (see SYSC 19G.1.23R). This transitional provision therefore addresses the position for remuneration for performance or services provided between the date on which SYSC 19G comes into force and the date on which it first applies to a firm. Transitional 10.4 R (1) Where an undertaking was subject to any of the remuneration codes listed in (2) immediately before SYSC 19G came into force, that remuneration code (and any related reporting requirements) will continue to apply. (2) The remuneration codes referred to in (1) are: (a) SYSC 19A (IFPRU Remuneration Code); and (b) SYSC 19C (BIPRU Remuneration Code). 10.5 R The reference in SYSC TP 10.4R(1) to an undertaking being subject to a remuneration code includes the situation in which those rules include

FCA 2021/XX Page 45 of 233 an obligation for a firm to ensure a parent undertaking complies with certain requirements. 10.6 G Under previous remuneration codes, certain obligations were not applied directly to unregulated parent undertakings but were applied indirectly through the imposition of an obligation on a firm within the group to ensure compliance by the parent undertaking. SYSC TP 10.5R makes clear that the transitional provision in SYSC TP 10.4R also applies to those indirect obligations on the parent undertaking. This means that where provisions in SYSC 19A or SYSC 19C applied on an indirect basis to a parent undertaking prior to the coming into force of SYSC 19G, those remain the relevant obligations for performance or services provided during the performance year in which SYSC 19G comes into force.

FCA 2021/XX Page 46 of 233 Annex C Amendments to the Prudential sourcebook for MiFID Investment Firms (MIFIDPRU) The text in this Annex takes into account the rules and guidance in MIFIDPRU proposed in CP20/24: A new UK prudential regime for MiFID investment firms as if such rules and guidance had been made. In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. 1 Application 1.1 Application and purpose Application 1.1.1 G There is no overall application provision for MIFIDPRU. Each chapter or section has its own application statement. However, MIFIDPRU broadly applies to the following: (1) MIFIDPRU investment firms; (2) UK parent entities; and (3) parent undertakings in an investment firm group that are incorporated in, or have their principal place of business in, the United Kingdom. 1.1.2 G (1) The definition of a MIFIDPRU investment firm includes a collective portfolio management investment firm. This means that a collective portfolio management investment firm must comply with the rules in MIFIDPRU, except to the extent that any provision of MIFIDPRU otherwise provides. (2) Collective portfolio management investment firms are also subject to the prudential requirements in IPRU-INV 11 (Collective Portfolio Management Firms and Collective Portfolio Management Investment Firms). Such firms should refer to IPRU￾INV 11.6 for further guidance on how the requirements in MIFIDPRU interact with the requirements in IPRU-INV 11. (3) Collective portfolio management investment firms are reminded that, as explained in MIFIDPRU 1.1.5G, many requirements in MIFIDPRU apply only in relation to the MiFID business of a firm (and therefore will not apply to the collective portfolio management activities carried on by a collective portfolio management investment firm), but certain requirements apply to the firm as a whole.

FCA 2021/XX Page 47 of 233 Application to overseas firms 1.1.3 G MIFIDPRU does not directly apply to an undertaking which is not incorporated in, and does not have its principal place of business in, the United Kingdom. However, MIFIDPRU imposes certain obligations on UK parent entities and responsible UK parents relating to undertakings established in a third country that form part of the same investment firm group. MIFIDPRU 2 (Levels of application) contains additional guidance on the application of MIFIDPRU to investment firm groups. 1.1.4 G (1) This guidance provision applies to a third country MIFIDPRU investment firm. It is without prejudice to the FCA’s general approach to authorising overseas firms. (2) The FCA will not generally give a Part 4A permission to a third country MIFIDPRU investment firm unless the FCA is satisfied that the applicant will be subject to prudential regulation by a regulatory body in its home jurisdiction, the requirements of which are broadly equivalent to the requirements that would apply under MIFIDPRU. (3) When conducting the assessment described in (2), the FCA will take into account the following non-exhaustive factors: (a) whether the requirements of the relevant jurisdiction are likely to achieve similar prudential outcomes to MIFIDPRU; (b) how the relevant overseas regulatory body supervises and enforces those requirements in practice; (c) the broader legal framework applicable to the applicant in the relevant jurisdiction; and (d) whether there are adequate arrangements in place between the FCA and the overseas regulatory body to facilitate any necessary supervisory cooperation. (4) The FCA considers that the approach described in (2) and (3) is consistent with: (a) the requirements in the threshold conditions (and in particular, the effective supervision threshold condition described in COND 2.3, the appropriate resources threshold condition described in COND 2.4 and the suitability threshold condition described in COND 2.5); (b) the fact that appropriate protection for consumers or potential consumers requires the FCA to be able to apply effective supervision to a third country MIFIDPRU investment firm. In turn, this relies on cooperation between

FCA 2021/XX Page 48 of 233 the FCA and the overseas regulatory body that supervises that third country MIFIDPRU investment firm and on the FCA being able to place appropriate reliance on the supervision applied by that overseas regulatory body. (5) If a third country MIFIDPRU investment firm is not subject to prudential regulation by a regulatory body in its home jurisdiction which is broadly equivalent to the requirements that would apply under MIFIDPRU, the FCA will normally expect it to establish a subsidiary in the United Kingdom. That subsidiary would need to be authorised as a MIFIDPRU investment firm and would then be directly subject to the requirements in MIFIDPRU. The subsidiary would need to demonstrate that it meets the threshold conditions to obtain authorisation. (6) Third country MIFIDPRU investment firms that are granted a Part 4A permission are reminded that although they are not subject to MIFIDPRU, they must still comply with the requirements in the threshold conditions and Principles on an ongoing basis. This includes the obligation under Principle 11 (Relations with regulators) to inform the FCA of anything of which the FCA would reasonably expect notice, which may include interactions between the firm and its overseas regulatory body. Purpose 1.1.5 G The purpose of MIFIDPRU is to set out the detailed prudential requirements that apply to MIFIDPRU investment firms. MIFIDPRU does not apply to designated investment firms, which are subject to prudential regulation by the PRA. Generally, the rules in MIFIDPRU are intended to cover the MiFID business undertaken by a firm, but certain requirements apply to a firm in its entirety. 1.1.6 G The requirements in MIFIDPRU expand upon the basic requirements under the threshold condition referred to in COND 2.4 (Appropriate resources) and the requirement in Principle 4 for a firm to maintain adequate financial resources. Tied agents 1.1.7 G (1) Certain provisions of MIFIDPRU refer to, or apply in relation to, tied agents. The definition of a tied agent refers to a person who, on behalf of an investment firm (including a third country investment firm): (a) promotes investment services and/or ancillary services to clients or prospective clients; (b) receives and transmits instructions or orders from the client in respect of investment services or financial instruments;

FCA 2021/XX Page 49 of 233 (c) places financial instruments; (d) and/or provides advice to clients or prospective clients in respect of investment services or financial instruments. (2) The references in MIFIDPRU to tied agents do not include appointed representatives that do not meet the definition of a tied agent (for example, because the relevant appointed representative does not carry on its activities in relation to the MiFID business of its principal firm). However, a firm’s potential responsibility for appointed representatives (whether or not they are also tied agents) will be a relevant factor for a firm’s ICARA process under MIFIDPRU 7 (Governance and risk management). Voluntary application of stricter requirements 1.1.8 R No provision in MIFIDPRU prevents a firm from: (1) holding own funds (or components of own funds) or liquid assets that exceed those required by MIFIDPRU; or (2) applying other measures that are stricter than those required by MIFIDPRU. [Note: article 3 of the IFR.] 1.1.9 G (1) If a firm chooses to apply stricter measures than those required under MIFIDPRU in accordance with MIFIDPRU 1.1.8R, the firm must still ensure that it is meeting the basic requirements of MIFIDPRU. This is illustrated by the following two examples: (a) Example 1: A firm chooses to hold own funds which exceed those required under MIFIDPRU by deciding to hold 0.03% of its average AUM, rather than 0.02% as required under MIFIDPRU 4.7.5R. This would be a stricter measure that still meets the basic requirements of MIFIDPRU and therefore would be permitted under MIFIDPRU 1.1.8R. (b) Example 2: A firm decides to hold a significant amount of additional own funds instead of applying the deductions from its common equity tier 1 capital required under MIFIDPRU 3.3.6R. This is on the basis that the additional own funds far exceed the estimated value of the required deductions and the firm considers that the deduction calculations are too onerous. While the firm may consider that holding these additional own funds is a stricter measure, this approach would not meet the basic requirements of MIFIDPRU (which, at a minimum, require the firm to calculate and apply such deductions). In addition, the failure to apply the correct deductions to

FCA 2021/XX Page 50 of 233 common equity tier 1 capital may result in the firm incorrectly applying the concentration risk requirements and limits in MIFIDPRU 5. This approach would therefore not be permitted under MIFIDPRU 1.1.8R because it does not meet the basic requirements of MIFIDPRU. (2) If a firm wishes to apply a stricter measure but is unsure of whether that measure would also meet the basic requirements of MIFIDPRU, it should discuss the proposal with the FCA before applying that measure. 1.2 SNI MIFIDPRU investment firms Basic conditions to be classified as an SNI MIFIDPRU investment firm 1.2.1 R A MIFIDPRU investment firm is an SNI MIFIDPRU investment firm if it satisfies the following conditions: (1) its AUM average AUM, as calculated in accordance with MIFIDPRU 4.7.5R is less than £1.2 billion; (2) its COH average COH, as calculated in accordance with MIFIDPRU 4.10.19R is less than: (a) £100 million per day for cash trades; and (b) £1 billion per day for derivatives trades; (3) its ASA average ASA, as calculated in accordance with MIFIDPRU 4.9.8R is zero; (4) its CMH average CMH, as calculated in accordance with MIFIDPRU 4.8.13R is zero; … (6) the on- and off-balance sheet total of the firm is less than £100 million; and (7) the total annual gross revenue from investment services and/or activities of the firm is less than £30 million, calculated as an average on the basis of the annual figures from the two-year period immediately preceding the given financial year. ; and (8) the firm has not been classified as a non-SNI MIFIDPRU investment firm due to the effect of MIFIDPRU 10.2 (Categorisation of clearing firms as non-SNI MIFIDPRU investment firms). 1.2.2 G The definitions of ASA and CMH relate to client assets and client money that are held in the course of MiFID business. As a result, a firm may hold client assets or client money in the course of business other than MiFID

FCA 2021/XX Page 51 of 233 business (provided that it has the necessary permissions to do so) and still meet the conditions to be classified as an SNI MIFIDPRU investment firm. When determining whether client assets or client money are to be treated as held in the course of MiFID business for these purposes, MIFIDPRU investment firms should refer to the rules and guidance in MIFIDPRU 4.8 (K-CMH requirement) and 4.9 (K-ASA requirement). Additional provisions relating to the calculation of conditions to be classified as an SNI MIFIDPRU investment firm 1.2.3 R Notwithstanding the calculation methodologies in MIFIDPRU 4, the firm shall use the following for the purposes of the criteria in MIFIDPRU 1.2.1R: (1) end-of-day values to assess each of the following conditions: (a) its AUM average AUM under MIFIDPRU 1.2.1R(1); (b) its COH average COH under MIFIDPRU 1.2.1R(2); (c) its ASA average ASA under MIFIDPRU 1.2.1R(3); (2) intra-day values to assess its CMH average CMH under MIFIDPRU 1.2.1R(4). [Note: article 12(1), second to fourth subparagraphs of the IFR.] 1.2.4 R (1) By way of derogation from MIFIDPRU 1.2.1R, a firm may use the alternative approach in (2) to measure: (a) its AUM average AUM for the purposes of MIFIDPRU 1.2.1R(1); and/or (b) its COH average COH for the purposes of MIFIDPRU 1.2.1R(2). (2) The alternative approach is to apply the methodologies in MIFIDPRU 4 for measuring AUM average AUM and COH average COH, but with the following modifications: (a) the measurement must be performed over the immediately preceding 12 months; and (b) the exclusion of the three 3 most recently monthly values does not apply. … … 1.2.7 R (1) A firm may use the end-of-day value for CMH average CMH instead of the intra-day value under MIFIDPRU 1.2.3R(2) if:

FCA 2021/XX Page 52 of 233 Measure Measurement of relevant values Threshold to be classified as an SNI Application of threshold on an individual … … … 1.2.9 R A MIFIDPRU investment firm must assess the following conditions on the basis of the firm’s individual situation: (1) ASA average ASA under MIFIDPRU 1.2.1R(3); (2) CMH average CMH under MIFIDPRU 1.2.1R(4); and (3) whether the firm has permission to deal on own account. [Note: article 12(2), second subparagraph of the IFR.] 1.2.10 R (1) A MIFIDPRU investment firm must assess the conditions in (2) on the basis of the combined position of each of the following entities that form part of the same group as that MIFIDPRU investment firm: (a) MIFIDPRU investment firms; (b) designated investment firms; (c) collective portfolio management investment firms; and (d) third country investment firms that carry on investment services and/or activities in the UK. (2) The relevant conditions are: (a) AUM average AUM under MIFIDPRU 1.2.1R(1); (b) COH average COH under MIFIDPRU 1.2.1R(2); (c) the on- and off-balance sheet total under MIFIDPRU 1.2.1R(6); and (d) total annual gross revenue under MIFIDPRU 1.2.1R(7). … … 1.2.12 G The following table summarises the effect of MIFIDPRU 1.2.1R to 1.2.10R.

FCA 2021/XX Page 53 of 233 MIFIDPRU investment firm basis or combined basis of investment firms within a group (see MIFIDPRU 1.2.8R 1.2.9R and 1.2.10R) AUM Average AUM End-of-day Less than £1.2 billion Combined See Note 1 COH Average COH (cash trades) End-of-day Less than £100 million per day Combined See Note 1 COH Average COH (derivatives) End-of-day Less than £1 billion per day Combined See Note 1 ASA Average ASA End-of-day Zero Individual CMH Average CMH Intra-day Zero Individual See Note 2 DTF Average DTF Firm must not have permission to deal on own account, so these measures must always be zero Individual NPR Individual CMG Individual TCD Individual On- and off￾balance sheet total End of last financial year for which accounts finalised by management body Less than £100 million Combined See Note 3 Total annual gross revenue from investment End of last financial year for which accounts finalised by Less than £30 million, based on an average of annual figures for Combined See Notes 3 and 4

FCA 2021/XX Page 54 of 233 services and/or activities management body the two-year period immediately preceding the current financial year Whether firm is a clearing member or indirect clearing firm under MIFIDPRU 10.2 Firm must not be a clearing member or indirect clearing firm Individual Notes Note 1: The firm may calculate the relevant values for these measures by applying the applicable methodologies in MIFIDPRU 4, but over a period of the most recent 12 months and without excluding the three most recent monthly values, in accordance with MIFIDPRU 1.2.4R. Note 2: If there has been an error in record keeping or in reconciliation of accounts that incorrectly indicated the firm has breached the zero threshold for CMH average CMH and the error is corrected before the end of the business day to which it relates, the firm may use the end-of-day value in accordance with MIFIDPRU 1.2.7R. Note 3: Where the relevant accounts have not been finalised and approved after six months from the end of the last financial year, the firm must use provisional accounts for these purposes, in accordance with MIFIDPRU 1.2.6R. Note 4: The firm may exclude any double counting that may arise in respect of gross revenues generated within the group, in accordance with MIFIDPRU 1.2.10R. … 1.2.15 R (1) Where a MIFIDPRU investment firm no longer meets one or more of the thresholds in (2), but continues to meet all other conditions in MIFIDPRU 1.2.1R, it shall cease to be an SNI MIFIDPRU investment firm three 3 months after the date on which the relevant threshold was first exceeded. (2) The relevant conditions are:

FCA 2021/XX Page 55 of 233 (a) the AUM average AUM threshold in MIFIDPRU 1.2.1R(1); (b) either or both of the COH average COH thresholds in MIFIDPRU 1.2.1R(2); (c) the on- and off-balance sheet total threshold in MIFIDPRU 1.2.1R(6); and (d) the total annual gross revenue threshold in MIFIDPRU 1.2.1R(7). [Note: article 12(3), second subparagraph of the IFR.] … Application of senior management, remuneration and systems and controls requirements to SNI MIFIDPRU investment firms 1.2.18 R (1) Subject to (2) and (3), the following provisions do not apply to an SNI MIFIDPRU investment firm: (a) MIFIDPRU 7.3 (Risk, remuneration and nomination committees); (b) the provisions in SYSC 19G (MIFIDPRU Remuneration Code) which are not listed in SYSC 19G.1.6R(2). (2) If Subject to (4) and (5), if a non-SNI MIFIDPRU investment firm meets the conditions to be classified as an SNI MIFIDPRU investment firm, the provisions in (1) will cease to apply only: (a) six months after the date on which the firm first met the conditions to be reclassified as an SNI MIFIDPRU investment firm; and (b) provided that the firm: (i) continued to meet the conditions to be classified as an SNI MIFIDPRU investment firm without interruption throughout that six-month period; and (ii) has given the notification in MIFIDPRU 1.2.13R(3)(b) to the FCA promptly following the expiry of the relevant period. (3) If Subject to (4) and (5), if an SNI MIFIDPRU investment firm no longer meets the conditions to be classified as such, it must:

FCA 2021/XX Page 56 of 233 Provisions of MIFIDPRU 2.5 Summary of content … … MIFIDPRU 2.5.51G Consolidated governance and remuneration requirements MIFIDPRU 2.5.52G Application of the ICARA process on a consolidated basis group basis (a) notify the FCA immediately of the date on which it ceased to be eligible to be classified as an SNI MIFIDPRU investment firm; and (b) comply with the provisions in (1) within 12 months from the date on which the firm ceased to be eligible to be an SNI MIFIDPRU investment firm. (4) MIFIDPRU 7.3 (Risk, remuneration and nomination committees) does not apply to a non-SNI MIFIDPRU investment firm if the firm meets the conditions in MIFIDPRU 7.1.4R. (5) The provisions listed in SYSC 19G.1.1R(4) do not apply to a non￾SNI MIFIDPRU investment firm if the firm meets the conditions in that rule. … 2 Level of application of requirements … 2.3 Exemptions … 2.3.2 R A MIFIDPRU investment firm will be exempt from MIFIDPRU 6 (Liquidity), as applied by MIFIDPRU 2.2.1R, where: … 2.5 Prudential consolidation … 2.5.3 G The table below is a guide to the content of this section. …

FCA 2021/XX Page 57 of 233 Tied agents included in the consolidated situation 2.5.6 G (1) … (2) The guidance in (1) relates to a tied agent that is included within the consolidated situation. There are separate requirements in: (a) MIFIDPRU 4.5.6R, which applies in relation to the individual fixed overheads requirement of a MIFIDPRU investment firm where a tied agent incurs expenses on behalf of that firm; and (b) MIFIDPRU 4.7.2R, MIFIDPRU 4.8.3R, MIFIDPRU 4.9.2R or MIFIDPRU 4.10.2R, which apply in relation to the individual K-factor requirement of a MIFIDPRU investment firm where a tied agent carries on certain investment services and/or activities on behalf of that firm. … 2.5.11 R A UK parent entity must comply with MIFIDPRU 6 (Liquidity) on the basis of its consolidated situation. … … Consolidated K-CMH and K-ASA requirements 2.5.30 R The consolidated K-CMH requirement and consolidated K-ASA requirement for an investment firm group must be calculated in accordance with the following: (1) the contribution of any individual MIFIDPRU investment firm to the consolidated situation must be determined by applying the relevant rules for calculating CMH and ASA in MIFIDPRU 4.8 and 4.9 to that individual firm; and (2) the contribution of any other entity (“X”) in the investment firm group to the consolidated situation must be determined by: … (b) subject to (3), treating: (i) the amounts identified in (a)(i) as CMH; (ii) the amounts identified in (a)(ii) as ASA;

FCA 2021/XX Page 58 of 233 and applying the calculation rules in MIFIDPRU 4.8 or 4.9 to those amounts; and … (3) when applying the calculation rules in MIFIDPRU 4.8, an arrangement operated by X in relation to client money may be classified as a segregated account only if (ignoring MIFIDPRU 4.8.9E, which does not apply for these purposes) it meets the conditions in MIFIDPRU 4.8.8R. … 2.5.41 R (1) This rule applies where a third country entity (“B”) is included within the consolidated situation of a UK parent entity. … (3) For the purposes of (2), the following modifications shall apply to the rules relating to the calculation of the K-CMG requirement in MIFIDPRU 4.13: … (e) the obligation in MIFIDPRU 4.13.13R(1)(b) to integrate understanding of the margin model into the ICARA process applies in relation to the UK parent entity, but only if the FCA has directed under MIFIDPRU [7] that the relevant investment firm group must operate the ICARA process on a consolidated basis. does not apply, but B must ensure that its ongoing processes and systems for assessing the nature and level of risks to which it is, or might be, exposed incorporate the understanding of relevant individuals within B of the margin model for the purposes of considering whether: (i) the resulting consolidated K-CMG requirement for the portfolio(s) is sufficient to cover the relevant risks to which B is exposed; and (ii) the K-CMG permission remains appropriate in relation to the portfolio(s) in respect of which it was granted. … Prudential consolidation in practice: reporting by investment firms 2.5.50 G Under MIFIDPRU 2.5.7R, a UK parent entity is required to comply with the reporting obligations in MIFIDPRU 9 on a consolidated basis. In practice, this involves reporting the same categories of information that

FCA 2021/XX Page 59 of 233 would be reported by a MIFIDPRU investment firm to the FCA on an individual basis, but using the figures that result from applying the relevant requirements on a consolidated basis in accordance with this section. This does not apply to data item MIF007 (ICARA assessment questionnaire), which does not need to be submitted on a consolidated basis. Prudential consolidation in practice: governance requirements 2.5.51 G (1) Under MIFIDPRU 7.1.3R, a UK parent entity to which MIFIDPRU 2.5.7R applies must comply with the general governance requirements in MIFIDPRU 7.2 (Senior management and systems and controls) on a consolidated basis. In practice, this means that the UK parent entity must ensure that it has a proper organisational structure, effective processes and adequate internal controls covering the business of the investment firm group. (2) The requirements in MIFIDPRU 7.3 (Risk, remuneration and nomination committees) do not apply on a consolidated basis. Prudential consolidation in practice: ICARA requirements 2.5.52 G As explained in MIFIDPRU 7.9.4G, an investment firm group is not required to operate an ICARA process on a consolidated basis. However, MIFIDPRU 7.9.5R permits an investment firm group to operate a single group ICARA process covering the business carried on by that investment firm group, provided that certain requirements are met. … 3 Own funds … … 3.6 General requirements for own funds … Notification of issuance of additional tier 1 and tier 2 instruments 3.6.5 R (1) A firm must notify the FCA at least 20 business days before the intended issuance date of the firm’s intention to issue: (a) additional tier 1 instruments; or (b) tier 2 instruments. (2) The notification requirement in (1) does not apply if:

FCA 2021/XX Page 60 of 233 (a) the firm has previously notified the FCA of an issuance of the same class of additional tier 1 instruments or tier 2 instruments; and (b) the terms of the new instruments being issued are identical in all material respects to the terms of the instruments comprising the issuance previously notified to the FCA. (3) The notification under (1) must: (a) be submitted to the FCA via the online notification and application system using the form in MIFIDPRU 3 Annex 6R; and (b) include the following: (i) confirmation of whether the instruments being issued are intended to be classified as additional tier 1 instruments or tier 2 instruments; (ii) confirmation of whether the instruments are intended to be issued to external investors or only to other members of the firm’s group or connected parties; (iii) a copy of the term sheet and details of any features of the capital instrument which are novel, unusual or different from a capital instrument of a similar nature previously issued by the firm or widely available in the market; (iv) confirmation from a member of the firm’s senior management or governing body who has oversight of the intended issuance that the instrument meets the conditions in MIFIDPRU 3.4 or MIFIDPRU 3.5 (as applicable, and including any conditions in the UK CRR applied by those sections) to be classified as additional tier 1 instruments or tier 2 instruments; and (v) a properly reasoned legal opinion from an appropriately qualified individual, confirming that the capital instruments meet the conditions in (iv). 3.6.6 G (1) MIFIDPRU investment firms that were classified as CRR firms immediately before [Editor’s note: insert date that MIFIDPRU begins to apply] should refer to MIFIDPRU TP 1 for transitional provisions relating to own funds permissions that were issued, and notifications that were made, before that date.

FCA 2021/XX Page 61 of 233 (2) MIFIDPRU investment firms that were in existence immediately before [Editor’s note: insert date that MIFIDPRU begins to apply], but were not classified as CRR firms, should refer to MIFIDPRU TP 7 for transitional provisions relating to own funds instruments issued before that date. 3.6.7 G Firms that are proposing to classify an issuance of capital instruments as common equity tier 1 capital should refer to the obligations and guidance in MIFIDPRU 3.3.3R and MIFIDPRU 3.3.4G. In particular, firms are reminded that they must obtain the FCA’s prior permission for the first issuance of a class of instruments that is intended to comprise common equity tier 1 capital. 3.6.8 R (1) A UK parent entity must apply the modifications in (2) when any of the following apply on a consolidated basis in accordance with MIFIDPRU 2.5.7R: (a) MIFIDPRU 3.3.2R to MIFIDPRU 3.3.4G; and (b) MIFIDPRU 3.6.5R. (2) The Handbook provisions in (1)(a) and (b) apply as if references to: (a) a “firm” were references to the UK parent entity; (b) “capital instruments” were to capital instruments issued by the UK parent entity; (c) “additional tier 1 instruments” and “tier 2 instruments” were to such instruments issued by the UK parent entity; and (d) “common equity tier 1 capital” were to such capital as calculated on a consolidated basis. 3.6.9 G Firms and parent undertakings are reminded that submitting a notification in accordance with MIFIDPRU 3.6.5R to 3.6.8R does not guarantee that the relevant instruments meet the required conditions in MIFIDPRU 3.4 or MIFIDPRU 3.5 to qualify as own funds. It is the ongoing responsibility of the firm or parent undertaking to ensure that any instruments being counted as own funds meet the necessary conditions on an ongoing basis (including, where applicable, if there is any subsequent variation in their terms). 3.7 Composition of capital for parent undertakings subject to the group capital test … … 3.7.4 R (1) Subject to (2), a parent undertaking must:

FCA 2021/XX Page 62 of 233 (a) when issuing own funds instruments which are intended to qualify as common equity tier 1 capital, comply with MIFIDPRU 3.3.2R to MIFIDPRU 3.3.4G; (b) when issuing own funds instruments which are intended to qualify as additional tier 1 instruments or tier 2 instruments, comply with MIFIDPRU 3.6.5R. (2) When the Handbook provisions in (1)(a) and (b) apply, those provisions apply as if references to: (a) a “firm” were references to the parent undertaking; (b) “capital instruments” were to capital instruments issued by the parent undertaking; (c) “additional tier 1 instruments” and “tier 2 instruments” were to such instruments issued by the parent undertaking; and (d) “common equity tier 1 capital” were to such capital as held by the parent undertaking. 3.7.5 R (1) This rule applies where a responsible UK parent has chosen to apply the approach in MIFIDPRU 2.6.7R(2)(a) in relation to an undertaking established in a third country. (2) Where this rule applies, a responsible UK parent must comply with MIFIDPRU 3.7.4R in relation to any issuance of own funds instruments by the undertaking established in a third country. … 3 Annex 6 Notification under MIFIDPRU 3.6.5R of issuance of additional tier 1 or tier 2 instruments R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] 4 Own funds requirements … … 4.4 Permanent minimum capital requirement … …

FCA 2021/XX Page 63 of 233 4.4.5 G The relevant permanent minimum capital requirement under this section applies to a collective portfolio management investment firm in parallel with its base own funds requirement under IPRU-INV 11. This means that a collective portfolio management investment firm must comply with both requirements, but they are not cumulative. 4.5 Fixed overheads requirement 4.5.1 R (1) The fixed overheads requirement of a MIFIDPRU investment firm is an amount equal to one quarter of the firm’s relevant expenditure during the preceding year. (2) When calculating its fixed overheads requirement in (1), a firm must use the figures resulting from the accounting framework applied by the firm in accordance with MIFIDPRU 4.5.2R. (3) This rule is subject to MIFIDPRU 4.5.7R and MIFIDPRU 4.5.9R. [Note: article 13(1) of the IFR.] 4.5.2 R (1) For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the figures in its most recent: (a) audited annual financial statements; or (b) unaudited annual financial statements, where audited financial statements are not available. (2) If a firm has used unaudited annual financial statements in accordance with (1)(b) and audited annual financial statements subsequently become available, the firm must update the calculation in MIFIDPRU 4.5.1R to reflect the audited figures. (3) Where the financial statements in (1) do not reflect a 12-month period, the firm must: (a) divide the amounts included in those statements by the number of months that are reflected in those financial statements; and (b) multiply the result of the calculation in (a) by 12, so as to produce an equivalent annual amount. [Note: article 1(1) and 1(2) of the EBA RTS on fixed overheads.] 4.5.3 R (1) For the purpose of MIFIDPRU 4.5.1R(1), a firm must calculate its relevant expenditure by: (a) calculating the firm’s total expenditure after distribution of profits; and

FCA 2021/XX Page 64 of 233 (b) deducting any of the items in (2) from the total expenditure in (1)(a) to the extent that those items have been included in that expenditure. (2) The items that a firm may deduct from its total expenditure are: (a) any of the following, if they are fully discretionary and have not been treated as a distribution of profits under (1)(a): (i) staff bonuses and other variable remuneration; (ii) employees’, directors’ and partners’ shares in profits; and (iii) other appropriations of profits; (b) shared commission and fees payable that meet all of the following conditions: (i) they are directly related to commission and fees receivable; (ii) the commission and fees receivable are included within total revenue; and (iii) the payment of the commission and fees payable is contingent on the actual receipt of the commission and fees receivable; (c) fees paid to tied agents; (d) non-recurring expenses from non-ordinary activities; (e) subject to MIFIDPRU 4.5.4R, fees, brokerage and other charges paid to central counterparties, exchanges and other trading venues and intermediate brokers for the purposes of executing, registering and clearing transactions, if they are directly passed on and charged to customers; (f) interest paid to customers on client money, where there is no obligation of any kind to pay such interest; (g) taxes where they fall due in relation to the annual profits of the firm; (h) losses from trading on own account in financial instruments; (i) payments related to contract-based profit and loss transfer agreements according to which the firm is

FCA 2021/XX Page 65 of 233 obliged to transfer its annual profit to the parent undertaking following the preparation of the firm’s annual financial statements; (j) payments into a fund for general banking risk in accordance with article 26(1)(f) of the UK CRR, as applied by MIFIDPRU 3.3.1R; and (k) expenses reflecting the amortisation of software assets where those software assets: (i) have been prudently valued; and (ii) have already been deducted from own funds as intangible assets under MIFIDPRU 3.3.6R(2). [Note: article 13(4) of the IFR and article 1 of the EBA RTS on fixed overheads.] 4.5.4 R The deducted amounts in MIFIDPRU 4.5.3R(2)(e) must not include fees and other charges necessary to maintain membership of, or otherwise meet loss-sharing financial obligations to, central counterparties, exchanges and other trading venues. Additional deduction for commodity and emission allowance dealers 4.5.5 R In addition to the deductions in MIFIDPRU 4.5.3R(2), a commodity and emission allowance dealer may deduct expenditure on raw materials in connection with the underlying commodity of the commodity derivatives the firm trades. [Note: article 2 of the EBA RTS on fixed overheads.] Expenses incurred on behalf of the firm by third parties 4.5.6 R (1) A firm must add any fixed expenses that have been incurred on its behalf by third parties, including tied agents, to the firm’s total expenditure for the purposes of MIFIDPRU 4.5.3R in accordance with the remainder of this rule. (2) A firm is not required to add fixed expenses incurred on its behalf by a third party to the firm’s expenditure if those expenses are already included in the figures resulting from MIFIDPRU 4.5.2R. (3) Where a break-down of the third party’s expenses is available, the firm must add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm. (4) Where a break-down of the third party’s expenses is not available, the firm must:

FCA 2021/XX Page 66 of 233 (a) add to the firm’s total expenditure the share of the third party’s expenses incurred on behalf of the firm as projected in the firm’s business plan; or (b) if the firm does not have a business plan that addresses the expenses incurred by the third party, reasonably estimate the share of those expenses that are attributable to the firm’s business and add that estimated share of expenses to the firm’s total expenditure. [Note: article 1(5) of the EBA RTS on fixed overheads.] Material change to projected relevant expenditure during the year 4.5.7 R (1) This rule applies where there: (a) is an increase of 30% or more in the firm’s projected relevant expenditure for the current year; or (b) would be an increase of £2 million or more in the firm’s fixed overheads requirement based on projected relevant expenditure for the current year. (2) Where this rule applies, a firm must: (a) immediately recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the increase in (1); (b) substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R(1); and (c) immediately recalculate its basic liquid assets requirement using the revised fixed overheads requirement in (b). [Note: article 13(2) of the IFR and article 3 of the EBA RTS on fixed overheads.] 4.5.8 G (1) Where there is a material increase in the firm’s projected relevant expenditure that triggers the obligation in MIFIDPRU 4.5.7R, the FCA expects that a firm will also consider the potential impact on its ICARA process and the conclusions documented in its last ICARA document. In particular, the firm should consider any potential impact on: (a) the liquid assets that the firm needs to hold to comply with MIFIDPRU 6, as the requirements in that chapter

FCA 2021/XX Page 67 of 233 are calibrated by reference to the fixed overheads requirement; (b) the level of own funds and liquid assets that the firm holds to comply with its obligations under MIFIDPRU 7; and (c) the calibration of the firm’s wind-down triggers. (2) The FCA considers that the review in (1) is particularly important if, immediately before the change occurred, the firm’s own funds requirement was determined by the fixed overheads requirement. 4.5.9 R (1) This rule applies where there: (a) is a decrease of 30% or more in the firm’s projected relevant expenditure for the current year; or (b) would be a decrease of £2 million or more in the firm’s fixed overheads requirement based on projected relevant expenditure for the current year. (2) Where this rule applies, a firm may: (a) recalculate its fixed overheads requirement by applying the methodology in MIFIDPRU 4.5.3R to the projected relevant expenditure, taking into account the decrease in (1); and (b) if it has obtained prior permission from the FCA in accordance with (3), substitute the revised fixed overheads requirement that results from the calculation in (a) for the firm’s original fixed overheads requirement under MIFIDPRU 4.5.1R. (3) To obtain the permission in (2), a firm must: (a) complete the application form in MIFIDPRU 4 Annex 10 and submit it to the FCA in accordance with the instructions on that form; (b) demonstrate all of the following to the satisfaction of the FCA: (i) that one of the conditions in (1)(a) or (b) is met and the projected reduction in the firm’s relevant expenditure is a reasonable projection; (ii) that the firm has adequately considered the impact of the reduction on the firm’s ICARA

FCA 2021/XX Page 68 of 233 process and the conclusions documented in the firm’s last ICARA document; and (iii) that there is a reasonable basis to conclude that, following the reduction in the firm’s fixed overheads requirement, the firm will continue to hold sufficient own funds and liquid assets to comply with its obligations under MIFIDPRU 7. 4.5.10 G (1) Under MIFIDPRU 4.5.1R, a MIFIDPRU investment firm is required to calculate its fixed overheads requirement based on its relevant expenditure as reflected in its annual financial statements for the previous year. (2) Under MIFIDPRU 4.5.7R, if there is a material increase in the firm’s projected relevant expenditure for the current year, the firm must recalculate its fixed overheads requirement on the basis of that projected increased relevant expenditure, taking into account the impact of that change. (3) However, under MIFIDPRU 4.5.9R, if there is a material change that results in a decrease in the firm’s projected relevant expenditure for the current year, the firm must obtain the prior permission of the FCA before substituting a reduced fixed overheads requirement calculated on the basis of the projected decrease. (4) In many cases, a material change of the type specified in MIFIDPRU 4.5.7R(1) or MIFIDPRU 4.5.9R(1) is likely to result from planned changes to the firm’s business. Non-exhaustive examples of such changes may include: (a) starting or ceasing a major business line; (b) acquiring or disposing of a major business; or (c) undertaking a significant investment, upgrade or restructuring programme. The FCA expects that a firm that is planning to implement a material change to its business will calculate the anticipated impact of that change on its fixed overheads requirement (and its broader own funds requirement) before executing the relevant change. This should include considering the potential impact on its ICARA process and its obligations under MIFIDPRU 7. Firms that have been providing investment services and/or activities for less than a year

FCA 2021/XX Page 69 of 233 4.5.11 R (1) This rule applies where a firm has been in business for less than one year. (2) For the purposes of the calculation in MIFIDPRU 4.5.1R, a firm must use the relevant expenditure included in its projections for the first 12 months’ trading, as submitted in its application for authorisation. [Note: article 13(3) of the IFR.] 4.6 Overall K-factor requirement 4.6.1 R The K-factor requirement of a MIFIDPRU investment firm is the sum of each of the following that apply to the firm: (1) K-AUM requirement; (2) K-CMH requirement; (3) K-ASA requirement; (4) K-COH requirement; (5) K-NPR requirement; (6) K-CMG requirement; (7) K-TCD requirement; (8) K-DTF requirement; and (9) K-CON requirement. 4.6.2 G (1) The rules and guidance in MIFIDPRU 4.7 to 4.16 explain how a MIFIDPRU investment firm should calculate each component of its overall K-factor requirement. (2) The manner in which firms carry on activities that are potentially relevant to one or more K-factor metrics may vary considerably. It is not practical for the FCA to give an exhaustive set of rules and guidance covering every conceivable business arrangement that firms may operate when carrying on such activities. (3) If a firm is unsure whether a particular arrangement is within scope of one or more components of the K-factor requirement, the FCA expects the firm to apply a purposive approach to the interpretation of the requirement, as required by GEN 2.2.1R. Among other factors, the FCA would therefore expect the firm to consider:

FCA 2021/XX Page 70 of 233 (a) whether the arrangement is sufficiently analogous to another arrangement that is clearly covered by any rules or associated guidance; (b) the risks that the relevant component of the K-factor requirement is designed to address and whether the same or similar risks arise in relation to the arrangement in question; and (c) where the component of the K-factor requirement is calculated by reference to a specific investment service and/or activity, the approach that the firm has adopted to applying other rules or guidance elsewhere in the Handbook to the arrangement, where those rules or guidance refer to the same investment service and/or activity. (4) The FCA expects that if asked, a firm will be able to justify the approach that the firm has taken to applying the K-factor requirement to a particular activity. (5) MIFIDPRU investment firms are reminded that even if an activity does not contribute towards the K-factor requirement, they should still consider, in accordance with the requirements in MIFIDPRU 7, whether that activity may give rise to potential material risks of harm or may be relevant to the firm’s wind￾down analysis. … … 4.7 K-AUM requirement 4.7.1 R The K-AUM requirement of a MIFIDPRU investment firm is equal to 0.02% of the firm’s average AUM. [Note: article 15(2) and 16 of the IFR.] 4.7.2 R When measuring its AUM, a MIFIDPRU investment firm must include any amounts that relate to the MiFID business of the firm that is carried on by any tied agents acting on its behalf. 4.7.3 G For the avoidance of doubt, the definition of AUM does not include any amounts arising from the firm’s provision of the ancillary service in paragraph 3 of Part 3A of Schedule 2 the Regulated Activities Order (i.e. providing advice to undertakings on capital structure, industrial strategy and related matters and advice and services relating to mergers and the purchase of undertakings). 4.7.4 R A firm must calculate its K-AUM requirement on the first business day of each month.

FCA 2021/XX Page 71 of 233 [Note: article 17(1) of the IFR.] 4.7.5 R (1) A firm must calculate the amount of its average AUM by: (a) taking the total AUM as measured on the last business day of each of the previous 15 months; (b) excluding the 3 most recent monthly values; and (c) calculating the arithmetic mean of the remaining 12 monthly values. (2) When measuring the value of its AUM on the last business day of each month, a firm must convert any amounts in foreign currencies on that date into the firm’s functional currency. (3) For the purposes of the currency conversion in (2), a firm must: (a) determine the conversion rate by reference to an appropriate market rate; and (b) record the rate that was chosen. [Note: article 17(1) of the IFR.] 4.7.6 G (1) The effect of MIFIDPRU 4.7.5R(2) is that when measuring the value of AUM at the end of each month, a firm must apply the relevant conversion rate on that date to the AUM attributable to that month. The AUM for each relevant preceding month should continue to be measured by reference to the conversion rate that was applicable at the end of that particular preceding month. (2) For purposes of MIFIDPRU 4.7.5R(3), where a firm is carrying out a conversion that involves sterling, the FCA considers that an example of an appropriate market rate would be the relevant daily spot exchange rate against sterling published by the Bank of England. 4.7.7 R (1) When measuring the amount of its AUM, a firm must: (a) where available, use the market value of the relevant assets; (b) where a market value is not available for an asset, use an alternative measure of fair value, which may include an estimated value calculated on a best efforts basis; (c) exclude any amounts that are included in the firm’s calculation of its CMH. (2) When measuring the amount of its AUM, a firm may offset any negative values or liabilities attributable to positions within the

FCA 2021/XX Page 72 of 233 relevant portfolios, so that AUM is equal to the net total value of the relevant assets. 4.7.8 R Where the firm has delegated the management of assets to another entity, the firm must include the value of those assets in its measurement of AUM. [Note: article 17(2), first paragraph of the IFR.] 4.7.9 R (1) Subject to (2), where a financial entity has formally delegated the management of assets to the firm, the firm may exclude the value of those assets from its measurement of AUM. (2) The exclusion in (1) does not apply if the financial entity that is formally delegating to the firm has itself excluded the relevant assets from the financial entity’s calculation of its own capital requirements due to the financial entity also acting as a delegated manager. (3) For the purposes of (1), formal delegation occurs where there is a legally binding agreement in place between the financial entity and the firm that sets out the rights and obligations of each party in relation to the delegation of the relevant portfolio management activities. [Note: article 17(2), second paragraph of the IFR.] 4.7.10 G (1) MIFIDPRU 4.7.8R and 4.7.9R address the position where one entity delegates management of assets to another entity. For these purposes, delegation involves a delegating entity (“A”) assuming a duty to the relevant client to manage the assets, and A then delegating the performance of that duty (in whole or in part) to another entity (“B”). (2) The following do not constitute delegation for the purposes of MIFIDPRU 4.7.8R or 4.7.9R: (a) where A is only arranging for B to provide a service directly to the relevant client, so that B owes a duty directly to the client to manage the assets and A does not; or (b) where A advises a client to use B’s management services in relation to certain assets, but A does not itself assume any responsibility to the client for managing those assets. (3) MIFIDPRU 4.7.8R explains that a MIFIDPRU investment firm cannot reduce its AUM by delegating management of assets to another entity. This is because the firm will normally continue to

FCA 2021/XX Page 73 of 233 owe a duty directly to the client, even if performance of that duty has been delegated (wholly or partly) to another entity. (4) MIFIDPRU 4.7.9R permits a firm to whom the management of assets has been formally delegated to exclude the value of those assets when measuring its AUM if the delegating entity is a financial entity. However, if the delegation does not meet the requirements to be a formal delegation, the firm may not exclude the relevant assets from its measurement of AUM. The definition of a financial entity covers entities that are subject to an AUM￾based capital requirement that is similar to the K-AUM requirement. (5) The rule in MIFIDPRU 4.7.9R is designed to ensure that assets under management are not “double-counted” for the purposes of applying regulatory capital requirements. The FCA considers that double-counting is unlikely to occur in relation to delegating entities which are not financial entities, as those delegating entities will not have capital requirements based specifically upon their level of assets under management. Therefore, where an entity that is not a financial entity has delegated the management of assets to the firm, the firm must include the value of those assets in its measurement of AUM. (6) MIFIDPRU 4.7.9R(2) will be relevant if a firm is managing a portfolio under sub-delegation arrangements. The effect can be illustrated through the following example. Firm A (a third country entity that is a financial entity) formally delegates the management of a portfolio of assets to Firm B (a MIFIDPRU investment firm). Firm B formally sub-delegates the management of part of the portfolio to Firm C (another MIFIDPRU investment firm). Firm B may choose to apply the exclusion in MIFIDPRU 4.7.9R(1), on the basis that Firm A is a financial entity. However, if Firm B claims the exclusion in MIFIDPRU 4.7.9R(1), Firm C cannot also exclude the value of the sub-delegated assets from Firm C’s measurement of AUM. This is because MIFIDPRU 4.7.9R(2) disapplies the exclusion if the delegating entity has already applied a similar exclusion in relation to the same portfolio. (7) MIFIDPRU 4.7.9R(2) also applies if the delegating entity is a financial entity in a third country and is applying an equivalent exclusion. For example, Firm D (an entity in a third country) delegates the management of a portfolio to Firm E (a financial entity in a third country). Firm E sub-delegates the management of part of that portfolio to Firm F (a MIFIDPRU investment firm). The third country rules to which Firm E is subject permit Firm E to exclude the value of the assets delegated by Firm D from Firm E’s AUM-based capital requirement. If Firm E is

FCA 2021/XX Page 74 of 233 relying on that exclusion, Firm F cannot rely on the exclusion in MIFIDPRU 4.7.9R(1). 4.7.11 G Where a financial entity (“A”) is providing investment advice of an ongoing nature to a MIFIDPRU investment firm (“B”) and B undertakes discretionary portfolio management, such an arrangement does not fall within MIFIDPRU 4.7.9R. This is because the arrangement is not a formal delegation of the management of assets by A to B, but involves two distinct activities: ongoing investment advice provided by A and discretionary portfolio management undertaken by B. In this situation, if A is a MIFIDPRU investment firm, it must include any assets in relation to which it is providing such advice in its measurement of AUM. Where B is undertaking discretionary portfolio management in relation to the same assets, B must also include those assets in its own measurement of AUM. 4.7.12 R (1) This rule applies where a firm has been managing assets for its clients under discretionary portfolio management or non￾discretionary arrangements constituting investment advice of an ongoing nature: (a) for less than 15 months; or (b) for 15 months or longer, but has been classified as a non-SNI MIFIDPRU investment firm for less than 15 months. (2) For the purposes of its calculation of average AUM under MIFIDPRU 4.7.5R, a firm must use: (a) historical data for the periods specified in (1) as soon as such data becomes available; or (b) such other amounts as the FCA may specify to replace any missing data points, based on the business projections that the firm submitted to the FCA when obtaining permission to perform the relevant activities. [Note: article 17(2), third paragraph of the IFR.] 4.7.13 G MIFIDPRU 4.10.26G to MIFIDPRU 4.10.32G contain additional guidance on the interaction between the measurement of a firm’s AUM and the measurement of a firm’s COH. 4.8 K-CMH requirement 4.8.1 R The K-CMH requirement of a MIFIDPRU investment firm is equal to the sum of: (1) 0.4% of average CMH held by the firm in segregated accounts; and

FCA 2021/XX Page 75 of 233 (2) 0.5% of average CMH held by the firm in non-segregated accounts. [Note: article 15(2) of the IFR.] 4.8.2 G (1) Generally, the FCA would expect that a MIFIDPRU investment firm would be holding client money in one or more segregated accounts. MIFIDPRU 4.8.9E explains that where a firm is complying with the applicable requirements of CASS 7 in relation to an amount of client money, there is a presumption that such an amount is being held in a segregated account. (2) As a result, the FCA considers that the K-CMH requirement for non-segregated accounts is most likely to be relevant where: (a) the K-CMH requirement applies on a consolidated basis and: (i) the consolidated situation includes one or more entities to which CASS does not apply, such as third country entities, that receive money from customers; and (ii) the arrangements under which the entity in (i) holds money received from customers do not satisfy the conditions in MIFIDPRU 4.8.8R (as they apply on a consolidated basis under MIFIDPRU 2.5.30R); or (b) a MIFIDPRU investment firm has been failing to comply with the applicable requirements of CASS 7 during a certain period, in which case the firm should treat any non-compliant arrangements as non￾segregated accounts for the purposes of calculating any K-CMH requirement that includes that period of non￾compliance. (3) For the avoidance of doubt, the scenario in (2)(b) does not affect any obligations that the firm has under CASS, or under any other rule, to take specified action or to notify the FCA where the firm has identified that it has breached the requirements of CASS. 4.8.3 R When calculating its CMH in accordance with this section, a MIFIDPRU investment firm must include any amounts that relate to MiFID business of the firm that is carried on by any tied agents acting on its behalf. 4.8.4 G Due to the restrictions in SUP 12.6.5R and SUP 12.6.15R, the FCA generally expects that MIFIDPRU 4.8.3R would not be directly relevant to MIFIDPRU investment firms on an individual basis. However, where this section applies on a consolidated basis in accordance with

FCA 2021/XX Page 76 of 233 MIFIDPRU 2.5 (Prudential consolidation), the UK parent entity will need to include any CMH attributable to tied agents of a third country investment firm included within the consolidated situation. 4.8.5 G (1) The definition of CMH includes only client money which is MiFID client money. Therefore, client money which is received in connection with business other than MiFID business does not need to be included within a MIFIDPRU investment firm’s calculation of CMH, except to the extent that MIFIDPRU 4.8.6R applies. (2) The definition of MiFID client money includes: (a) money deposited into a client bank account in accordance with CASS 7.13.3.R; (b) money originally received in connection with MiFID business which a firm has placed in a qualifying money market fund in accordance with CASS 7.13.3R(4). This means that while the units or shares in the relevant qualifying money market fund must still be treated by the firm as client assets for the purposes of CASS and must be dealt with in accordance with CASS 7.13.26G, the value of those units or shares must be included in CMH for the purposes of MIFIDPRU; (c) an amount of the firm’s own money that the firm has paid into its client bank account for the purposes of CASS 7.13.65R where the firm is applying alternative approach mandatory prudent segregation; and (d) money received from a client in connection with MiFID business which a firm has allowed a third party (such as an exchange, a clearing house or an intermediate broker) to hold in accordance with CASS 7.14 (Client money held by a third party). (3) Where a firm controls money by virtue of a mandate in accordance with CASS 8, such money is not MiFID client money where it is not client money received or held by the firm. A firm is not required to include any such sums it controls but does not hold within its calculation of CMH. (4) MIFIDPRU investment firms are reminded that while money that is not MiFID client money does not contribute to the K-CMH requirement, they should still consider any potential material harms that may arise in connection with receiving money from clients as part of their ICARA process under MIFIDPRU 7. This includes any material harms that may arise in relation to amounts received that are not treated as client money, such as under a title transfer collateral arrangement.

FCA 2021/XX Page 77 of 233 4.8.6 R If a MIFIDPRU investment firm is unsure whether a particular amount of client money should be classified as MiFID client money, it must treat the relevant amount as MiFID client money for the purposes of this section until the firm is satisfied that the amount is not MiFID client money. 4.8.7 G For the avoidance of doubt, MIFIDPRU 4.8.6R applies only for the purposes of determining how the client money concerned should be treated for the purposes of MIFIDPRU. It does not affect how such client money should be treated for the purposes of other provisions in the Handbook (such as CASS or COBS) or under any other applicable legislation. 4.8.8 R An arrangement will constitute a segregated account if it is an arrangement in respect of which a firm (“A”) ensures that all of the following conditions are satisfied: (1) A keeps records and accounts enabling A, at any time and without delay, to distinguish assets held for one client from assets held for any other client and from A’s own assets; (2) A maintains its records and accounts in a way that ensures their accuracy, and in particular that they correspond to the assets held for clients and may be used as an audit trail; (3) A conducts, on a regular basis, reconciliations between A’s internal accounts and records and those of any third parties by whom those assets are held; (4) A takes the necessary steps to ensure that deposited client funds are held in an account or accounts identified separately from any accounts used to hold funds belonging to A; (5) A operates adequate organisational arrangements to minimise the risk of the loss or diminution of client assets or of rights in connection with those assets, as a result of misuse of the assets, fraud, poor administration, inadequate record-keeping or negligence; and (6) the applicable national law provides that, in the event of A’s insolvency or entry into resolution or administration, assuming that A has complied with (1) to (5), client funds cannot be used to satisfy claims against A, other than claims by the relevant clients. 4.8.9 E (1) This rule applies for the purposes of MIFIDPRU 4.8.8R. (2) A MIFIDPRU investment firm which holds client money must comply with, among other requirements, the applicable requirements on:

FCA 2021/XX Page 78 of 233 (a) organisational requirements in relation to client money in CASS 7.12; (b) segregation of client money in CASS 7.13 or client money held by a third party in CASS 7.14; (c) records, accounts and reconciliations in CASS 7.15; and (d) acknowledgement letters in CASS 7.18. (3) Compliance with (2) in relation to an arrangement may be relied on as tending to establish compliance with the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R. (4) Contravention of (2) in relation to an arrangement may be relied on as tending to establish contravention of the conditions for that arrangement to be classified as a segregated account in MIFIDPRU 4.8.8R. 4.8.10 G The effect of MIFIDPRU 4.8.9E is that if a MIFIDPRU investment firm complies with the requirements in the provisions of CASS specified in MIFIDPRU 4.8.9E(2) in relation to a particular arrangement for client money, it can proceed on the basis that such client money is being held in a segregated account for the purposes of the K-CMH requirement. Conversely, if the firm does not comply with the relevant CASS provisions in relation to a client money arrangement, this will generally be evidence that the relevant client money should be treated as being held in a non-segregated account for the purposes of calculating the K￾CMH requirement. 4.8.11 G Where consolidation under MIFIDPRU 2.5 (Prudential consolidation) applies to an investment firm group, MIFIDPRU 2.5.30R and MIFIDPRU 2.5.31R explain how to calculate the consolidated K-CMH requirement. 4.8.12 R A firm must calculate its K-CMH requirement on the first business day of each month. [Note: article 18(1), third paragraph of the IFR.] 4.8.13 R A firm must calculate the amount of its average CMH by: (1) taking the total CMH as measured at the end of each business day during the previous 9 months; (2) excluding the daily values for the most recent 3 months; and (3) calculating the arithmetic mean of the daily values for the remaining 6 months.

FCA 2021/XX Page 79 of 233 [Note: article 18(1), first and second paragraphs of the IFR.] 4.8.14 R For the purpose of the calculation in MIFIDPRU 4.8.13R, a firm must measure CMH in accordance with, to the extent applicable: (1) any records, accounts and reconciliations that the firm maintains to comply with the requirements of CASS 7.15 (Records, accounts and reconciliations); and (2) any values contained in accounting records. 4.8.15 R Where a firm has been holding CMH for less than 9 months, for the purpose of the calculating its average CMH, it must use: (1) historical data for the period in MIFIDPRU 4.8.13R to calculate average CMH as soon as it becomes available; or (2) such other amounts as the FCA may specify to replace any missing data points, based on the business projections that the firm submitted to the FCA when obtaining permission to perform the relevant activities to which the client money relates. [Note: article 18(2) of the IFR.] 4.9 K-ASA requirement 4.9.1 R The K-ASA requirement of a MIFIDPRU investment firm is equal to 0.04% of the firm’s average ASA. [Note: article 15(2) of the IFR.] 4.9.2 R When calculating its K-ASA requirement in accordance with this section, a MIFIDPRU investment firm must include within its ASA any amounts that relate to MiFID business of the firm that is carried on by any tied agents acting on its behalf. 4.9.3 G Due to the limited types of activities in respect of which a tied agent may be exempt from the requirement for authorisation in the UK (as explained in SUP 12.2.7G), the FCA generally expects that MIFIDPRU 4.9.2R would not be directly relevant to MIFIDPRU investment firms on an individual basis. However, where MIFIDPRU 4.9 applies on a consolidated basis in accordance with MIFIDPRU 2.5 (Prudential consolidation), the UK parent entity will need to include any ASA attributable to tied agents of a third country investment firm included within the consolidated situation. 4.9.4 R A firm must exclude from its measurement of ASA any units or shares in a qualifying money market fund that are treated as MiFID client money. 4.9.5 G (1) The definition of ASA includes only client assets held by a MIFIDPRU investment firm in the course of MiFID business.

FCA 2021/XX Page 80 of 233 Therefore, client assets which are held in connection with business other than MiFID business do not need to be included within a MIFIDPRU investment firm’s calculation of ASA, except to the extent that MIFIDPRU 4.9.6R applies. (2) MIFIDPRU investment firms should note that, as explained in MIFIDPRU 4.8.5G, the definitions of MiFID client money and CMH include amounts that a MIFIDPRU investment firm has placed with qualifying money market funds in accordance with CASS 7.13.3R(4). Due to MIFIDPRU 4.9.4R and the definition of MiFID client money, although the resulting units or shares in a qualifying money market fund may be treated as client assets for the purposes of the custody rules, for the purposes of MIFIDPRU, their value should be included in CMH and not in ASA. (3) MIFIDPRU investment firms are reminded that while client assets that a firm holds otherwise than in the course of MiFID business do not contribute to the K-ASA requirement, they should still consider any potential material harms that may arise in connection with receiving assets from clients as part of their ICARA process under MIFIDPRU 7. (4) As part of their ICARA processes, firms should also consider material harms that may arise in relation to amounts received that are not treated as client assets for the purposes of the custody rules but in relation to which the firm may have future obligations to a client, such as under a title transfer collateral arrangement. 4.9.6 R If a MIFIDPRU investment firm is unsure whether particular client assets are held in the course of MiFID business, it must treat those assets as held in the course of MiFID business for the purposes of this section until it is satisfied that the assets are not held in the course of such business. 4.9.7 R A firm must calculate its K-ASA requirement on the first business day of each month. [Note: article 19(1), third paragraph of the IFR.] 4.9.8 R A firm must calculate the amount of its average ASA by: (1) taking the total ASA as measured at the end of each business day for the previous 9 months; (2) excluding the values for the most recent 3 months; and (3) calculating the arithmetic mean of the daily values for the remaining 6 months.

FCA 2021/XX Page 81 of 233 [Note: article 19(1), first and second paragraphs of the IFR.] 4.9.9 R When measuring ASA, a firm must: (1) where available, use the market value of the relevant assets; and (2) where a market value is not available for an asset, use an alternative measure of fair value, which may include an estimated value calculated on a best efforts basis. 4.9.10 G The values used by a firm under MIFIDPRU 4.9.8R should be consistent with the information on client assets contained in any relevant regulatory data reported by the firm to the FCA, and in any internal or external reconciliations and records maintained in accordance with CASS 6.6 (Records, accounts and reconciliations), except where a rule or relevant guidance expressly requires the firm to take a different approach. 4.9.11 R Where either of the following applies, a firm must include the value of the relevant assets in its measurement of ASA: (1) the firm has delegated the safeguarding and administration of assets to another entity; or (2) another entity has delegated the safeguarding and administration of assets to the firm. [Note: article 19(2) of the IFR.] 4.9.12 G The effect of MIFIDPRU 4.9.11R is that a firm will not reduce its level of ASA by delegating the safeguarding of assets to a third party. However, a firm will increase the level of its ASA by accepting the delegation of safeguarding and administration of assets to the firm by a third party. This reflects the risk of harm that may result from the firm’s direct safeguarding responsibilities and the firm’s responsibilities in relation to the selection, appointment and periodic review of any third party to which the firm has delegated safeguarding. 4.9.13 R Where a firm has been safeguarding assets for less than 9 months, for the purposes of calculating its average ASA, it must use: (1) historical data for the period in MIFIDPRU 4.9.8R to calculate average ASA as soon as it becomes available; or (2) such other amounts as the FCA may specify to replace any missing data points, based on the business projections that the firm submitted to the FCA when obtaining permission to perform the relevant safeguarding activities. [Note: article 19(3) of the IFR.]

FCA 2021/XX Page 82 of 233 4.10 K-COH requirement 4.10.1 R The K-COH requirement of a MIFIDPRU investment firm is equal to the sum of: (1) 0.1% of average COH attributable to cash trades; and (2) 0.01% of average COH attributable to derivatives trades. [Note: article 15(2) of the IFR.] 4.10.2 R When calculating its K-COH requirement in accordance with this section, a MIFIDPRU investment firm must include within its COH any amounts that relate to MiFID business of the firm that is carried on by any tied agents acting on its behalf. 4.10.3 G The definition of COH includes orders that a firm handles when carrying on either of the following types of MiFID business: (1) reception and transmission of client orders; and (2) execution of orders on behalf of a client. 4.10.4 R A firm is not required to include the following in its measurement of COH: (1) orders executed by a firm in its own name (including where the firm executes an order in its own name on behalf of a client); (2) orders that a firm handles when acting in the capacity as the operator of a multilateral trading facility or organised trading facility; (3) transactions that are caught within the definition of reception and transmission of client orders only as a result of the situation described in recital 44 of MiFID; or (4) orders that are not ultimately executed. [Note: article 20(2), fifth to seventh subparagraphs of the IFR.] 4.10.5 G MIFIDPRU 4.10.6G to MIFIDPRU 4.10.17G contain further guidance on whether particular arrangements are included within the measurement of COH. Execution of orders in the firm’s own name 4.10.6 G Where a firm executes orders in its own name (irrespective of whether those orders are ultimately for the benefit of a client), those orders are included within the firm’s measurement of its DTF under MIFIDPRU

FCA 2021/XX Page 83 of 233 4.15 (K-DTF requirement) and not within its measurement of COH under this section. The extended (“bringing together”) definition of reception and transmission 4.10.7 G Transactions that are described in recital 44 of MiFID are, in summary, transactions that result from a firm bringing together two or more investors (such as introducing an issuer to a potential source of funding), where the firm does not otherwise interpose itself within the chain of execution of any resulting order. In practice, this is most likely to be relevant in the context of corporate finance business or private equity business. A firm may exclude such transactions from its measurement of COH provided that its role does not go beyond this “extended” definition of reception and transmission (which is further described in in the guidance in PERG 13.3 (Investment Services and Activities)). Matched principal trading 4.10.8 G A firm that trades in a matched principal capacity will be placing orders in its own name. Such orders must therefore be included in the measurement of the firm’s DTF and are not included in the calculation of COH. Name give-up activities 4.10.9 G (1) The FCA understands that activities that are described as involving “name give-up” may take different forms. (2) In certain cases, a firm may be distributing indications of interest that indicate a willingness to enter into a transaction, but do not have fixed terms. The firm may then pass the names of the counterparties to each other following a match in order to allow them to facilitate the trade. In the FCA’s view, the indications of interest and name-passing that occur as part of this activity are not included within the measurement of COH. However, this does not mean that every transaction which begins with an indication of interest is always outside the scope of COH. Where a firm is subsequently instructed to transmit an order on firm terms, or to execute an order, that transaction will be within scope of COH, even if the order results from a process that began with an initial indication of interest. (3) In some circumstances, a firm may be disseminating orders on firm terms that result in a transaction as soon as they are confirmed by the recipient, following which the firm will disclose the name of the relevant counterparty. In the FCA’s view, this activity is included within the measurement of COH because it involves reception and transmission of an order on firm terms.

FCA 2021/XX Page 84 of 233 Exchange give-up activities 4.10.10 G (1) In some circumstances, firms may facilitate trading by their clients on exchanges. Once a transaction has been executed, the relevant trade is then given up to the client’s clearing firm. (2) In the FCA’s view, a firm should consider the exact capacity in which it is acting, and whether it incurs any liability as principal, when determining if orders resulting from exchange give-up activities are included within the measurement of COH. (3) If the firm enters into the transaction in its own name and therefore incurs principal liability, even for a short period, in relation to the trade before it is given up, the FCA considers that the order should be included within the firm’s measurement of DTF and not within its measurement of COH. (4) If the firm does not incur liability as principal and merely acts as agent in the name of a third party in relation to the trade, the FCA considers that the order should be included within the firm’s measurement of COH. Exchange block trades 4.10.11 G (1) A firm may be involved in negotiating a bilateral trade in relation to an exchange-traded instrument between counterparties that takes place off-exchange because the size of the trade exceeds certain specified levels. In some cases, the exchange may provide communications functionality to facilitate such block trades, but the trades are not executed on the exchange’s public market. (2) In the FCA’s view, a firm will need to determine the capacity in which the firm is acting in relation to the block trade to determine if the value of the trade should be included in the firm’s measurement of COH. (3) If the firm enters into the block trade in its own name and the trade is then given up to a client, the firm should include the value of that trade in its measurement of DTF. (4) If the firm executes the block trade as agent by committing the client to the terms of the trade, the firm should include the value of that trade in its measurement of COH. (5) If the firm receives firm terms of the block trade from the client and transmits such terms to the counterparty in order for the counterparty to confirm those terms to create a binding transaction, the firm should include the value of that trade in its measurement of COH.

FCA 2021/XX Page 85 of 233 Broker functionality 4.10.12 G In some circumstances, a firm may be a member of an exchange and may provide functionality whereby trades can be executed and booked directly into the account of the relevant client. In such a case, the FCA considers that such trades should be included in the firm’s measurement of COH, as the firm is still being used to execute the relevant trade. Orders connected with the operation of trading venues 4.10.13 G (1) A firm which is operating a multilateral trading facility or operating an organised trading facility does not need to include any orders it handles solely in that capacity in its measurement of COH. Nonetheless, it should consider as part of its ICARA process whether that activity gives rise to the risk of material potential harm which might require it to hold additional own funds or liquid assets under MIFIDPRU 7. (2) However, if the operator of an organised trading facility is engaging in matched principal trading, as permitted by MAR 5A.3.5R, any matched principal trades are included in its measurement of DTF under MIFIDPRU 4.15 (K-DTF requirement). 4.10.14 G For the avoidance of doubt, a firm that executes client orders on a multilateral trading facility or an organised trading facility when the firm is not acting in the capacity of the trading venue operator must include such orders in its measurement of COH (unless the firm executes such orders in its own name, in which case they must be included in its measurement of DTF). 4.10.15 G In certain circumstances, the same firm may both act as the operator of a multilateral trading facility or an organised trading facility and also be submitting an order on that trading venue on behalf of a client. In such a case, although the firm is not required to measure COH in relation to its role as the operator of the trading venue, it must still measure COH (or DTF if it is possible to enter into transactions in its own name on the trading venue) in relation to the order that it is executing for the client. Orders that are never executed 4.10.16 G (1) The effect of MIFIDPRU 4.10.4R(4) is that where a firm receives a client order but that order is not ultimately executed, it does not have to include the value of that order in its measurement of COH. However, as part of its ICARA process, a firm should consider whether the fact that an order has not been executed gives rise to any material risks to the firm or to its clients. This may depend upon the reasons why client orders have not been executed.

FCA 2021/XX Page 86 of 233 (2) If, for example, the order was not executed because market conditions did not allow the firm (or another entity to whom the order was ultimately transmitted) to achieve an appropriate outcome for the client, this may be consistent with the firm’s contractual and regulatory duties. In that case, this may not give rise to any additional material risks. (3) However, if, for example, the firm failed to transmit or execute orders because of an oversight or an internal systems failure, this may indicate that the firm has been failing in its duties to its client or in its regulatory obligations. Alternatively, the firm may have successfully transmitted an order, but failed to select an appropriate entity to receive and execute that order, and therefore may have failed to comply with its obligations to act in the best interests of the client when transmitting the order. In these types of cases, the firm should consider as part of its ICARA process whether such failures may give rise to material risks and how such risks should be addressed. 4.10.17 G (1) Firms are reminded that while failure to achieve the execution of an individual order may not necessarily be indicative of potential material harms, a series or pattern of failures may be evidence of such harms. (2) Firms are also reminded that the analysis under their ICARA process is separate from the application of any individual regulatory or other legal duties owed to an individual client. Therefore, while a firm may conclude that an isolated oversight in relation to a client order does not give rise to the risk of material harm in the context of the ICARA process, this does not affect any conduct obligations owed by the firm to that particular client. Calculating COH 4.10.18 R A firm must calculate its K-COH requirement on the first business day of each month. [Note: article 20(1), third paragraph of the IFR.] 4.10.19 R A firm must calculate the amount of its average COH by: (1) taking the total COH measured throughout each business day over the previous 6 months; (2) excluding the daily values for the most recent 3 months; and (3) calculating the arithmetic mean of the daily values of the remaining 3 months. [Note: article 20(1) of the IFR.]

FCA 2021/XX Page 87 of 233 Measuring the value of orders for COH 4.10.20 R (1) When measuring its COH, a firm must use the sum of the absolute value of each buy order and sell order, as determined in accordance with the remainder of this rule. (2) For cash trades relating to financial instruments the value of the order is the amount paid or received on the trade at the time at which it is executed, unless the firm has chosen to apply the approach in MIFIDPRU 4.10.23R. (3) For derivatives trades other than orders relating to interest rate derivatives, the value of the order is the notional amount of the contract, determined in accordance with MIFIDPRU 4.14.20R(2). (4) For orders relating to interest rate derivatives, the value of the order is the notional amount of the contract determined in accordance with MIFIDPRU 4.14.20R(2), adjusted in accordance with MIFIDPRU 4.10.25R. (5) A firm may calculate the value of an order by deducting any transaction costs so as to reflect the consideration received or paid by the client for the relevant instruments, provided that such transaction costs are not paid separately to the firm by the client. 4.10.21 G (1) Under the general approach in MIFIDPRU 4.10.20R(2), a firm would ordinarily determine the gross value of an order by multiplying the market price of the instrument by the quantity of that instrument being purchased or sold. (2) However, MIFIDPRU 4.10.20R(5) permits (but does not require) a firm to calculate the value of an order by reference to the consideration paid or received by the client for the instruments (i.e. net of transaction costs), provided that such transaction costs are included in the gross value of the order and are not paid by the client to the firm separately. (3) For example, Firm A executes an order for a client to buy 100 shares. The total cost of the order, including transaction costs, is £100. The client receives shares worth £88, after the firm uses £12 to cover transaction costs. Under the standard approach in MIFIDPRU 4.10.20R(2), the firm may record the value of the order in its COH as £100 (i.e. the gross cost of the order). The firm may, for example, choose this approach for reasons of simplicity and administrative convenience. (4) Alternatively, in the example above, the firm may apply the approach under MIFIDPRU 4.10.20R(5) to record the value of

FCA 2021/XX Page 88 of 233 the order in its COH as £88 (i.e. net of transaction costs paid by the client in relation to the transaction). (5) However, a firm cannot rely on MIFIDPRU 4.10.20R(5) to reduce the value of an order by transaction costs that are paid separately by the client to the firm. For example, Firm B executes an order for a client to buy 100 shares. The total cost of the order is £100. The client additionally pays £12 to Firm B for transaction costs. In this case, the firm must record the net value of the order under MIFIDPRU 4.10.20R(5) in its COH as £100 (and not £88), as the transaction costs have been paid separately. 4.10.22 G For cash trades relating to exchange-traded options, the amount paid or received under MIFIDPRU 4.10.20R(2) is the premium paid for the option. [Note: article 20(2) of the IFR.] 4.10.23 R (1) By way of derogation from MIFIDPRU 4.10.20R(2), a firm that is receiving and transmitting an order that is a cash trade may apply the approach in this rule to determine the value of that order for the purposes of measuring COH. (2) Where a firm chooses to apply the approach in this rule, the value of the order shall be determined by reference to: (a) in the case of an order which specifies a fixed price or limit price at which the order should be executed, that price; or (b) in the case of an order which does not specify a price, the market price of the relevant instrument at the end of the day on which the order is transmitted by the firm. (3) A firm that chooses to apply the approach in this rule must do so either: (a) in relation to all cash trades that the firm is receiving and transmitting; or (b) only in relation to cash trades received and transmitted by the firm in respect of which the firm has not received timely information from the executing entity about the terms on which the order was executed. (4) A firm that applies the approach in this rule must document the basis in (3) on which it has chosen to do so. 4.10.24 G (1) The effect of MIFIDPRU 4.10.23R is to permit firms that are receiving and transmitting orders that are cash trades to choose

FCA 2021/XX Page 89 of 233 to determine the COH attributable to such orders using an alternative approach. Such firms may either: (a) apply the standard approach in MIFIDPRU 4.10.20R(2) and use the price at which the relevant order was ultimately executed, once this has been confirmed by the entity that executes the order; or (b) apply the alternative approach in MIFIDPRU 4.10.23R and use a deemed price that is determined by reference to the limit price of the order or, if there is no limit price, the end-of-day market price at the time at which the order is transmitted. (2) However, a firm must not use the alternative approach in MIFIDPRU 4.10.23R for the purposes of regulatory arbitrage to reduce its K-COH requirement. In order to prevent this, a firm may only choose to apply the alternative approach either: (a) in relation to all cash trades that the firm receives and transmits; or (b) in relation to cash trades that the firm receives and transmits where the firm does not receive timely information from the broker about the terms on which the order was ultimately executed. In this case, the firm would need to apply the standard approach in MIFIDPRU 4.10.20R(2) in relation to all other cash trades. This is designed to ensure that the firm can record daily information for COH in circumstances where information about the ultimate execution of transmitted orders might otherwise be missing or might be significantly delayed. 4.10.25 R (1) For the purposes of MIFIDPRU 4.10.20R(4), a firm must adjust the notional amount of an interest rate derivative by multiplying that notional amount by the duration. (2) For the purposes of (1), the duration shall be determined in accordance with the following formula: Duration = time to maturity (in years) / 10 [Note: article 20(2), second subparagraph of the IFR.] Interaction between K-COH requirement and K-AUM requirement 4.10.26 G MIFIDPRU 4.10.27G to MIFIDPRU 4.10.32G explain the circumstances in which a firm must include orders that arise in connection with portfolio management or investment advice in, or may exclude orders from, its measurement of COH.

FCA 2021/XX Page 90 of 233 4.10.27 G (1) The basic definition of COH includes: (a) orders that the firm executes when providing execution services for a client; and (b) orders that the firm has received from a client and transmitted to another entity for execution. (2) The rules and guidance in MIFIDPRU 4.10.28R to 4.10.32G explain how this definition applies in particular scenarios and certain exclusions or modifications that may apply. 4.10.28 R A firm may exclude from its calculation of COH any orders that the firm generates in the course of providing either of the following in relation to a portfolio, if the relevant portfolio is included in the firm’s calculation of its K-AUM requirement: (1) portfolio management; or (2) investment advice of an ongoing nature. 4.10.29 R (1) This rule applies where: (a) portfolio management has been delegated to a firm by a financial entity; and (b) as a result of the delegation in (a), the firm has excluded the delegated portfolio from its calculation in AUM in accordance with MIFIDPRU 4.7.9R. (2) Where this rule applies, the firm in (1) must include in its measurement of COH any orders that the firm executes in the course of providing portfolio management in relation to the delegated portfolio. (3) Where this rule applies, the firm in (1) is not required to include in its measurement of COH: (a) any orders that the firm passes back to the delegating financial entity for execution (whether or not such orders are executed by that financial entity itself or are transmitted by the financial entity to another entity for execution); or (b) any orders that the firm places with another entity for execution in the course of providing portfolio management in relation to the delegated portfolio. 4.10.30 G The exclusions in MIFIDPRU 4.7.9R, MIFIDPRU 4.10.28R and MIFIDPRU 4.10.29R(3) may result in a firm that carries on delegated portfolio management having no K-AUM requirement or K-COH

FCA 2021/XX Page 91 of 233 requirement in relation to all or part of a delegated portfolio. Where one or more exclusions apply, a firm should still assess as part of its ICARA process whether the activity of providing delegated portfolio management may give rise to potential material harms that may need to be covered by additional financial resources. Firms should refer to the rules and guidance in MIFIDPRU 7 for additional information on the ICARA process. 4.10.31 G (1) MIFIDPRU 4.10.29R does not apply where a financial entity (“A”) is carrying on portfolio management in relation to a portfolio and a MIFIDPRU investment firm (“B”) is providing investment advice of an ongoing nature to A in relation to that portfolio. In this situation, A has not delegated portfolio management to B. Instead, A is providing the service of portfolio management to A’s client, and B is providing the separate service of investment advice to A. If A is a MIFIDPRU investment firm, A will include the value of the relevant portfolio when calculating its K-AUM requirement. B will calculate its own K-AUM requirement in relation to the same portfolio. (2) Although MIFIDPRU 4.10.29R does not apply in this scenario, B may benefit from the separate exclusion in MIFIDPRU 4.10.28R(2) and therefore would not be required to include any orders that result from its ongoing investment advice within B’s calculation of COH, as B will be calculating a K-AUM requirement in relation to the relevant portfolio. 4.10.32 G When measuring COH for the purposes of MIFIDPRU 4.10.19R, a firm must include: (1) orders that the firm executes, or receives and transmits, as a result of providing investment advice (other than investment advice of an ongoing nature, if the firm calculates a K-AUM requirement in relation to such advice) to a client and subsequently receiving instructions from that client to transmit or execute the relevant order; and (2) orders that a firm receives from another firm (“X”), where: (a) X is providing investment advice (including investment advice of an ongoing nature) to a client; (b) as a result of the advice in (a), the client instructs X to place an order with the firm; and (c) the firm executes or receives and transmits the order received from X. [Note: article 20(2), fourth subparagraph of the IFR.]

FCA 2021/XX Page 92 of 233 Firms with less than 6 months data on COH 4.10.33 R (1) This rule applies where a firm has been handling client orders: (a) for less than 6 months; or (b) for 6 months or longer, but has been classified as a non￾SNI MIFIDPRU investment firm for less than 6 months. (2) For the purposes of its calculation of average COH under MIFIDPRU 4.10.19R, a firm must use: (a) historical data for the period in MIFIDPRU 4.10.19R as soon as such data becomes available; or (b) such other amounts as the FCA may specify to replace any missing data points, based on the business projections that the firm submitted to the FCA when obtaining permission to perform the relevant activities. [Note: article 20(3) of the IFR.] … … 4.13 K-CMG requirement … … 4.13.11 G The FCA may revoke a K-CMG permission in respect of a portfolio where one or more of the conditions in MIFIDPRU 4.13.9R ceases to be met in relation to that portfolio. The FCA would expect to review the appropriateness of any K-CMG permissions as part of any SREP it undertakes in relation to the firm in accordance with MIFIDPRU 7. … 4.15 K-DTF requirement 4.15.1 R (1) Subject to MIFIDPRU 4.15.10R, The the K-DTF requirement of a MIFIDPRU investment firm is equal to the sum of: (a)(1) 0.1% of DTF average DTF attributable to cash trades; and (b)(2) 0.01% of DTF average DTF attributable to derivatives trades. (2) A firm must calculate its DTF in accordance with the rules in this section.

FCA 2021/XX Page 93 of 233 4.15.2 G (1) The definition of DTF includes transactions that a firm enters into when dealing on own account or when executing client orders in the firm’s own name. (2) A firm that has permission to operate an organised trading facility may engage in: (a) matched principal trading in certain types of financial instruments with client consent, in accordance with MAR 5A.3.5R(1); and/or (b) dealing on own account in illiquid sovereign debt instruments in accordance with MAR 5A.3.5R(2). Where a firm engages in either activity, it must include those transactions in the calculation measurement of its DTF. (3) Except for the transactions in (2), DTF does not include orders that a firm handles in the course of operating an organised trading facility. However, DTF will include transactions entered into by a firm in its own name through an organised trading facility where the firm is not operating that organised trading facility. … … 4.15.4 R (1) A firm must calculate the amount of its DTF average DTF as by: (a)(1) the rolling average of the value of the total daily trading flow; taking the total DTF as measured throughout each business day in each of the previous 9 months; (b)(2) measured throughout each business day over the previous 9 months; excluding the daily values for the most recent 3 months; and (c)(3) excluding the most recent 3 months, calculating the arithmetic mean of the daily values for the remaining 6 months. (2) A firm must calculate the rolling average in (1) as the arithmetic mean of the daily values for the remaining 6 months, after the values in (1)(c) have been excluded. … 4.15.8 G When calculating measuring DTF for the purposes of MIFIDPRU 4.15.4R, a firm must: (1) include transactions executed by a firm in its own name either for itself or on behalf of a client; and

FCA 2021/XX Page 94 of 233 (2) exclude transactions executed by the firm for the purpose of providing portfolio management services on behalf of investment funds. 4.15.9 R (1) This rule applies where a firm has had a daily trading flow for less than 9 months. (2) For the purposes of its calculation of average DTF under MIFIDPRU 4.15.4R, a firm must use: (a) historical data for the relevant period as soon as such data becomes available; or (b) such other amounts as the FCA may specify to replace any missing data points, based on the business projections that the firm submitted to the FCA when obtaining permission to perform the relevant activities. Adjusted coefficient in stressed market conditions 4.15.10 R (1) This rule applies where a firm’s measurement of its DTF under MIFIDPRU 4.15.4R includes a proportion of daily trading flow that occurred on a trading segment of a trading venue to which stressed market conditions (as defined in article 6 of the Market Making RTS) applied. (2) Where this rule applies, a firm may apply the following adjusted coefficients: (a) for cash trades, a coefficient determined in accordance with (3) in substitution for the relevant coefficient in MIFIDPRU 4.15.1R(1); or (b) for derivatives trades, a coefficient determined in accordance with (4) in substitution for the relevant coefficient in MIFIDPRU 4.15.1R(2). (3) For cash trades, the adjusted coefficient must be determined by using the following formula: CadjCash = C * (DTFexcl/DTFincl) where: (a) CadjCash = the adjusted coefficient in (2)(a); (b) C = the original coefficient in MIFIDPRU 4.15.1R(1); (c) DTFexcl = the average DTF of cash trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any cash trade that occurred on a trading

FCA 2021/XX Page 95 of 233 segment of a trading venue between the time at which the trading venue determined that: (i) stressed market conditions began to apply; and (ii) stressed market conditions ceased to apply; (d) DTFincl = the average DTF of all cash trades calculated in accordance with MIFIDPRU 4.15.4R. (4) For derivative trades, the adjusted coefficient must be determined by using the following formula: CadjDer = C * (DTFexcl/DTFincl) where: (a) CadjDer = the adjusted coefficient in (2)(b); (b) C = the original coefficient in MIFIDPRU 4.15.1R(2); (c) DTFexcl = the average DTF of derivative trades calculated in accordance with MIFIDPRU 4.15.4R, excluding the value of any derivative trade that occurred on a trading segment of a trading venue between the time at which the trading venue determined that: (i) stressed market conditions began to apply; and (ii) stressed market conditions ceased to apply; (d) DTFincl = the average DTF of all derivative trades calculated in accordance with MIFIDPRU 4.15.4R. 4.15.11 G (1) MIFIDPRU 4.15.10R allows (but does not require) a firm to apply a reduced coefficient for the purposes of determining its K-DTF requirement where part of the firm’s average DTF for the relevant period is attributable to transactions that took place on a segment of a trading venue to which stressed market conditions applied. The relevant coefficient must be calculated separately for cash trades and derivatives trades. (2) MIFIDPRU 4.15.10R allows a firm to substitute a reduced coefficient that applies to the firm’s average DTF for the relevant calculation period. The size of the reduction is proportional to the value of trades that were placed on a segment of a trading venue during stressed market conditions within the calculation period, relative to the overall value of trades entered into by the firm during that period.

FCA 2021/XX Page 96 of 233 Insert the following new chapters, MIFIDPRU 6 and 7, after MIFIDPRU 5 (Concentration risk). The text is not underlined. 4.15.12 G (1) The following is an example of how the adjusted coefficient in MIFIDPRU 4.15.10R applies. (2) A firm executes total cash trades in its own name worth £9,600m during the 6-month calculation period for determining average DTF in MIFIDPRU 4.15.4R(3). That 6-month period includes 128 business days. (3) The total £9,600m of cash trades includes £375m of cash trades that were executed on trading venues during stressed market conditions (as defined in article 6 of the Market Making RTS). (4) In this example: DTFincl = £9,600m / 128 days = £75m DTFexcl = (£9,600m - £375m) / 128 days = £9,225m / 128 days = £72.07m C = 0.1% CadjCash = 0.1% x (72.07 / 75) = 0.1% x 0.961 = 0.0961% (5) To calculate its K-DTF requirement for this calculation period, the firm would therefore multiply the full amount of its average DTF for the period by the adjusted coefficient (CadjCash). Therefore: K-DTF requirement for cash trades = £75m x 0.0961% = £72,075 … Application under MIFIDPRU 4.5.9R – permission to rebase fixed overhead requirement 4 Annex 10 R [Editor’s note: the form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] … 6 Basic liquid assets requirement 6.1 Application and purpose

FCA 2021/XX Page 97 of 233 Application 6.1.1 R This chapter applies to: (1) a MIFIDPRU investment firm; and (2) a UK parent entity that is required by MIFIDPRU 2.5.11R to comply with MIFIDPRU 6 on the basis of its consolidated situation. 6.1.2 R Where this chapter applies on the basis of the consolidated situation of the UK parent entity, any references to a “firm” or “MIFIDPRU investment firm” in this chapter are to be interpreted as references to the hypothetical single MIFIDPRU investment firm created under the consolidated situation. 6.1.3 G MIFIDPRU 2.5.47R and 2.5.48G contain additional rules and guidance on how a UK parent entity should apply the requirements in this chapter on a consolidated basis. A UK parent entity may apply for an exemption from the application of this chapter on a consolidated basis under MIFIDPRU 2.5.19R. Purpose and interpretation 6.1.4 G This chapter contains: (1) a basic liquid assets requirement for MIFIDPRU investment firms (MIFIDPRU 6.2); and (2) rules and guidance on which assets count as core liquid assets for the purposes of the basic liquid assets requirement (MIFIDPRU 6.3). 6.1.5 G (1) Where this chapter applies to a MIFIDPRU investment firm on a solo basis, the firm must be able to comply with this chapter relying only on the core liquid assets it holds itself. (2) The FCA does, however, recognise that there are circumstances in which it may be appropriate for a firm to rely on liquidity support provided by other entities within its group. Therefore, a firm that is subject to prudential consolidation may apply for an exemption from the application of this chapter on an individual basis under MIFIDPRU 2.3.2R(1). 6.1.6 G Requirements relating to a MIFIDPRU investment firm’s systems and controls for the identification, monitoring and management of material potential harms that arise out of liquidity risk are contained in MIFIDPRU 7. 6.1.7 G The basic liquid assets requirement in this chapter is based on a proportion of a firm’s fixed overheads requirement and any guarantees provided to clients. A firm may need to hold more liquid assets to comply with its liquid assets threshold requirement under MIFIDPRU 7.

FCA 2021/XX Page 98 of 233 6.2 Basic liquid assets requirement 6.2.1 R A firm must hold an amount of core liquid assets equal to the sum of: (1) one third of the amount of its fixed overhead requirement; and (2) 1.6 % of the total amount of any guarantees provided to clients. [Note: article 43(1) and 45 of the IFR.] 6.2.2 R Where a firm calculates a total amount for guarantees under MIFIDPRU 6.2.1R(2), it must: (1) calculate the total value of guarantees that the firm has outstanding at the end of each business day; or (2) calculate an average value for the guarantees that the firm has had outstanding over an appropriate time period, which must be updated at regular, appropriate intervals. 6.2.3 G (1) MIFIDPRU 6.2.2R(2) is intended to allow a firm to smooth out its liquidity requirement for guarantees, where the value of its outstanding guarantees fluctuates on a daily basis. (2) The time period for calculating and updating this amount is likely to be appropriate if it produces an average value that is representative of the overall liquidity risk arising out of the provision of guarantees to clients. 6.2.4 G To illustrate the approach in MIFIDPRU 6.2.2R(2): (1) a firm that executes orders on behalf of a client may guarantee the settlement of any resulting transactions between the client and a third party; (2) in this case, it may be appropriate for the firm to use the principles for calculating average COH to calculate an average value for the guarantees that the firm has had outstanding over an appropriate time period; (3) average COH is calculated as the arithmetic mean of historic daily COH values. A firm could use the arithmetic mean of historic daily values for outstanding guarantees to calculate its amount for guarantees; (4) average COH is calculated by reference to the historic three month period beginning six months ago (i.e. excluding the three most recent months). A firm could calculate its amount for guarantees by reference to the same time period, if this produces an average value for guarantees that is representative of the overall liquidity risk in these guarantees; and

FCA 2021/XX Page 99 of 233 (5) a firm could update this calculation monthly, in line with the requirement to update average COH in MIFIDPRU 4, if this produces a value that is representative of the overall liquidity risk. 6.3 Core liquid assets 6.3.1 R Subject to MIFIDPRU 6.3.3R to 6.3.5R, a core liquid asset means any of the following, when denominated in pound sterling: (1) coins and banknotes; (2) short-term deposits at a UK-authorised credit institution; (3) assets representing claims on or guaranteed by the UK government or the Bank of England; (4) units or shares in a short-term MMF; (5) units or shares in a third country fund that is comparable to a short￾term MMF; and (6) trade receivables, if the conditions in MIFIDPRU 6.3.3R are met. 6.3.2 G When assessing whether a third country fund is comparable to a short-term MMF, a firm should consider factors such as: (1) whether the restrictions on instruments eligible for inclusion in the fund are comparable to the restrictions on instruments in article 10(1) of the Money Market Funds Regulation; and (2) whether the fund is subject to requirements concerning portfolio diversification and risk management which are comparable to the requirements applicable to short-term MMFs in the Money Market Funds Regulation. 6.3.3 R A firm may treat trade receivables as core liquid assets if: (1) the firm is: (a) an SNI MIFIDPRU investment firm; or (b) a MIFIDPRU investment firm that does not have permission to carry on: (i) dealing on own account; or (ii) underwriting of financial instruments and/or placing of financial instruments on a firm commitment basis; (2) they are receivable within 30 days;

FCA 2021/XX Page 100 of 233 (3) they account for no more than one third of the requirement based upon the fixed overheads requirement in MIFIDPRU 6.2.1R(1); (4) they are not used to meet the requirement for guarantees in MIFIDPRU 6.2.1R(2); and (5) they are subject to a minimum haircut of 50%. [Note: article 43(3) of the IFR.] 6.3.4 R (1) If a firm’s relevant expenditure or guarantees are incurred in a currency other than pound sterling, the firm may also treat the following assets as liquid assets, when denominated in that currency: (a) coins and banknotes; (b) short-term deposits at a credit institution; (c) assets representing claims on or guaranteed by a central bank or government in a third country; (d) units or shares in a short-term MMF; (e) units or shares in a third country fund that is comparable to a short-term MMF; and (f) trade receivables, if the conditions in MIFIDPRU 6.3.3R are met. (2) The assets in (1) must not account for more than the proportion of fixed overheads or guarantees that the firm incurs in that currency. (3) This rule is subject to MIFIDPRU 6.3.5R. 6.3.5 R A firm must not treat any of the following as a core liquid asset: (1) any asset that belongs to a client; and (2) any other asset that is encumbered. 6.3.6 G (1) For the purposes of MIFIDPRU 6.3.5R(1), an asset may belong to a client whether or not the asset is held in the firm’s own name. Examples of assets belonging to a client include money or other assets held under the FCA’s client asset rules. (2) For the purposes of MIFIDPRU 6.3.5R(2), an asset may be encumbered if it is pledged as security or collateral, or subject to some other legal restriction (for example, due to regulatory or contractual requirements) which affects the firm’s ability to liquidate, sell, transfer, or assign the asset.

FCA 2021/XX Page 101 of 233 Section Summary of content MIFIDPRU 7.2 General requirements relating to a firm’s governance arrangements MIFIDPRU 7.3 Requirements relating to risk, remuneration and nomination committees MIFIDPRU 7.4 The overall financial adequacy rule and a firm’s baseline obligations in relation to the ICARA process MIFIDPRU 7.5 The requirements of the ICARA process relating to capital and liquidity planning, stress testing and wind-down planning MIFIDPRU 7.6 Rules and guidance explaining how a firm should assess and monitor the adequacy of its own funds MIFIDPRU 7.7 Rules and guidance explaining how a firm should assess and monitor the adequacy of its liquid assets MIFIDPRU 7.8 Requirements relating to the periodic review of the ICARA process and record keeping requirements MIFIDPRU 7.9 Requirements for firms to monitor group risk and rules explaining when an investment firm group may operate a group-level ICARA process 7 Governance and risk management 7.1 Application 7.1.1 G (1) MIFIDPRU 7 is relevant to the following: (a) a MIFIDPRU investment firm; (b) a UK parent entity of an investment firm group to which consolidation applies under MIFIDPRU 2.5; and (c) a parent undertaking that operates a group ICARA process in accordance with MIFIDPRU 7.9.5R. (2) MIFIDPRU 7.1.3R explains the detailed application of the different sections of MIFIDPRU 7. 7.1.2 G The following table summarises the content of MIFIDPRU 7:

FCA 2021/XX Page 102 of 233 MIFIDPRU 7.10 Guidance explaining the FCA’s general approach to the SREP MIFIDPRU 7 Annex 1G General guidance on assessing potential harms that is potentially relevant to all MIFIDPRU investment firms MIFIDPRU 7 Annex 2G Additional guidance on assessing potential harms that is relevant for MIFIDPRU investment firms dealing on own account and firms with significant investments on their balance sheet MIFIDPRU 7 Annex 3R to 6R Notification forms MIFIDPRU 7 Annex 7G Table mapping the rules in MIFIDPRU 7 about the ICARA process to their associated guidance provisions Section of MIFIDPRU 7 Application to SNI MIFIDPRU investment firms Application to non-SNI MIFIDPRU investment firms Application at the level of an investment firm group MIFIDPRU 7.2 (Senior management and systems and controls) Applies to the UK parent entity of an investment firm group to which consolidation applies under MIFIDPRU 2.5 MIFIDPRU 7.3 (Risk, remuneration and nomination committees) Does not apply Applies if the firm does not qualify for the exclusion in MIFIDPRU 7.1.4R Does not apply MIFIDPRU 7.4 (Overall financial adequacy rule and baseline Applies if the investment firm group is operating a group ICARA process 7.1.3 R MIFIDPRU 7 applies as specified in the following table:

FCA 2021/XX Page 103 of 233 ICARA obligations) MIFIDPRU 7.5 (Capital and liquidity planning, stress testing and wind-down planning) Applies if the investment firm group is operating a group ICARA process MIFIDPRU 7.6 (Assessing adequacy of own funds) Applies if the investment firm group is operating a group ICARA process MIFIDPRU 7.7 (Assessing adequacy of liquid assets) Applies if the investment firm group is operating a group ICARA process MIFIDPRU 7.8 (Periodic review of the ICARA process and record keeping) Applies if the investment firm group is operating a group ICARA process MIFIDPRU 7.9 (Group risks and the group ICARA process) Applies if the investment firm group is operating a group ICARA process MIFIDPRU 7.10 (The FCA’s general approach to the SREP) Applies as guidance Applies as guidance Applies as guidance 7.1.4 R (1) MIFIDPRU 7.3 (Risk, remuneration and nomination committees) does not apply to a non-SNI MIFIDPRU investment firm:

FCA 2021/XX Page 104 of 233 (a) where the value of the firm’s on- and off-balance sheet assets over the preceding 4-year period is a rolling average of £100 million or less; or (b) where: (i) the value of the firm’s on- and off-balance sheet assets over the preceding 4-year period is a rolling average of £300 million or less; and (ii) the conditions in (2) are satisfied. (2) The conditions referred to in (1)(b)(ii) are: (a) the size of the firm’s on- and off-balance sheet trading book business is equal to or less than £150 million; and (b) the size of the firm’s on- and off-balance sheet derivatives business is equal to or less than £100 million. (3) For the purposes of paragraph (1), paragraph (4) applies where a non-SNI MIFIDPRU investment firm does not have data covering the 4-year periods referred to in that paragraph. (4) Where this rule applies, a non-SNI MIFIDPRU investment firm must calculate the rolling averages referred to in paragraph (3) over the period for which they have data. 7.1.5 G For the purposes of MIFIDPRU 7.1.4R(3), the FCA expects non-SNI MIFIDPRU investment firms to have insufficient data for a period only where they did not carry on any MiFID business during that period. 7.1.6 R (1) The amounts referred to in MIFIDPRU 7.1.4R must be calculated on an individual basis. (2) The value of the on- and off-balance sheet assets in MIFIDPRU 7.1.4R(1)(a) and (b) must be the arithmetic mean of the assets over the preceding 4 years. 7.1.7 R (1) When calculating the amounts referred to in MIFIDPRU 7.1.4R, firms should use their total gross assets, total gross trading book assets and total gross market value of their derivatives business. (2) Any amounts in foreign currencies should be converted into sterling using the relevant conversion rate. (3) A firm must determine the conversion rate in (2) by reference to an appropriate market rate and should record which rate was chosen.

FCA 2021/XX Page 105 of 233 7.1.8 G The FCA considers that an example of an appropriate market rate for the purposes of MIFIDPRU 7.1.7R(3) would be the relevant daily spot exchange rate against sterling published by the Bank of England. 7.1.9 R (1) This rule applies to a non-SNI MIFIDPRU investment firm that does not fall within either MIFIDPRU 7.1.4R(1)(a) or (b) but subsequently satisfies the conditions to do so. (2) MIFIDPRU 7.3 (Risk, remuneration and nomination committees) ceases to apply to the firm in (1) if: (a) the firm has met the necessary conditions to fall within either MIFIDPRU 7.1.4R(1)(a) or (b) for a continuous period of at least 6 months (or such longer period as may have elapsed before the firm submits the notification in (b)); and (b) the firm has notified the FCA that it has met the conditions in (a). (3) The notification in (2)(b) must be submitted via the online notification and application system using the form in MIFIDPRU 7Annex 3R. 7.1.10 G The effect of MIFIDPRU 7.1.9R(2)(a) is that firms may move between meeting the conditions in MIFIDPRU 7.1.4R(3)(a) and (b) during the 6- month period. 7.1.11 R Where a non-SNI MIFIDPRU investment firm previously met the conditions necessary for it to fall within MIFIDPRU 7.1.4R(1)(a) or (b) but no longer does so, it must comply with the provisions in MIFIDPRU 7.3 within 6 months from the date on which the firm ceased to meet the conditions. 7.1.12 R (1) Where a non-SNI MIFIDPRU investment firm ceases to meet the conditions necessary for it to fall within MIFIDPRU 7.1.4R(1)(a) or (b), it must promptly notify the FCA. (2) The notification in (1) must be submitted via the online notification and application system using the form in MIFIDPRU 7 Annex 3R. 7.1.13 G Where a firm ceases to meet the conditions necessary for it to fall within MIFIDPRU 7.1.4R(1)(a) or (b), but subsequently meets the conditions again within a period of 3 months, the firm will still be subject to MIFIDPRU 7.3 6 months after the date on which it first ceased to meet the conditions. The firm will only cease to be subject to MIFIDPRU 7.3 where it meets the conditions in MIFIDPRU 7.1.9R. 7.2 Senior management and systems and controls Internal governance

FCA 2021/XX Page 106 of 233 7.2.1 R (1) A MIFIDPRU investment firm must have robust governance arrangements, including: (a) a clear organisational structure with well defined, transparent and consistent lines of responsibility; (b) effective processes to identify, manage, monitor and report the risks the firm is or might be exposed to, or pose or might pose to others; and (c) adequate internal control mechanisms, including sound administration and accounting procedures. (2) The arrangements referred to in (1) must: (a) be appropriate and proportionate to the nature, scale and complexity of the risks inherent in the business model and the activities of the firm; and (b) be compatible with the requirements in the FCA Handbook relating to risk management and internal governance, for example those in MIFIDPRU 7 and SYSC, that apply to the firm. 7.2.2 G When establishing and maintaining the arrangements referred to in MIFIDPRU 7.2.1R(1), a firm should consider at least the following: (1) the requirements that apply to the firm under MIFIDPRU 7 and SYSC 19G (MIFIDPRU Remuneration Code); (2) the legal structure of the firm, including its ownership and funding structure; (3) whether the firm is part of a group; (4) the type of activities for which the firm is authorised, including the complexity and volume of those activities; (5) the business model and strategy of the firm, including its risk strategy, risk appetite and risk profile; (6) the types of client the firm has; (7) the outsourced functions and distribution channels of the firm; and (8) the firm’s existing IT systems, including continuity systems. 7.3 Risk, remuneration and nomination committees Risk committee

FCA 2021/XX Page 107 of 233 7.3.1 R (1) A non-SNI MIFIDPRU investment firm to which this rule applies must establish a risk committee. (2) Subject to (3), a firm must ensure that: (a) at least fifty percent of the members of the risk committee are members of the management body who do not perform any executive function in the firm; and (b) the chair of the risk committee is a member of the management body who does not perform any executive function in the firm. (3) The requirements in (2) do not apply to a firm that, solely because of its legal structure, cannot have members of the management body who do not perform any executive function in the firm. (4) Members of the risk committee must have the appropriate knowledge, skills and expertise to fully understand, manage and monitor the risk strategy and the risk appetite of the firm. (5) The risk committee must advise the management body on the firm's overall current and future risk appetite and strategy and assist the management body in overseeing the implementation of that strategy by senior management. (6) Notwithstanding the role of the risk committee, the management body of a firm has overall responsibility for the firm’s risk strategies and policies. 7.3.2 G (1) MIFIDPRU 7.3.1R(2) only applies to firms that are required to establish a risk committee under MIFIDPRU 7.3.1R(1). (2) The chair may be included for the purposes of calculating the fifty percent referred to in MIFIDPRU 7.3.1R(2)(a). (3) Where a firm has established a risk committee, the FCA expects that its responsibilities will typically include: (a) providing advice to the firm’s management body on risk strategy, including the oversight of current risk exposures of the firm, with particular, but not exclusive, emphasis on prudential risks; (b) developing proposals for consideration by the management body in respect of overall risk appetite and tolerance, as well as the metrics to be used to monitor the firm’s risk management performance; (c) oversight and challenge of the design and execution of stress and scenario testing;

FCA 2021/XX Page 108 of 233 (d) oversight and challenge of the day-to-day risk management and the executive’s oversight arrangements; (e) oversight and challenge of due diligence on risk issues relating to material transactions and strategic proposals that are subject to approval by the management body; (f) providing advice to the firm’s remuneration committee, as appropriate, in relation to the development, implementation and review of remuneration policies and practices that are consistent with, and promote, effective risk management; (g) providing advice, oversight and challenge necessary to embed and maintain a supportive risk culture throughout the firm. Remuneration committee 7.3.3 R (1) A non-SNI MIFIDPRU investment firm to which this rule applies must establish a remuneration committee. (2) Subject to (3), a firm must ensure that: (a) at least fifty percent of the members of the remuneration committee are members of the management body who do not perform any executive function in the firm; and (b) the chair of the remuneration committee is a member of the management body who does not perform any executive function in the firm. (3) The requirements in (2) do not apply to a firm that, solely because of its legal structure, cannot have members of the management body who do not perform any executive function in the firm. (4) A firm must ensure that the remuneration committee is constituted in a way that enables it to exercise competent and independent judgment on remuneration policies and practices and the incentives created for managing risk, capital and liquidity. (5) The remuneration committee must be responsible for preparing decisions regarding remuneration, including decisions which have implications for the risk and risk management of the firm and which are to be taken by the management body. (6) When preparing such decisions, the remuneration committee must take into account the public interest and the long-term interests of shareholders, investors and other stakeholders in the firm.

FCA 2021/XX Page 109 of 233 7.3.4 G (1) MIFIDPRU 7.3.3R(2) only applies to firms that are required to establish a remuneration committee under MIFIDPRU 7.3.3R(1). (2) The chair may be included for the purposes of calculating the fifty percent referred to in MIFIDPRU 7.3.3R(2)(a). Nomination committee 7.3.5 R (1) A non-SNI MIFIDPRU investment firm to which this rule applies must establish a nomination committee. (2) Subject to (3), a firm must ensure that: (a) at least fifty percent of the members of the nomination committee are members of the management body who do not perform any executive function in the firm; and (b) the chair of the nomination committee is a member of the management body who does not perform any executive function in the firm. (3) The requirements in (2) do not apply to a firm that, solely because of its legal structure, cannot have members of the management body who do not perform any executive function in the firm. (4) A firm must ensure that: (a) the nomination committee is able to use any forms of resources the nomination committee deems appropriate, including external advice; and (b) the nomination committee receives appropriate funding. 7.3.6 G (1) MIFIDPRU 7.3.5R(2) only applies to firms that are required to establish a nomination committee under MIFIDPRU 7.3.5R(1). (2) The chair may be included for the purposes of calculating the fifty percent referred to in MIFIDPRU 7.3.5R(2)(a). Establishing committees at group level 7.3.7 G (1) A firm may apply to the FCA for a modification under section 138A of the Act to permit the firm to establish a risk committee, remuneration committee or nomination committee at group level instead of complying with the requirement on an individual basis. (2) The FCA may grant a modification under section 138A of the Act for these purposes only where it is satisfied that: (a) compliance by the firm with the requirement to establish a committee on an individual basis would be unduly

FCA 2021/XX Page 110 of 233 burdensome or would not achieve the purpose for which the rules were made; and (b) granting the modification would not adversely affect the advancement of any of the FCA’s objectives. (3) To be satisfied that granting the modification would not affect the advancement of any of the FCA’s objectives under (2)(b), the FCA would normally expect the firm to demonstrate that the committee established at group level: (a) meets the composition requirements in MIFIDPRU 7.3.1R(2), MIFIDPRU 7.3.3R(2) or MIFIDPRU 7.3.5R(2), as applicable; and (b) has members with the appropriate knowledge, skills and expertise in relation to the firm subject to the requirement to establish a committee. 7.4 Internal capital adequacy and risk assessment (ICARA) process: overview and baseline obligations 7.4.1 R This section applies to a MIFIDPRU investment firm. Purpose 7.4.2 G MIFIDPRU 7.4 to MIFIDPRU 7.9 contain rules and guidance which supplement the overarching requirements for MIFIDPRU investment firms under: (1) the appropriate resources threshold condition in Schedule 6 to the Act (as explained in COND 2.4) under which a firm must have appropriate resources in relation to the regulated activities that it carries on; and (2) Principle 4 (Financial prudence) under which a firm must maintain adequate financial resources. 7.4.3 G (1) The overall purpose of the rules in MIFIDPRU 7.4 to MIFIDPRU 7.9, taken together with the other requirements in MIFIDPRU, is to ensure that a MIFIDPRU investment firm: (a) has appropriate systems and controls in place to identify, monitor and, where proportionate, reduce all potential material harms that may result from the ongoing operation of its business or winding down its business; and (b) holds financial resources that are adequate for the business it undertakes.

FCA 2021/XX Page 111 of 233 (2) The requirement for adequate financial resources is designed to achieve two key outcomes for MIFIDPRU investment firms: (a) to enable a firm to remain financially viable throughout the economic cycle, with the ability to address any potential material harms that may result from its ongoing activities (including both regulated activities and unregulated activities); and (b) to enable the firm to conduct an orderly wind-down while minimising harm to consumers or to other market participants, and without threatening the integrity of the wider UK financial system. (3) The rules and guidance in MIFIDPRU 7.4 to MIFIDPRU 7.9 build upon the FCA’s general approach to assessing the adequacy of financial resources explained in Finalised Guidance FG20/1. Firms should also refer to that guidance when considering their obligations under those sections of MIFIDPRU. 7.4.4 G The FCA recognises that: (1) it will not be possible for the FCA or firms to eliminate all potential risks and sources of harm; (2) there is a vast range of harms that might theoretically materialise, but the FCA and firms should focus on material harms, adopting a proportionate and risk-based approach to each firm’s business and operating model; and (3) some firms may still fail, but the FCA and firms should aim to ensure that any wind-down of those firms occurs in an orderly manner, minimising the impact on consumers and the wider market. Proportionality and application to different business models 7.4.5 G Although all MIFIDPRU investment firms are subject to the appropriate resources threshold condition and Principle 4, the practical steps that a firm must take to meet these requirements will vary according to the firm’s business model and operating model. Therefore, the FCA expects that a large or complex firm will generally need to take a more detailed approach to the monitoring and management of a wider range of potential harms than a smaller firm carrying on simpler activities. 7.4.6 G (1) MIFIDPRU 7.4 to MIFIDPRU 7.8 contain a set of core requirements that the FCA expects every MIFIDPRU investment firm to incorporate into its ICARA process. This does not mean that the manner in which each firm implements these core requirements will be identical. When considering the appropriate way to satisfy

FCA 2021/XX Page 112 of 233 these core requirements, a firm should focus on the potential material harms that may arise: (a) from the ongoing operation of its business; and (b) during a wind-down of its business. (2) MIFIDPRU 7.5 to MIFIDPRU 7.8 also contain some additional requirements that the FCA would expect larger or more complex MIFIDPRU investment firms to incorporate into their ICARA processes. Again, the precise manner in which these additional requirements are implemented must take into account the firm’s business model and operating model and its potential to cause material harms. Overall financial adequacy rule 7.4.7 R (1) A firm must, at all times, hold own funds and liquid assets which are adequate, both as to their amount and their quality, to ensure that: (a) the firm is able to remain financially viable throughout the economic cycle, with the ability to address any material potential harm that may result from its ongoing activities; and (b) the firm’s business can be wound down in an orderly manner, minimising harm to consumers or to other market participants. (2) The requirement in (1) is known as the overall financial adequacy rule. 7.4.8 G (1) The overall financial adequacy rule establishes the standard that the FCA will apply to determine if a MIFIDPRU investment firm has adequate financial resources. The amount and quality of own funds and liquid assets that each firm must hold will vary according to its business model and operating model, the environment in which it operates and the nature of its internal systems and controls. (2) The remainder of this section explains the basic requirements of the ICARA process. The ICARA process is the collective term for the internal systems and controls that a firm must operate to identify and manage potential material harms that may arise from the operation of its business, and to ensure that its operations can be wound down in an orderly manner. (3) The firm should use the ICARA process to identify whether it is complying with the overall financial adequacy rule. The focus of the ICARA process is on identifying and managing risks that may result in material harms. Depending on the nature of the potential harms identified, it may be that the only realistic option to manage

FCA 2021/XX Page 113 of 233 them and to comply with the overall financial adequacy rule is to hold additional own funds or additional liquid assets above the firm’s own funds requirement or basic liquid assets requirement respectively. However, in other cases, the FCA recognises that there may be more appropriate or effective ways to manage the potential harms. MIFIDPRU 7.4.16G contains further guidance on reducing the risk of material potential harms. (4) MIFIDPRU 7.6 contains specific rules and guidance about how a firm should use the ICARA process to assess the own funds that the firm requires to comply with the overall financial adequacy rule. (5) MIFIDPRU 7.7 contains specific rules and guidance about how a firm should use the ICARA process to assess the liquid assets that the firm requires to comply with the overall financial adequacy rule. (6) MIFIDPRU 7.9 contains guidance on how the FCA will normally conduct a SREP on a firm’s ICARA process or may conduct a thematic review of a sector in which multiple firms are active. Where the FCA considers that the firm’s ICARA process has not adequately identified and managed the risks of material harm occurring, the FCA may require the firm to take corrective action. In appropriate cases, this may include requiring the firm to hold additional own funds or liquid assets to ensure that the firm is complying with the overall financial adequacy rule. The FCA may take supervisory action in connection with the prudential requirements of a MIFIDPRU investment firm outside the context of a SREP where it considers it necessary or desirable to do so. Where the FCA has conducted a sectoral review, it may impose additional requirements on some or all firms that are active in the relevant sector. ICARA process: baseline obligations 7.4.9 R (1) A firm must have in place appropriate systems and controls to identify, monitor and, if proportionate, reduce all material potential harms: (a) that the ongoing operation of the firm’s business might cause to: (i) the firm’s clients and counterparties; (ii) the markets in which the firm operates; and (iii) the firm itself; and (b) that might result from winding down the firm’s business, in order to ensure that the firm can be wound down in an orderly manner.

FCA 2021/XX Page 114 of 233 (2) If any material potential harms remain after a firm has implemented the systems and controls in (1), the firm must assess whether to: (a) hold additional own funds to address those harms in accordance with MIFIDPRU 7.6.2R; and (b) hold additional liquid assets to address those harms in accordance with MIFIDPRU 7.7.2R. (3) The requirements in this rule apply to a firm’s entire business, including: (a) all regulated activities, irrespective of whether they constitute MiFID business; and (b) any unregulated activities. (4) The systems, controls and procedures operated by a firm to comply with the requirements in this rule are known as the ICARA process. [Note: articles 24(1) and 29(1) of the IFD.] 7.4.10 R A firm’s ICARA process must be proportionate to the nature, scale and complexity of the business carried on by the firm. [Note: article 24(2), first paragraph of the IFD.] 7.4.11 R A firm must ensure that its ICARA process complies with the applicable requirements in MIFIDPRU 7.4 to MIFIDPRU 7.8 in a consistent and coherent manner. 7.4.12 G (1) MIFIDPRU 7.4.11R requires a firm to ensure that the inputs to, analyses applied by, and conclusions arising from, its ICARA process are properly linked and reflect a consistent and coherent analysis of the firm’s business and operating model. (2) Without prejudice to the generality of MIFIDPRU 7.4.11R, the FCA would consider the following to be examples of consistency and coherence required by the ICARA process: (a) the potential material harms that the firm identifies under MIFIDPRU 7.4.13R are consistent with the firm’s articulation of its business model and strategy under MIFIDPRU 7.5.2R(1) and with the firm’s stated risk appetite under MIFIDPRU 7.5.2R(2); (b) the firm’s analysis under MIFIDPRU 7.5.2R(4) of the own funds and liquid assets that are necessary to comply with the overall financial adequacy rule is consistent with:

FCA 2021/XX Page 115 of 233 (i) the potential impact of the potential material harms that the firm identifies under MIFIDPRU 7.4.13R; (ii) the firm’s projections of its future requirements under MIFIDPRU 7.5.2R(4); and (iii) the impact of the stressed scenarios that the firm has identified under MIFIDPRU 7.5.2R(5); (c) the potential recovery actions specified by the firm under MIFIDPRU 7.5.5R(2) are consistent with the firm’s projections of its future requirements under MIFIDPRU 7.5.2R(4) and the potential stressed scenarios that the firm has identified under MIFIDPRU 7.5.2R(5); (d) the firm’s wind-down planning under MIFIDPRU 7.5.7R is consistent with the levels of own funds and liquid assets that the firm has assessed would be necessary to wind￾down the firm for the purposes of the overall financial adequacy rule and with the firm’s assessment of the potential harms that might result from winding down its business under MIFIDPRU 7.4.13R; and (e) the firms’ wind-down planning is consistent with the potential recovery actions specified by the firm under MIFIDPRU 7.5.5R(2) and the circumstances in which the firm has concluded that no further recovery actions would be feasible or desirable. ICARA process: identifying harms 7.4.13 R As part of its ICARA process, a firm must assess its business model and identify all material harms that could result from: (1) the ongoing operation of the firm’s business; and (2) the winding-down of the firm’s business. 7.4.14 G When assessing potential material harms for the purpose of MIFIDPRU 7.4.13R, the FCA considers that the following non-exhaustive considerations will be relevant: (1) the level of detail required in the assessment is likely to vary depending on the complexity of the business and operating model. More complex business and operating models are generally likely to involve a wider range of potential material harms and so will generally require a more detailed assessment; (2) the obligation under MIFIDPRU 7.4.13R is to identify all material harms that could result from the firm’s business, even if those harms can be appropriately mitigated. It is important that a firm

FCA 2021/XX Page 116 of 233 starts by identifying all potential material harms that could arise from its business and operating model. The issue of how the identified harms can be mitigated should be considered separately afterwards, including assessing under MIFIDPRU 7.6 and 7.7 whether the firm should hold additional own funds and liquid assets; (3) the potential for harm may evolve throughout the course of an economic cycle. Therefore, the assessment should consider how the risk of harm may develop in the future, rather than simply performing a static assessment based on current economic circumstances; (4) risks to the firm itself may result in an increased risk of harm to the firm’s clients or counterparties and therefore should form part of the assessment. For example, if the firm is affected by a significant disruption or suffers a significant loss, this may prevent the firm from providing important services to clients or from being able to meet its liabilities to counterparties. Significant and unexpected financial losses sustained by a firm may also decrease the financial resources available to the firm to address other potential harms and may increase the risk of disorderly wind-down and sudden disruption of services to the firm’s clients; and (5) firms should refer to the guidance in Finalised Guidance FG20/1 on “Identifying and assessing the risk of harm” when assessing the impact of potential harms. 7.4.15 G (1) MIFIDPRU 7 Annex 1 contains additional guidance on identifying potential material harms that the FCA considers will generally be relevant to the business models of most firms. (2) MIFIDPRU 7 Annex 2 contains additional guidance on identifying potential material harms that the FCA considers is likely to be relevant to firms that deal on own account or hold significant investments on their balance sheets. This guidance is intended to apply in addition to the general guidance in MIFIDPRU 7 Annex 1. (3) The FCA may issue further guidance or publish additional information in the future to reflect its observations of how firms are implementing the ICARA process or to take into account developments in relation to particular products or sectors. Firms should have regard to any additional guidance or information that the FCA may publish when applying the requirements in this section. ICARA process: risk mitigation 7.4.16 G (1) The ICARA process is an internal risk management process that a MIFIDPRU investment firm must operate on an ongoing basis. As part of that process, the FCA expects that a firm will consider

FCA 2021/XX Page 117 of 233 whether the risk of material potential harms can be reduced through proportionate measures (other than holding additional financial resources) and, if so, whether it is appropriate to implement such measures. The nature of any potential measures will vary depending on the firm’s business and operating model. Examples may include implementing additional internal systems and controls, strengthening governance and oversight processes or changing the manner in which the firm conducts certain business. A firm will need to form a judgement about what is appropriate and proportionate in its particular circumstances. That judgement will be informed by the firm’s risk appetite. (2) A firm will need to assess whether it should hold additional own funds or additional liquid assets to mitigate any material potential harms that it has identified. This may be the case where the firm cannot identify other appropriate, proportionate measures to mitigate harms, or where it has applied such measures, but a residual risk of material harm remains. Any such assessment must be realistic and based on severe but plausible assumptions. 7.5 ICARA process: capital and liquidity planning, stress testing, wind-down planning and recovery planning 7.5.1 R This section applies to a MIFIDPRU investment firm. Business model assessment and capital and liquidity planning 7.5.2 R As part of its ICARA process, a firm must: (1) have a clearly articulated business model and strategy; (2) have a clearly articulated risk appetite that is consistent with the business model and strategy identified under (1); (3) identify any material risks of misalignment between the firm’s business model and operating model and the interests of its clients and the wider financial markets, and evaluate whether those risks have been adequately mitigated; (4) consider on a forward-looking basis the own funds and liquid assets that will be required to meet the overall financial adequacy rule, taking into account any planned future growth; and (5) consider relevant severe but plausible stresses that could affect the firm’s business and consider whether the firm would still have sufficient own funds and liquid assets to meet the overall financial adequacy rule. Stress testing and reverse stress testing requirement 7.5.3 G MIFIDPRU 7.5.2R(5) requires a firm to use stress testing to identify whether it holds sufficient own funds and liquid assets. Firms should refer

FCA 2021/XX Page 118 of 233 to Finalised Guidance FG20/1 for specific guidance on the FCA’s expectations in relation to stress testing. 7.5.4 G (1) As part of their business model assessment and capital and liquidity planning under MIFIDPRU 7.5.2R, the FCA expects that firms with larger or more complex businesses will also undertake: (a) more in-depth stress testing of their business model and strategy; and (b) reverse stress testing. (2) Such firms should refer to MIFIDPRU 7 Annex 1.15G to MIFIDPRU 7 Annex 1.20G for additional information about the FCA’s expectations in relation to more in-depth stress testing and reverse stress testing. Recovery actions 7.5.5 R As part of its ICARA process, a firm must: (1) identify levels of own funds and liquid assets that the firm considers, if reached, may indicate that there is a credible risk that the firm will breach its threshold requirements; and (2) identify potential recovery actions that the firm would expect to take: (a) to avoid a breach of the firm’s threshold requirements where the firm’s own funds or liquid assets fall below the levels identified in (1); and (b) to restore compliance with its threshold requirements if the firm were to breach its threshold requirements during a period of financial difficulty. 7.5.6 G (1) The FCA considers that when a firm is considering potential recovery actions that the firm might take for the purposes of MIFIDPRU 7.5.5R, the following non-exhaustive list of considerations may be relevant: (a) the governance arrangements of the firm, and in particular which individuals will be responsible for taking the relevant decisions within the required timeframe; (b) the key business lines operated by the firm and the critical functions that the firm will need to maintain, and the steps necessary to ensure that these can continue to operate;

FCA 2021/XX Page 119 of 233 (c) the level of own funds and liquid assets that the firm is likely to need to restore compliance with the threshold requirements; (d) the options available to the firm to raise additional own funds or liquid assets; (e) the options available to the firm to conserve existing own funds or liquid assets; (f) any significant risks that may arise in connection with proposed recovery actions; and (g) any material impediments that may exist to implementing proposed recovery actions and whether these can be resolved or mitigated. (2) The FCA expects that a firm will adopt a proportionate approach to identifying potential recovery actions, taking into account the nature, scale and complexity of the firm’s business and operating model. The actions that the firm proposes must be credible and justifiable, taking into account the circumstances in which such actions may be likely to be required. Wind-down planning and wind-down triggers 7.5.7 R As part of its ICARA process, a firm must: (1) identify the steps and resources that would be required to ensure the orderly wind-down and termination of the firm’s business over a realistic timescale; and (2) evaluate the potential harms arising from winding down the firm’s business and identify how to mitigate them. [Note: articles 24 and 29(2) of the IFD.] 7.5.8 G When carrying out a wind-down planning assessment under MIFIDPRU 7.5.7R and determining the timeline and any required actions, a firm should refer to the guidance in the FCA’s Wind-Down Planning Guide and in Finalised Guidance FG20/1. 7.5.9 R (1) A firm must use its wind-down analysis under MIFIDPRU 7.5.7R to assess the amount of own funds and liquid assets that would be required to ensure an orderly wind-down of its business for the purposes of the overall financial adequacy rule. (2) The firm’s assessment in (1) must not result in amounts that are lower than:

FCA 2021/XX Page 120 of 233 (a) in the case of own funds, the firm’s fixed overheads requirement; and (b) in the case of liquid assets, the firm’s basic liquid assets requirement. 7.5.10 G (1) The overall financial adequacy rule requires a MIFIDPRU investment firm to hold sufficient own funds and liquid assets to ensure that it can wind down its business in an orderly manner (as well as to operate its business on an ongoing basis). MIFIDPRU 7.5.9R requires a firm to use its wind-down analysis to assess the appropriate level of own funds and liquid assets for these purposes. (2) A firm’s assessment of the amounts that it needs to hold under the overall financial adequacy rule to ensure that it can be wound down in an orderly manner must never be lower than its wind-down triggers. The firm may conclude, however, that it would require amounts that are higher than these minimum amounts in order to ensure an orderly wind-down. (3) In appropriate cases, the FCA may consider that either or both of a firm’s wind-down triggers should be set at a higher level. In such cases, the FCA may invite a firm to apply for a requirement in accordance with section 55L(5) of the Act, or may impose a requirement on the FCA’s own initiative in accordance with section 55L(3) of the Act, for the firm to use an alternative wind-down trigger for these purposes. (4) If the firm’s own funds fall below the own funds wind-down trigger or if the firm’s liquid assets fall below the liquid assets wind-down trigger, the FCA would normally expect that the firm would commence winding down, unless the firm’s governing body has determined that there is an imminent and credible likelihood of recovery. The potential supervisory actions that the FCA may decide to take in such circumstances are explained in further detail in MIFIDPRU 7.6 in relation to the own funds wind-down trigger and MIFIDPRU 7.7 in relation to the liquid assets wind-down trigger. (5) Where a firm’s own funds or liquid assets fall below the level that is required to ensure an orderly wind-down of the firm, this will be a breach of the overall financial adequacy rule. However, as explained further in MIFIDPRU 7.6 in relation to own funds and MIFIDPRU 7.7 in relation to liquid assets, this does not mean that the FCA expects a firm to commence winding down immediately upon breaching the overall financial adequacy rule. It is only when the firm breaches one or both of the wind-down triggers that there is a general presumption that the firm should wind-down. Where the firm has breached the overall financial adequacy rule but continues to hold own funds and liquid assets that exceed the wind-

FCA 2021/XX Page 121 of 233 down triggers, the FCA would typically expect to take the intervention measures set out in MIFIDPRU 7.6.15G and MIFIDPRU 7.7.16G, as appropriate. However, there may be specific cases where the firm’s financial position and the projections of its likely future financial resources mean that commencing a wind-down would be appropriate, even though the firm has not yet breached the wind-down triggers. The FCA will consider the appropriate supervisory actions in such cases according to their particular facts. 7.6 ICARA process: assessing and monitoring the adequacy of own funds 7.6.1 R This section applies to a MIFIDPRU investment firm. 7.6.2 R As part of its ICARA process, a firm must produce a reasonable estimate of the own funds it needs to hold to address: (1) any potential material harms that the firm has identified under MIFIDPRU 7.4.13R and in relation to which it has not taken any measures to reduce the impact of such harms under MIFIDPRU 7.4.9R; and (2) any residual potential material harms that remain after the firm has taken measures to reduce the impact of such harms under MIFIDPRU 7.4.9R. 7.6.3 R (1) A firm must assess whether, as a result of its analysis under MIFIDPRU 7.6.2R, it should hold additional own funds in excess of its own funds requirement to comply with the overall financial adequacy rule. (2) When carrying out the assessment in (1), a firm must not: (a) determine that it needs a lower level of own funds for an activity or harm than is required by a rule in MIFIDPRU 4 (Own funds requirements) or MIFIDPRU 5 (Concentration risk); or (b) use components of the own funds requirement to cover potential material harms that cannot reasonably be attributed to that component. 7.6.4 G (1) The overall financial adequacy rule requires a firm to hold adequate own funds to ensure that: (a) the firm is able to remain financially viable throughout the economic cycle, with the ability to address any potential material harms that may result from its ongoing activities; and

FCA 2021/XX Page 122 of 233 (b) the firm’s business can be wound down in an orderly manner. (2) In order to comply with the overall financial adequacy rule, a firm must therefore hold the higher of: (a) the amount of own funds that the firm requires at any given point in time to fund its ongoing business operations, taking into account potential periods of financial stress during the economic cycle; and (b) the amount of own funds that a firm would need to hold to ensure that the firm can be wound down in an orderly manner. (3) The own funds threshold requirement is the amount of own funds that a firm needs to hold at any given time to comply with the overall financial adequacy rule. (4) The firm’s analysis of potential material harms under MIFIDPRU 7.6.2R is particularly relevant when it is considering the level of own funds that are necessary for the ongoing operation of its business, but will also be relevant when considering how the firm should address potential material harms as part of an orderly wind￾down. (5) The following diagram summarises the process that a firm should undertake to determine its own funds threshold requirement:

FCA 2021/XX Page 123 of 233

• The own funds threshold requirement cannot be lower than the K￾factor requirement or the fixed overheads requirement. ** The K-factor requirement does not apply to SNI MIFIDPRU investment firms and the permanent minimum capital requirement (PMR) is not linked to harm. *** Unless otherwise specified by the FCA. 7.6.5 R (1) Unless (2) applies, a firm must meet its own funds threshold requirement with own funds that satisfy the following conditions: (a) subject to (b), at least 75% of the own funds threshold requirement must be met with any combination of common equity tier 1 capital and additional tier 1 capital; and (b) at least 56% of the own funds threshold requirement must be met with common equity tier 1 capital.

FCA 2021/XX Page 124 of 233 (2) The FCA may specify an alternative combination of own funds for the purpose of (1) in a requirement applied to the firm. 7.6.6 G (1) MIFIDPRU 7.6.7G and 7.6.8G explain the approach that the FCA expects a non-SNI MIFIDPRU investment firm would apply to carry out the assessment in MIFIDPRU 7.6.3R. (2) MIFIDPRU 7.6.9G explains the approach that the FCA expects an SNI MIFIDPRU investment firm would apply to carry out the assessment in MIFIDPRU 7.6.3R. (3) MIFIDPRU 7.6.10G explains the approach that the FCA would expect all MIFIDPRU investment firms to apply when assessing its own funds threshold requirement. 7.6.7 G (1) MIFIDPRU 4 and 5 explain how a firm must determine its own funds requirement. Where, as part of its ICARA process, a firm has identified potential material harms that cannot be fully mitigated, the firm should first consider the extent to which the impact of the residual harm on own funds is covered (wholly or partly) by the framework in MIFIDPRU 4 and 5. (2) Example 1: If the potential material harm arises from the ordinary course of the firm’s portfolio management business, a non-SNI MIFIDPRU investment firm should consider the potential impact of the harm by comparison with the firm’s K-AUM requirement. If the harm is a harm that might typically arise from portfolio management, the firm may treat the harm as covered by the K-AUM requirement. However, if the harm is unusual in nature or might be particularly severe (for example, fraud or other irregularities), it would be unreasonable for the firm to treat the harm as fully covered by the K-AUM requirement. This is because the K-AUM requirement is designed to address typical harms from ordinary portfolio management, and not every conceivable material harm that might result from such activity. (3) Example 2: If the potential material harm arises from the ordinary course of the firm investing its own proprietary capital in positions allocated to the trading book, a non-SNI MIFIDPRU firm should consider the nature of that harm. For example, if the harm relates to the ordinary operational aspects of dealing on own account, the firm may treat the harm as covered by the K-DTF requirement, unless the harm is unusual or particularly severe. If the harm arises from adverse market movements in relation to the firm’s trading book positions, the firm may treat the harm as covered by the K￾NPR requirement (or K-CMG requirement if the position arises in a portfolio for which the firm has received a K-CMG permission), unless the relevant positions have particular features that mean the harm may be unusual or particularly severe in nature.

FCA 2021/XX Page 125 of 233 (4) Example 3: Some components of the K-factor requirement, such as the K-CON requirement, reflect specific types of harm. In that case, the firm should consider the purpose of the relevant requirement. As the K-CON requirement is designed to address the potential harm arising from a firm having concentrated exposures to a counterparty or group of connected counterparties, a non-SNI MIFIDPRU investment firm should only compare a harm to the K￾CON requirement where that harm arises from, or is connected to, such concentrated exposures. (5) Example 4: When assessing harms that may occur during a wind￾down of the firm’s business, a non-SNI MIFIDPRU investment firm should consider the potential impact of the harm by comparison with its fixed overheads requirement. In that case, the firm should identify the likely costs of winding down the firm and the potential financial impact of any material harms that might occur while doing so and compare the aggregate amount with the fixed overheads requirement. This will allow such firms to determine if they are holding sufficient own funds to ensure an orderly wind￾down, as required by the overall financial adequacy rule. 7.6.8 G (1) Some harms may not fit within the own funds requirement framework in MIFIDPRU 4 or 5 because they cannot reasonably be attributed to the activities or risks that the rules in those chapters are designed to address. Where those harms are potentially material in nature, a non-SNI MIFIDPRU investment firm will need to assess their potential financial impact separately and cannot treat those harms as covered (either wholly or partly) by a requirement under MIFIDPRU 4 or 5. This includes the potential material harms resulting from any regulated activities that do not constitute MiFID business and from any unregulated activities. (2) Example 1: A non-SNI MIFIDPRU investment firm undertakes significant amounts of corporate finance business. The K-factor requirement does not include any components which are designed to address the potential harms arising from such business, as none of the K-factor metrics relate to corporate finance business. If the firm identifies potential material harms that may arise from its corporate finance activities, it cannot therefore compare that harm to any part of the K-factor requirement. In that case, the firm will need to assess the potential financial impact of that harm and will need to hold additional own funds to cover that impact. (3) Example 2: A non-SNI MIFIDPRU investment firm holds client money in connection with designated investment business that is not MiFID business. The K-CMH requirement applies only to MiFID client money. If the firm identifies potential material harms that result from holding client money for non-MiFID business, it will therefore need to assess the potential financial impact of that harm and hold additional own funds to cover that impact. Similarly,

FCA 2021/XX Page 126 of 233 if there are material issues arising from currency mismatches in relation to MiFID client money, this may be a risk that is not adequately covered by the K-CMH requirement. 7.6.9 G (1) SNI MIFIDPRU investment firms are not subject to the K-factor requirement. In practice, this means that their own funds requirement is typically determined by the fixed overheads requirement, although for smaller firms, the permanent minimum capital requirement may be determinative. (2) SNI MIFIDPRU investment firms should therefore identify all relevant potential material harms from their ongoing business operations that cannot be mitigated by other means and estimate their impact on the firm’s own funds. They should then compare the aggregate financial impact on own funds with the firm’s fixed overheads requirement (or, if higher, the permanent minimum capital requirement). (3) Separately, SNI MIFIDPRU investment firms should also identify the likely costs of winding down the firm and the potential financial impact of any material harms that might occur while doing so and should compare the aggregate amount with the fixed overheads requirement. This will allow such firms to determine if they are holding sufficient own funds to ensure an orderly wind-down, as required by the overall financial adequacy rule. (4) Where an SNI MIFIDPRU investment firm is close to exceeding one or more of the thresholds in MIFIDPRU 1.2.1R that would result in the firm being reclassified as a non-SNI MIFIDPRU investment firm, the FCA considers that the firm should begin to compare its assessment of the own funds that it needs to comply with the overall financial adequacy rule with the K-factor requirement that would apply to the firm if it were a non-SNI MIFIDPRU investment firm. The guidance in MIFIDPRU 7.6.7G and 7.6.8G will be relevant in such circumstances. This will ensure that the firm is better prepared to comply with the additional obligations in MIFIDPRU 4 and 5, and to ensure that its ICARA process is calibrated appropriately, at the point at which the firm becomes a non-SNI MIFIDPRU investment firm. 7.6.10 G (1) MIFIDPRU 7.6.7G to MIFIDPRU 7.6.9G explain the approach that a firm should take to determine if a potential harm is covered by the firm’s own funds requirement. Where a firm has identified potential harms that are not covered by its own funds requirement, or are covered only partly by its own funds requirement, the firm should aggregate the estimated financial impact of those harms to determine the overall additional amount of own funds (i.e. above its own funds requirement) that the firm needs to comply with the overall financial adequacy rule.

FCA 2021/XX Page 127 of 233 (2) Where the FCA disagrees with a firm’s assessment of the amount of own funds that is required by the overall financial adequacy rule, the FCA may provide individual guidance to that firm about the amount of own funds that the FCA considers is necessary to satisfy that rule. Alternatively, the FCA may apply a requirement to the firm that specifies an amount of own funds that the firm must hold for that purpose. (3) The effect of MIFIDPRU 7.6.3R(2) is that a firm must not: (a) determine that it needs a lower level of own funds for an activity or harm than is required by a component of the own funds requirement that addresses that risk or harm; or (b) use components of the own funds requirement to cover harms that cannot be attributed to that component. This is illustrated by the example in (4). (4) Example: A non-SNI MIFIDPRU investment firm carries on portfolio management and determines that its K-AUM requirement is £50,000. However, the firm estimates that the actual financial impact of potential harm that may result from its portfolio management activities is only £30,000. The firm also carries on corporate finance advisory business (which does not give rise to a K-factor requirement) and estimates that the financial impact of the potential harm arising from such business is £40,000. The firm should not conclude that its own funds threshold requirement is £70,000. This is because the firm is not permitted to: (a) conclude that the amount of own funds that it holds in relation to its portfolio management activities is less than the K-AUM requirement. This means that the firm is not permitted to substitute its own estimate of £30,000 for the minimum K-AUM requirement of £50,000; or (b) use part of the K-AUM requirement to cover potential material harms that do not arise in connection with portfolio management. This means that the firm cannot reallocate part of the own funds that should be held to cover the K-AUM requirement to cover risks arising from its corporate finance business. (5) Instead, assuming that there are no other relevant potential materials harms to be taken into account, the firm should conclude that its own funds threshold requirement is £90,000, being the sum of the K-AUM requirement and the firm’s estimate of the potential financial impact of harms arising from its corporate finance business.

FCA 2021/XX Page 128 of 233 Requirement to notify the FCA of certain levels of own funds 7.6.11 R (1) A firm must notify the FCA immediately in each case where its own funds fall below the level of the firm’s: (a) early warning indicator; (b) own funds threshold requirement; or (c) own funds wind-down trigger, or the firm considers that there is a reasonable likelihood that its own funds will fall below that level in the foreseeable future. (2) A notification under (1) must include the following information: (a) a clear statement of the current level of the firm’s own funds in comparison to: (i) its own funds threshold requirement; and (ii) in the case of a notification under (1)(c), the firm’s own funds wind-down trigger; (b) an explanation of why the firm’s own funds have reached the current level; (c) in the case of a notification made under (1)(a), where the firm has identified that its own funds may fall below a level specified by the firm for the purposes of MIFIDPRU 7.5.5R(1), the recovery actions that the firm intends to take, as identified under MIFIDPRU 7.5.5R(2)(a) and 7.5.6G; (d) in the case of a notification made under (1)(a), confirmation of whether the firm expects that its own funds could fall below its own funds threshold requirement in the foreseeable future and an explanation of why the firm has that expectation; (e) in the case of a notification made under (1)(b), the recovery actions specified for the purposes of MIFIDPRU 7.5.5R(2)(b) and 7.5.6G that the firm has already taken or will take to restore compliance with its own funds threshold requirement; and (f) in the case of a notification made under (1)(c), the firm’s intentions in relation to activating its wind-down plan. (3) A firm must submit the notification in (1) via the online notification and application system using the form in MIFIDPRU 7 Annex 4R.

FCA 2021/XX Page 129 of 233 7.6.12 G In appropriate cases, the FCA may consider that the early warning indicator should be set at an alternative level to 110% of the firm’s own funds threshold requirement. In such cases, the FCA may invite a firm to apply for a requirement in accordance with section 55L(5) of the Act, or may impose a requirement on the FCA’s own initiative in accordance with section 55L(3) of the Act, to provide for notification to the FCA if the firm’s own funds reach the specified alternative level. 7.6.13 G (1) The notification requirement in MIFIDPRU 7.6.11R does not replace a firm’s obligations under: (a) Principle 11 to disclose appropriately to the FCA anything relating to the firm of which the FCA would reasonably expect notice; or (b) the general notification requirements in SUP 15.3. (2) Where a firm has submitted a notification in MIFIDPRU 7.6.11R, that notification will generally discharge a firm’s obligations under Principle 11 and the general notification requirements in SUP 15.3 in relation to the matters contained in the notification. However, a firm must still consider whether the FCA should be notified of developments before any of the notification indicators in MIFIDPRU 7.6.11R occur. In addition, Principle 11 and SUP 15.3 may require a firm to notify the FCA of additional material information that is not specifically referenced in MIFIDPRU 7.6.11R. (3) MIFIDPRU investment firms are reminded, in particular, that the FCA would generally expect to be notified at an early stage of any significant event which creates a material risk of a firm ceasing to hold adequate financial resources, even if the impact of that event has not yet fully materialised. FCA approach to intervention in relation to own funds 7.6.14 G (1) The table in MIFIDPRU 7.6.15G explains the interventions that the FCA would generally expect to make where there is evidence that a MIFIDPRU investment firm may be at risk of breaching the requirements that apply to its own funds. The table sets out the points at which the FCA would normally intervene and what actions it would normally take. (2) The FCA would generally expect that the interventions in the table would be cumulative – i.e. in a declining prudential situation, as the firm hits each intervention point in turn, the FCA would take some or all of the actions associated with that particular point. The actions are intended to be proportionate and progressively stronger responses to address the prudential concerns raised by each intervention point.

FCA 2021/XX Page 130 of 233 Intervention point Purpose Potential FCA supervisory actions Early warning indicator: When the early warning indicator is triggered, the firm must notify the FCA under MIFIDPRU 7.6.11R(1)(a) This is intended as an early warning to the FCA that the firm may be at risk of breaching its own funds threshold requirement. This will allow the firm and the FCA to consider any preventative action that may be appropriate. Where the notification is not the expected result of planned action by the firm, the FCA would normally expect the following to occur: (a) a dialogue between the FCA and the firm based on the information provided in the notification to understand the reason for the decline in the firm’s own funds and the firm’s future plans; and (b) enhanced monitoring and supervision of the firm by the FCA. If, having considered the information provided by the firm about its proposed actions, the FCA reasonably considers that the firm may breach its own funds threshold requirement in the foreseeable future, the FCA may consider the following additional actions: (c) requesting the firm to cease making discretionary distributions of capital, loans to affiliated entities, payments of dividends or payments of variable remuneration; (3) However, if the firm experiences a sudden adverse event which causes the firm to hit multiple intervention points simultaneously, the FCA may immediately take the actions associated with the most severe point. (4) The actions specified in the table are without prejudice to the possibility of the FCA taking alternative or additional actions in appropriate cases. The purpose of the table is to provide greater clarity for firms on the FCA’s general expectations and approach to interventions, to assist firms’ own planning and responses. 7.6.15 G This table belongs to MIFIDPRU 7.6.14G.

FCA 2021/XX Page 131 of 233 (d) requesting the firm to take some or all of the recovery actions identified by the firm under MIFIDPRU 7.5.5R(2) and 7.5.6G; (e) requesting the firm to report additional information to the FCA; (f) requesting the firm to improve its internal risk management and systems and controls; (g) requesting the firm to cease making acquisitions; or (h) where appropriate, inviting the firm to apply for a requirement under section 55L(5) of the Act, or imposing a requirement on the FCA’s own initiative under section 55L(3) of the Act, in relation to (c) – (g) above. Threshold requirement notification: Firm holding insufficient own funds to meet its own funds threshold requirement In the FCA’s view, where a firm is failing to hold sufficient own funds to comply with its own funds threshold requirement, the firm will be failing to meet the appropriate resources threshold condition. This trigger is intended to prompt the firm and the FCA to address the breach of threshold conditions in a timely manner. Where appropriate, the focus should be on recovery of the The FCA would normally expect that: (a) the firm will have taken any relevant recovery actions identified by the firm under MIFIDPRU 7.5.5R(2)(a) and 7.5.6G before breaching its own funds threshold requirement and will be preparing to take, or will have taken, any relevant recovery actions identified under MIFIDPRU 7.5.5R(2)(b); and (b) the firm will cease making discretionary distributions of capital, loans to affiliated entities, payments of dividends or payments of variable remuneration. If, having considered the information provided by the firm about its proposed actions, the FCA reasonably considers that the firm may fail to restore its own

FCA 2021/XX Page 132 of 233 firm (unless the firm chooses to exit the market by voluntarily winding down). However, any proposed actions for recovery must be credible and achievable within a reasonable and realistic timeframe. funds to the level required by the own funds threshold requirement within a reasonable timeframe, the FCA may consider the following additional actions: (c) requesting that the firm cease taking on new business; (d) requesting the firm to report additional information to the FCA; (e) requesting that the firm’s parent undertaking provides additional own funds for the firm; (f) where appropriate, inviting the firm or its parent undertaking to apply for a requirement under section 55L(5) or [section 143K(1)]4 of the Act, or imposing a requirement on the FCA’s own initiative under section 55L(3) or [section 143K(2)] of the Act, in relation to (a) – (e) above; or (g) where appropriate, inviting the firm to apply for variation or cancellation of permission under section 55H of the Act, or varying or cancelling the firm’s permission on the FCA’s own initiative under section 55J of the Act. The FCA would also expect the firm to consider whether it is appropriate to trigger the firm’s wind-down plan under MIFIDPRU 7.5.7R in order to ensure an orderly wind-down of its business. This may be the case where the firm’s identified wind-down actions will require a reasonable length 4 Editor’s note: References in this chapter to section 143K of the Financial Services and Markets Act 2000 are to that section as it would be inserted by the Financial Services Bill, in the form in which it was introduced to the House of Lords on 14 January 2021. These references may change if the Bill is amended during the parliamentary process.

FCA 2021/XX Page 133 of 233 of time to execute, such as where the firm will need to transfer customers or close out its own positions. Wind-down trigger notification: Firm’s own funds fall below its own funds wind￾down trigger The own funds wind-down trigger is intended to specify a level of own funds that is sufficient to ensure an orderly wind￾down of the firm. Where the firm’s own funds requirement is determined by the fixed overheads requirement and the firm has not identified that it needs to hold additional own funds to comply with the overall financial adequacy rule, the own funds wind-down trigger may be equal to the firm’s own funds threshold requirement. In that case, the FCA may proceed directly to applying the interventions in this row, rather than those specified for a breach of the own funds threshold requirement above. In order to maximise the potential for an orderly wind￾down, the FCA expects that firms that breach this trigger should The FCA would normally expect the following to occur: (a) the firm’s governing body will make a formal decision to initiate the firm’s wind-down plan, unless the governing body has a reasonable basis for determining that there is an imminent and credible likelihood of the firm’s recovery; and (b) where the firm decides to initiate its wind-down plan, the FCA will invite the firm to apply for a requirement under section 55L(5) of the Act, or will impose a requirement on the FCA’s own initiative under section 55L(3) of the Act, that prevents the firm from taking on any new business. The FCA may consider the following additional actions if it has concerns that without such actions, the potential risk of harm to consumers or the markets is likely to increase: (c) taking appropriate action to protect any client money or client assets, including, where appropriate, inviting the firm to apply for a requirement under section 55L(5) of the Act, or imposing a requirement on the FCA’s own initiative under section 55L(3) of the Act, to achieve any necessary protection; and (d) where appropriate, inviting the firm to apply for variation or cancellation of permission under section 55H of the Act, or varying or cancelling the firm’s

FCA 2021/XX Page 134 of 233 normally commence winding down immediately, unless the firm’s governing body and the FCA determine that there is an imminent and credible likelihood of recovery. permission on the FCA’s own initiative under section 55J of the Act. If a firm refuses to commence an orderly wind-down despite its governing body or the FCA having concluded that there is no imminent and credible likelihood of recovery, the FCA will consider the full range of its supervisory powers. In particular, the FCA may use a combination of its own initiative powers under section 55L(3) and section 55J of the Act to: (e) prevent the firm from continuing to carry on any regulated activities; and (f) require the firm to take appropriate actions to ensure the fair treatment and appropriate protection of clients and counterparties during any run-off period for its existing regulated business. 7.7 ICARA process: assessing and monitoring the adequacy of liquid assets 7.7.1 R This section applies to a MIFIDPRU investment firm. 7.7.2 R (1) As part of its ICARA process, a firm must produce a reasonable estimate of the maximum amount of liquid assets that the firm would require to: (a) fund its ongoing business operations during each quarter over the next 12 months; and (b) ensure that the firm could be wound down in an orderly manner. (2) The assessment in (1) must take into account any potential material harms that the firm has identified under MIFIDPRU 7.4.9R where the firm has been unable to reduce such harms appropriately through its systems and controls.

FCA 2021/XX Page 135 of 233 (3) Without prejudice to the ongoing nature of the ICARA process, the firm must update the analysis in (1) immediately following any material change in the firm’s business model or operating model. (4) In order to produce the estimate in (1), the firm must ensure that it has in place reliable management information systems to provide timely and forward-looking information on its liquidity position. 7.7.3 G (1) The overall financial adequacy rule requires a firm to hold adequate liquid assets to ensure that: (a) the firm is able to remain financially viable throughout the economic cycle, with the ability to address any potential harm that may result from its ongoing activities; and (b) the firm’s business can be wound down in an orderly manner. (2) In order to comply with the overall financial adequacy rule, a firm must therefore hold the sum of the basic liquid assets requirement and the higher of: (a) the amount of liquid assets that the firm requires at any given point in time to fund its ongoing business operations, taking into account potential periods of financial stress during the economic cycle; or (b) the additional amount of liquid assets that a firm would need to hold when commencing its wind-down process to ensure that the firm could be wound down in an orderly manner. (3) The firm should use the analysis it produces under MIFIDPRU 7.7.2R to ensure that it is complying with the overall financial adequacy rule. (4) The liquid assets threshold requirement is the amount of liquid assets that a firm needs to hold at any given time to comply with the overall financial adequacy rule. 7.7.4 G (1) When considering the liquid assets that are required to fund its ongoing business operations under MIFIDPRU 7.7.2R(1), a firm should consider, among other factors: (a) the ordinary level of liquid assets that would typically be required to operate the firm’s underlying business, taking into account any seasonal variations; (b) any material harms that may realistically occur during the next 12 months and their potential impact on the firm’s liquidity position;

FCA 2021/XX Page 136 of 233 (c) any liquid assets that a firm may need to use as collateral or to meet margining requirements; and (d) any estimated gaps in funding, including during periods of severe but plausible stress. (2) The liquid assets that a firm requires at any given time during the 12-month period in MIFIDPRU 7.7.2R(1) may fluctuate, depending on the timing of a firm’s expected liabilities and the nature of its business. Therefore, a firm should divide the 12-month period into quarters and assess the highest amount of liquid assets that it would require at any given time in each quarter. The FCA accepts that forecasts of the liquid assets that a firm requires may become less accurate for later quarters, but expects firms to use a 12-month time horizon to ensure that adequate attention is given to potential harms and significant liquidity outflows that may occur during that period. (3) As a firm’s liquidity requirements are typically dynamic in nature, MIFIDPRU 7.7.2R requires a firm to update its liquid assets assessment where there has been a material change in the firm’s business model or operating model. This ensures that the firm updates its liquidity analysis to reflect material changes in its circumstances that may affect the availability of liquid assets or the firm’s liquidity requirements, while also assessing future needs over a rolling 12-month time horizon. (4) As part of its reporting obligations under MIFIDPRU 9, a firm will need to report liquidity information to the FCA on a regular basis. The FCA will use this information to monitor both the liquid assets that the firm is holding and the firm’s assessment of its liquid assets threshold requirement. 7.7.5 G (1) A firm’s basic liquid assets requirement provides a minimum level of core liquid assets that the firm must maintain at all times. The purpose of the basic liquid assets requirement is to ensure that the firm always has a minimum stock of liquid assets to fund the initial stages of its wind-down process if wind-down becomes necessary. The firm cannot, therefore, use the value of the core liquid assets that it holds to meet the basic liquid assets requirement as liquid assets for the liquidity needs of its ongoing business. (2) The basic liquid assets requirement may, however, be insufficient to provide the liquid assets that the firm has assessed would be necessary to facilitate an orderly wind-down as part of its wind￾down planning under MIFIDPRU 7.5.7R. Therefore, the firm may identify that it needs to hold an additional amount of liquid assets to meet its funding needs as part of the wind-down process. This is not necessarily the whole amount of the liquid assets that would be required to fund the entire wind-down process, as in some circumstances, the firm may reasonably expect to generate

FCA 2021/XX Page 137 of 233 additional liquid assets during wind-down. However, the firm should identify if it could have a funding gap during the wind-down process that the firm needs to cover by holding more liquid assets at the point that wind-down begins. (3) The following diagram summarises the process that a firm should undertake to determine its liquid assets threshold requirement:

• Firms are reminded that when they assess the amount of liquid assets they need for ongoing operations, they cannot use the value of the core liquid assets held to meet the basic liquid assets requirement to fund those operations. ** The basic liquid assets requirement may be insufficient to provide the liquid assets that the firm has assessed would be necessary to facilitate an orderly wind-down. Therefore, the firm may identify that it needs to hold an additional amount of liquid assets to meet its funding needs to commence its wind-down process. *** Unless otherwise specified by the FCA. 7.7.6 R (1) Subject to (2) and (3), a firm may hold the liquid assets necessary to comply with its liquid assets threshold requirement in any combination of:

FCA 2021/XX Page 138 of 233 (a) any core liquid asset, except trade receivables under MIFIDPRU 6.3.2R; or (b) any non-core liquid asset, as defined in MIFIDPRU 7.7.8R, provided that the firm applies an appropriate haircut in accordance with MIFIDPRU 7.7.9R. (2) This rule does not apply in relation to the liquid assets that a firm is holding to meet its basic liquid assets requirement, which must be core liquid assets. (3) A firm may only use a non-core liquid asset for the purpose in (1) if the firm is satisfied that the asset can easily and promptly be converted into cash, even in stressed market conditions. 7.7.7 G When considering whether a non-core liquid asset meets the requirement in MIFIDPRU 7.7.6R(3), a firm should take the following principles into account: (1) low risk: assets that are less risky tend to have higher liquidity. High credit standing of the issuer and a low degree of subordination tends to increase an asset’s liquidity. Low duration, low legal risk, low inflation risk and denomination in a convertible currency with low foreign exchange risk all tend to enhance an asset’s liquidity; (2) ease and certainty of valuation: an asset’s liquidity tends to increase if market participants are more likely to agree on its valuation. Assets with more standardised, homogenous and simple structures tend to be more fungible, promoting liquidity. The pricing formula of a high-quality liquid asset should be easy to calculate and not depend on strong assumptions. The inputs into the pricing formula should also be publicly available. In practice, this should rule out the inclusion of most structured or exotic products; (3) low correlation with risky assets: the stock of assets should not be subject to wrong-way (highly correlated) risk. For example, assets issued by financial institutions are more likely to be illiquid in times of liquidity stress in the financial sector; (4) listed on a developed and recognised exchange: being listed tends to increase an asset’s transparency and liquidity; (5) active and sizable market: the asset should have an active market at all times. This means that: (a) there should be historical evidence of market breadth and market depth. This could be demonstrated by low bid-ask spreads, high trading volumes, a large and diverse number of market participants, and the existence of a repo market. Diversity of market participants reduces market

FCA 2021/XX Page 139 of 233 concentration and increases the reliability of the liquidity in the market; and (b) there should be robust market infrastructure in place. The presence of multiple committed market makers increases liquidity as quotes will most likely be available for buying or selling the asset; (6) low volatility: assets whose prices remain relatively stable and are less prone to sharp price declines over time will have a lower probability of triggering forced sales to meet liquidity requirements. Volatility of traded prices and spreads are simple proxy measures of market volatility. There should be historical evidence of relative stability of market terms (e.g. prices and haircuts) and volumes during stressed periods; and (7) flight to quality: historically, the market has shown tendencies to move into these types of assets in a systemic crisis. The correlation between proxies of market liquidity and financial system stress is one simple measure that could be used. 7.7.8 R (1) Except as specified in (2), the following assets are eligible as non￾core liquid assets: (a) short-term deposits at a credit institution that does not have a Part 4A permission in the UK to accept deposits; (b) assets representing claims on, or guaranteed by, multilateral development banks and international organisations; (c) assets representing claims on, or guaranteed by, any third country central bank or government; (d) financial instruments; and (e) any other instrument eligible as collateral against the margin requirement of an authorised central counterparty. (2) A firm must not treat any of the following as a non-core liquid asset: (a) any asset that belongs to a client; (b) any other asset that is encumbered; or (c) any asset issued by the firm or any of its affiliated entities, except a short-term deposit with an affiliated credit institution. 7.7.9 G (1) For the purposes of MIFIDPRU 7.7.8R(2)(a), an asset may belong to a client whether or not the asset is held in the firm’s own name.

FCA 2021/XX Page 140 of 233 Non-core liquid asset Haircut Short-term deposits at a credit institution that does not have permission in the UK to accept deposits 0% Assets representing claims on, or guaranteed by, multilateral development banks or international organisations 0% Assets representing claims on, or guaranteed by, any third country central bank or government 0% - 50% Regulated covered bonds, or comparable covered bonds regulated in a third country 7% - 30% Asset-backed securities eligible for ‘STS’ designation under the Securitisation Regulation, and backed by residential loans, personal loans, leases or commercial loans for purposes other than commercial real estate development, or comparable asset-backed securities regulated in a third country 25% - 35% Examples of assets belonging to a client include money or other assets held under the FCA’s client asset rules. (2) For the purposes of MIFIDPRU 7.7.8R(2)(b), an asset may be encumbered if it is pledged as security or collateral, or subject to some other legal restriction (for example, due to regulatory or contractual requirements) which affects the firm’s ability to liquidate, sell, transfer, or assign the asset. 7.7.10 R A firm must apply an appropriate haircut to the value of a non-core liquid asset to reflect the potential loss of value when converting the asset into cash during stressed market conditions. 7.7.11 G The FCA considers that a minimum haircut of no less than that in the range specified in the table in MIFIDPRU 7.7.12G is likely to be appropriate for the purposes of MIFIDPRU 7.7.10R. 7.7.12 G This table belongs to MIFIDPRU 7.7.11G.

FCA 2021/XX Page 141 of 233 High quality corporate debt securities 15% - 50% Shares that form part of a major stock index 50% Financial instruments not covered above for which there is a liquid market as defined in article 42(1)(17) of MiFIR or article 42(1)(17) of EU MiFIR 55% Other instruments eligible as collateral against the margin requirement of an authorised central counterparty 25% - 55% 7.7.13 G For the purposes of MIFIDPRU 7.7.10R and 7.7.11G, in relation to shares or units in collective investment undertakings: (1) where a firm is aware of the exposures underlying the CIU, it may look through to those underlying exposures to assign an appropriate haircut; (2) where a firm is not aware of the exposures underlying the CIU, it should assume that the CIU invests, up to the maximum amount allowed under its mandate, in the highest risk assets permissible; and (3) in either case, a firm should consider applying an additional haircut to reflect any additional loss of value that could result from the underlying exposures being held through a CIU. Requirement to notify the FCA of certain levels of liquid assets 7.7.14 R (1) A firm must notify the FCA immediately in each case where: (a) its liquid assets fall below its liquid assets threshold requirement; or (b) its liquid assets fall below its liquid assets wind-down trigger or the firm considers that there is a reasonable likelihood that its liquid assets will fall below its liquid assets wind-down trigger in the foreseeable future. (2) A notification under (1) must include the following information: (a) a clear statement of the current level of the firm’s liquid assets in comparison to:

FCA 2021/XX Page 142 of 233 (i) the firm’s liquid assets threshold requirement; and (ii) in the case of a notification under (1)(b), the firm’s liquid assets wind-down trigger; (b) an explanation of why the firm’s liquid assets have reached the current level; (c) in the case of a notification under (1)(a), an explanation of the recovery actions specified for the purposes of MIFIDPRU 7.5.5R(2)(b) and 7.5.6G that the firm has already taken or will take to restore compliance with its liquid assets threshold requirement; and (d) in the case of a notification under (1)(b), the firm’s intentions in relation to activating its wind-down plan. (3) A firm must submit the notification in (1) via the online notifications and applications system using the form in MIFIDPRU 7 Annex 5R. 7.7.15 G (1) The notification requirement in MIFIDPRU 7.7.14R does not replace a firm’s obligations under: (a) Principle 11 to disclose appropriately to the FCA anything relating to the firm of which the FCA would reasonably expect notice; or (b) the general notification requirements in SUP 15.3. (2) Where a firm has submitted a notification in MIFIDPRU 7.7.14R, that notification will generally discharge a firm’s obligations under Principle 11 and the general notification requirements in SUP 15.3 in relation to the matters contained in the notification. However, a firm must still consider whether the FCA should be notified of developments before any of the notification indicators in MIFIDPRU 7.7.14R occur. In addition, Principle 11 and SUP 15.3 may require a firm to notify the FCA of additional material information that is not specifically referenced in MIFIDPRU 7.7.14R. (3) MIFIDPRU investment firms are reminded, in particular, that the FCA would generally expect to be notified at an early stage of any significant event which creates a material risk of a firm ceasing to hold adequate financial resources, even if the impact of that event has not yet fully materialised. FCA approach to intervention in relation to liquid assets

FCA 2021/XX Page 143 of 233 Intervention point Purpose Potential FCA supervisory actions Threshold requirement notification: Firm holding insufficient liquid assets to meet its liquid assets threshold requirement The liquid assets threshold requirement is the amount of liquid assets that the firm needs at any given point in time to comply with the overall financial adequacy rule. The FCA will monitor a firm’s assessment of its liquid assets threshold requirement The FCA would normally expect that: (a) the firm will have considered taking the recovery actions identified under MIFIDPRU 7.5.5R(2)(a) and MIFIDPRU 7.5.6G before breaching its liquid assets threshold requirement and will be considering whether to take, or will have taken, any relevant recovery actions identified under MIFIDPRU 7.5.5R(2)(b); 7.7.16 G (1) The table in MIFIDPRU 7.7.17G explains the interventions that the FCA would generally expect to make where a MIFIDPRU investment firm has breached, or there is evidence that the firm may be at risk of breaching, its liquid assets requirements. The table sets out the points at which the FCA would normally intervene and what actions it would normally take. Note that unlike for own funds, there is no early warning indicator requirement in relation to liquid assets. (2) The FCA would generally expect that the interventions in the table would be cumulative – i.e. in a declining prudential situation, as the firm hits each intervention point in turn, the FCA would take some or all of the actions associated with that particular point. The actions are intended to be proportionate and progressively stronger responses to address the prudential concerns raised by each intervention point. (3) However, if the firm experiences a sudden adverse event which causes the firm to hit multiple intervention points simultaneously, the FCA may immediately take the actions associated with the most severe point. (4) The actions specified in the table are without prejudice to the possibility of the FCA taking alternative or additional actions in appropriate cases. The purpose of the table is to provide greater clarity for firms on the FCA’s general expectations and approach to interventions, to assist firms’ own planning and responses. 7.7.17 G This table belongs to MIFIDPRU 7.7.16G.

FCA 2021/XX Page 144 of 233 through the information that the firm provides under MIFIDPRU 9. This notification is intended to prompt the firm and the FCA to address the breach of threshold conditions in a timely manner. Where a firm has ceased to hold sufficient liquid assets to meet its liquid assets threshold requirement, the focus should be on restoring liquid assets to at least the level of the liquid assets threshold requirement and recovery of the firm (unless the firm chooses to exit the market by voluntarily winding down). However, any proposed actions for recovery must be credible and achievable within a reasonable and realistic timeframe (b) the firm’s governing body will regularly evaluate whether the firm should take additional actions to restore its level of liquid assets to at least the level of the liquid assets threshold requirement; and (c) the firm may be requested to report additional information to the FCA. If, having considered the information provided by the firm about its proposed actions, the FCA reasonably considers that the firm may fail to restore its liquid assets to the level required by the liquid assets threshold requirement within a reasonable timeframe, the FCA may consider the following actions: (d) requesting the firm to cease making discretionary payments; (e) requesting that the firm cease taking on new business; (f) requesting that the firm’s parent undertaking provides additional liquid assets for the firm; (g) where appropriate, inviting the firm or its parent undertaking to apply for a requirement under section 55L(5) or [section 143K(1)] of the Act, or imposing a requirement on the FCA’s own initiative under section 55L(3) or [section 143K(2)] of the Act, in relation to (a) – (f) above; or (h) where appropriate, inviting the firm to apply for variation or cancellation of permission under section 55H of the Act, or varying or cancelling the

FCA 2021/XX Page 145 of 233 firm’s permission on the FCA’s own initiative under section 55J of the Act. The FCA would also expect the firm to consider whether it is appropriate to trigger the firm’s wind-down plan under MIFIDPRU 7.5.7R in order to ensure an orderly wind-down of its business. This may be the case where the firm’s identified wind-down actions will require a reasonable length of time to execute, such as where the firm will need to transfer customers or close out its own positions. Wind-down trigger notification: Firm’s liquid assets fall below its liquid assets wind-down trigger The liquid assets wind-down trigger is an absolute minimum level of liquid assets that a firm must maintain at all times to provide the necessary financial resources to commence wind￾down. This is equal to the firm’s basic liquid assets requirement (or such higher amount as the FCA may have imposed for these purposes in a requirement). In order to maximise the potential for an orderly wind￾down, the FCA expects that firms that breach this trigger should normally commence winding down immediately unless the firm’s governing body and the FCA The FCA would normally expect the following to occur: (a) the firm’s governing body will make a formal decision to initiate the firm’s wind-down plan, unless the governing body has a reasonable basis for determining that there is an imminent and credible likelihood of the firm’s recovery; and (b) where the firm decides to initiate its wind-down plan, the FCA will invite the firm to apply for a requirement under section 55L(5) of the Act, or will impose a requirement on the FCA’s own initiative under section 55L(3) of the Act, that prevents the firm from taking on any new business. The FCA may consider the following additional actions if it has concerns that without such actions, the potential risk of harm to consumers or the markets is likely to increase: (c) taking appropriate action to protect any client money or client assets, including, where appropriate, inviting the firm to apply for a requirement under

FCA 2021/XX Page 146 of 233 determine that there is an imminent and credible likelihood of recovery. section 55L(5) of the Act, or imposing a requirement on the FCA’s own initiative under section 55L(3) of the Act, to achieve any necessary protection; and (d) where appropriate, inviting the firm to apply for variation or cancellation of permission under section 55H of the Act, or varying or cancelling the firm’s permission on the FCA’s own initiative under section 55J of the Act. If a firm refuses to commence an orderly wind-down despite its governing body or the FCA having concluded that there is no imminent and credible likelihood of recovery, the FCA will consider the full range of its supervisory powers. In particular, the FCA may use a combination of its own initiative powers under section 55L(3) and section 55J of the Act to: (e) prevent the firm from continuing to carry on any regulated activities; and (f) direct the firm to take appropriate actions to ensure the fair treatment and appropriate protection of clients and counterparties during any run-off period for its existing regulated business. 7.8 Reviewing and documenting the ICARA process 7.8.1 R This section applies to a MIFIDPRU investment firm. 7.8.2 R A firm must review the adequacy of its ICARA process: (1) at least once every 12 months; and (2) irrespective of any review carried out under (1), following any material change in the firm’s business model or operating model.

FCA 2021/XX Page 147 of 233 [Note: article 24(2), first paragraph of the IFD.] 7.8.3 G A firm whose activities are significant in their nature, scale or complexity should consider whether it is appropriate to review the adequacy of its ICARA process more regularly than the minimum frequency specified in MIFIDPRU 7.8.2R(1). The FCA considers that in such cases, it may be more appropriate to review the ICARA process on a half-yearly basis. 7.8.4 G The effect of MIFIDPRU 7.8.2R(2) is that if there is a significant change in the firm’s business model or operating model, the firm should not wait until the next scheduled review of its ICARA process, but should carry out a review promptly. For example, if a firm is launching a material new product or business line or is merging with another business, the FCA expects that the firm would, as part of its preparation for that event, analyse the impact on the firm’s ICARA process. Similarly, if a firm’s business undergoes a significant change due to external factors (for example, due to significant changes in the structure of a market sector), the FCA expects that a firm will consider the effects on the firm’s ICARA process in a timely manner. 7.8.5 R (1) A firm must notify the FCA of the date on which the firm will submit data item MIF007 (ICARA assessment questionnaire) in accordance with: (a) in the case of a non-SNI MIFIDPRU investment firm, MIFIDPRU 9.2.2R; and (b) in the case of an SNI MIFIDPRU investment firm, MIFIDPRU 9.2.4R. (2) The submission date that the firm notifies under (1) will continue to apply unless the firm notifies the FCA of a change of the submission date in accordance with (3). (3) A firm may notify the FCA of a revised submission date for the purpose of (1), provided that the revised date will not result in the FCA not receiving data item MIF007 in relation to the firm for a period that exceeds 12 months. (4) The notifications in (1) and (3) must be submitted via the online notification and application system using the form in MIFIDPRU 7 Annex 6R. (5) Where, in accordance with MIFIDPRU 7.8.2R(1) and MIFIDPRU 7.8.3G, a firm reviews the adequacy of its ICARA process more frequently than annually, the requirements in (1) to (4) apply with the following modifications: (a) the notification under (1) must specify each date on which the firm will submit data item MIF007 following the relevant reviews; and

FCA 2021/XX Page 148 of 233 (b) the references to “submission date” should be read as references to each submission date notified under (a). (6) Notwithstanding (1) to (5): (a) the FCA may direct a firm to submit data item MIF007 on a different date to ensure that the FCA has access to appropriate and timely information on the firm’s financial position; and (b) if the FCA gives a direction to a firm in accordance with (a), the firm must submit data item MIF007 to the FCA on the date specified in that direction until the FCA directs otherwise. 7.8.6 G (1) Firms may operate different internal arrangements for reviewing the adequacy of their ICARA process. When considering the timetable for such a review, a firm should take into account the following three dates: (a) the date on which the underlying data used to carry out the review of the ICARA process was prepared (the “reference date”); (b) the date on which the firm’s review of the ICARA process is carried out (the “review date”); and (c) the date that the firm has notified to the FCA under MIFIDPRU 7.8.5R on which the firm will submit data item MIF007 to report on its review of the ICARA process (the “submission date”). (2) When choosing a submission date under MIFIDPRU 7.8.5R, the FCA would expect a firm to consider the following: (a) the period between the reference date and the review date should be reasonable, taking into account the time that the firm is likely to need to carry out a robust assessment of its ICARA process to meet the requirements in this section and the importance of using relevant data for such purposes; and (b) the period between the review date and the submission date should also be reasonable, taking into account the importance of the FCA receiving timely information in relation to the firm and the time that is likely to be necessary for the firm to complete data item MIF007 accurately and completely. (3) The FCA expects firms to design their internal timetables for the review of their ICARA processes and the submission of data item

FCA 2021/XX Page 149 of 233 MIF007 in a reasonable way, reflecting the importance of proper internal risk management. In the first instance, the FCA has provided firms with flexibility under MIFIDPRU 7.8.5R to adopt a review and reporting timetable that fits best with the firm’s internal processes. However, under MIFIDPRU 7.8.5R(5), the FCA may direct a firm to report on an alternative date if the FCA considers that the firm’s proposed review and reporting timetable would not result in the FCA receiving the necessary information in an appropriate and timely manner. (4) A firm can change the date on which it submits data item MIF007 by notifying the FCA in accordance with MIFIDPRU 7.8.5R(3). However, a firm is not permitted to specify a revised date that would result in the firm not submitting data item MIF007 to the FCA for more than 12 months. For example, a firm has a submission date of 1 April each year. The firm submits data item MIF007 on 1 April 2023. On 1 March 2024, the firm wishes to change its submission date to 31 December. The firm would not be permitted to change the submission date in this way, as the next submission date would be 31 December 2024, which would be more than 12 months after 1 April 2023. However, the firm could have notified the FCA on, for example, 1 December 2023 that it intended to change its submission date to 31 December. This is because the next submission of data item MIF007 would then have occurred on 31 December 2023, which would be within 12 months of the previous submission on 1 April 2023. (5) As explained in MIFIDPRU 7.8.3G, a firm whose activities are significant in their nature, scale or complexity may conclude that it should review the adequacy of its ICARA process more frequently than the minimum annual review required under MIFIDPRU 7.8.2R(1). In that case, the firm must submit data item MIF007 after each review and must notify the FCA under MIFIDPRU 7.8.5R of the submission date for each data item. The guidance in this provision applies to each of those submission dates. 7.8.7 R Where a firm carries out a review of its ICARA process in accordance with MIFIDPRU 7.8.2R(2) following a change in its business model or operating model: (1) the firm must submit data item MIF007 to the FCA within 20 business days of the governing body having approved the ICARA document resulting from that review in accordance with MIFIDPRU 7.8.9R; and (2) the requirement in MIFIDPRU 7.8.5R to notify the FCA of the submission date of data item MIF007 does not apply to a data item submitted under (1).

FCA 2021/XX Page 150 of 233 7.8.8 R (1) A firm must document any review carried out under MIFIDPRU 7.8.2R. (2) The documentation produced by the firm to comply with (1): (a) may consist of multiple documents, provided that the interaction between them is clear, they are prepared on a consistent basis and they can all be provided to the FCA promptly upon request; and (b) is collectively referred to as the ICARA document. (3) The ICARA document must include the following: (a) a clear description of the firm’s business model and strategy and how it aligns with the firm’s risk appetite; (b) an explanation of the activities carried on by the firm, with a focus on the most material activities; (c) where the firm has concluded that the ICARA process is fit for purpose, a clear explanation of why the firm reached this conclusion; (d) where the firm has concluded that the ICARA process requires further improvement, a clear explanation of: (i) the improvements needed; (ii) the steps needed to make those improvements and the timescale for taking them; and (iii) who within the firm is responsible for taking the steps in (ii); (e) a clear explanation of any other changes to the firm’s ICARA process that have occurred following the review and the reasons for those changes; (f) an analysis of the effectiveness of the firm’s risk management processes during the period covered by the review; (g) a summary of the material harms identified by the firm under MIFIDPRU 7.4.13R and any steps taken to mitigate them; (h) an overview of the business model assessment and capital and liquidity planning undertaken by the firm under MIFIDPRU 7.5.2R;

FCA 2021/XX Page 151 of 233 (i) a clear explanation of how the firm is complying with the overall financial adequacy rule, including a clear break￾down of the following as at the review date: (i) available own funds; (ii) available liquid assets; and (iii) the firm’s assessment of its threshold requirements; (j) a summary of any stress testing and reverse stress testing carried out by the firm; (k) the levels of own funds and liquid assets that, if reached, the firm has identified under MIFIDPRU 7.5.5R(1) may indicate that there is a credible risk that the firm will breach its threshold requirements; (l) the potential recovery actions that the firm has identified under MIFIDPRU 7.5.5R(2) and 7.5.6G; and (m) an overview of the firm’s wind-down planning under MIFIDPRU 7.5.7R, including: (i) any required actions; (ii) the anticipated timelines for actions to be taken; and (iii) any key assumptions or qualifications. Senior management responsibility for the ICARA process 7.8.9 R (1) The content of the ICARA document must be reviewed and approved by the firm’s governing body within a reasonable period after the review under MIFIDPRU 7.8.2R has been completed. (2) As part of its review under (1), the governing body must specifically review and approve the key assumptions underlying the ICARA document. 7.8.10 G (1) Senior conduct rules staff members are reminded of their obligations under COCON 2.2.2R to take reasonable steps to ensure that the business of the firm for which they are responsible complies with the relevant requirements and standards of the regulatory system. (2) In particular, COCON 4.2.12G explains that senior conduct rules staff members should take reasonable steps to ensure that the business for which they are responsible:

FCA 2021/XX Page 152 of 233 (a) has operating procedures and systems with well-defined steps for complying with the detail of relevant requirements and standards of the regulatory system; and (b) is run prudently. (3) The FCA considers that the ICARA process is a key requirement of the regulatory system for MIFIDPRU investment firms and is an essential part of a firm’s internal systems and procedures for ensuring that the firm’s business is run prudently. Accordingly, the FCA expects that senior conduct rules staff members will take an active role in contributing to the analysis required under the ICARA process in respect of the business areas for which they are responsible and in embedding its requirements into those business areas. (4) Firms and senior conduct rules staff members should refer to the provisions in COCON, and in particular the guidance in COCON 3 and COCON 4, for further information on the FCA’s general approach to assessing compliance with the relevant conduct rules. Record keeping requirements 7.8.11 R (1) A firm must keep adequate records of the following: (a) its ICARA document; and (b) the review and approval of the ICARA document by the firm’s governing body under MIFIDPRU 7.8.9R. (2) A firm must retain the records in (1) for at least 3 years from the date on which the relevant document was approved. 7.9 ICARA process: firms forming part of a group 7.9.1 G This section contains: (1) a requirement for individual MIFIDPRU investment firms to take into account group risk as part of their ICARA process; (2) rules and guidance on the extent to which an investment firm group may manage risks on a group basis and may operate a group ICARA process; and (3) rules and guidance on the extent to which the position of multiple MIFIDPRU investment firms may be combined with a single ICARA document. Analysis of group risk by individual firms 7.9.2 R Where a MIFIDPRU investment firm is a part of a group, the firm’s ICARA process must take into account any material risks or potential

FCA 2021/XX Page 153 of 233 harms that may result from the firm’s relationship with other members of that group or the group as a whole. 7.9.3 G The requirement in MIFIDPRU 7.9.2R applies in relation to: (1) any group, irrespective of whether that group is an investment firm group; and (2) any relationship that the firm has with any member of that group, irrespective of whether the other entity is an authorised person. Group ICARA process 7.9.4 G An investment firm group to which MIFIDPRU 2.5 (Prudential consolidation) applies is not required to operate an ICARA process on a consolidated basis. 7.9.5 R Subject to MIFIDPRU 7.9.7R, an investment firm group (whether or not it is subject to MIFIDPRU 2.5) may operate a group ICARA process, provided that the following conditions are satisfied: (1) the group ICARA process is consistent with the manner in which the business of the investment firm group, and the risks arising from it, are operated and managed in practice; (2) any assessment under the group ICARA process of own funds or liquid assets that are required to cover the identified risks is allocated between individual firms within the investment firm group on a reasonable basis and that basis is properly documented; (3) each MIFIDPRU investment firm covered by the group ICARA process complies with the overall financial adequacy rule on an individual basis; (4) each MIFIDPRU investment firm covered by the group ICARA process maintains a separate wind-down plan for the purposes of MIFIDPRU 7.5.7R and applies the wind-down triggers on an individual basis; (5) the notification requirements in MIFIDPRU 7.6.11R and 7.7.13R apply in relation to each individual MIFIDPRU investment firm included within the group ICARA process, using the amounts determined in accordance with (2) to (4); (6) the management of any risks on a group basis takes place within one of the following entities: (a) a MIFIDPRU investment firm within the investment firm group; or

FCA 2021/XX Page 154 of 233 (b) the UK parent entity of the investment firm group; (7) the governing body of the relevant entity in (6) has accepted overall responsibility for the group ICARA process and for ensuring compliance with this rule; (8) the requirement in MIFIDPRU 7.8.9R for the governing body of an individual MIFIDPRU investment firm to approve the content of the ICARA document applies to the governing body of the relevant entity in (7); and (9) each individual MIFIDPRU investment firm included within the group ICARA process submits data item MIF007 (ICARA assessment questionnaire) to the FCA on an individual basis, reflecting the position of that firm as it results from the conclusions of the group ICARA process. 7.9.6 R Except as specified in MIFIDPRU 7.9.5R, a MIFIDPRU investment firm that is included within a group ICARA process is not required to comply with the requirements in MIFIDPRU 7.4 to MIFIDPRU 7.8 on an individual basis. 7.9.7 R (1) An investment firm group must not: (a) operate a group ICARA process if the FCA has directed the investment firm group that it must manage or assess the risks arising from its business on a different basis because one or more of the conditions in (2) applies in relation to that investment firm group; or (b) include within a group ICARA process any MIFIDPRU investment firm that the FCA has directed to manage or assess the risks arising from its business on a different basis because one or more of the conditions in (2) applies in relation to that firm. (2) The relevant conditions are that: (a) there is a material risk that potential harms arising in relation to the firm or investment firm group would not be adequately captured through a group ICARA process; (b) there is a material risk that a group ICARA process would result in excessive complexity that would interfere with the FCA’s ability to supervise the compliance of the investment firm group, or any of the individual MIFIDPRU investment firms within it, with the applicable obligations under MIFIDPRU 7; or

FCA 2021/XX Page 155 of 233 (c) the investment firm group previously operated, or the firm was previously included within, a group ICARA process that did not meet the requirements in MIFIDPRU 7.9. 7.9.8 R Except as otherwise specified in MIFIDPRU 7.9.5R, a group ICARA process must comply with the requirements in MIFIDPRU 7.4 to MIFIDPRU 7.8 as if the references in those sections to a “MIFIDPRU investment firm” were references to the investment firm group operating that group ICARA process. 7.9.9 G (1) Under MIFIDPRU 7.9.7R, if an investment firm group is operating a group ICARA process that is inadequate to address the potential harms arising from its business, the FCA may direct all members of the investment firm group, or specific individual MIFIDPRU investment firms within it, to apply the ICARA process on an individual basis. (2) In addition, a group ICARA process must satisfy the requirements in MIFIDPRU 7.9.5R on an ongoing basis. If any of the conditions in that rule for the use of the group ICARA process are not met, all MIFIDPRU investment firms covered by that group ICARA process will need to operate individual ICARA processes instead. (3) An investment firm group that wishes to operate a group ICARA process must therefore ensure that its risk management processes are sufficiently robust to satisfy the requirements in MIFIDPRU 7.9.5R and that there is appropriate accountability of the responsible governing body in accordance with the requirements of that rule. (4) The FCA considers that it is particularly important that there is a proper analysis of how the overall financial adequacy rule and wind-down planning arrangements apply to each individual MIFIDPRU investment firm within the investment firm group. This reflects the fact that the solvency of firms must be assessed on an individual basis and legal entities must be wound down separately. Combined ICARA documents covering multiple group entities 7.9.10 R Where an investment firm group contains multiple MIFIDPRU investment firms, the ICARA document for each firm may be combined within a single document, provided that: (1) to the extent that any risks are managed under a group ICARA process, this is clearly documented and explained; and (2) for any risks that are managed on an individual basis, and for any requirements that MIFIDPRU 7.9.5R specifies must always apply on an individual basis under a group ICARA process, the

FCA 2021/XX Page 156 of 233 combined ICARA document clearly explains the position of each individual firm and how it complies with the relevant requirements. 7.9.11 G The effect of MIFIDPRU 7.9.10R is that even where an investment firm group does not operate a group ICARA process, a single ICARA document can be used to document the individual ICARA processes operated by multiple MIFIDPRU investment firms within that investment firm group. However, the single ICARA document must clearly explain how each MIFIDPRU investment firm meets the applicable requirements on an individual basis. 7.10 Supervisory review and evaluation process Application 7.10.1 G (1) This section contains guidance on the FCA’s approach to the supervisory review and evaluation process (SREP) of the ICARA process. (2) Although there are no rules in this section that impose direct obligations on MIFIDPRU investment firms or UK parent entities, such entities may find the guidance in this section helpful in understanding the FCA’s general approach to considering whether MIFIDPRU investment firms are complying with the overall financial adequacy rule and the other requirements of the ICARA process. (3) The guidance in this section relates only to the FCA’s approach to the SREP. It does not apply in relation to any other supervisory action that the FCA may take outside the context of a SREP, except where stated. Purpose 7.10.2 G The own funds and liquid assets necessary to comply with the overall financial adequacy rule need to be assessed by the firm and, where appropriate, the FCA. This involves: (1) the ICARA process applied by the firm, or, in the circumstances set out in MIFIDPRU 7.9, by the investment firm group; (2) the FCA’s monitoring of the information provided by a firm under its ongoing reporting obligations in MIFIDPRU 9; and (3) in appropriate cases, a SREP, which is conducted by the FCA. Decision to conduct a SREP 7.10.3 G (1) There is no mandatory frequency with which the FCA will conduct a SREP on a particular MIFIDPRU investment firm or investment firm group. Instead, the FCA will decide how to

FCA 2021/XX Page 157 of 233 prioritise its resources to conduct SREPs by taking into account a range of factors, which include, but are not limited to: (a) the nature, scale and complexity of the business carried on by a firm or investment firm group; (b) the FCA’s analysis of the risks associated with the firm or investment firm group and its potential to cause harm to consumers or to the financial markets; (c) the information provided by a firm or other members of its group to the FCA under any notification and reporting obligations under MIFIDPRU and any other provisions in the Handbook; (d) the history of the firm’s or investment firm group’s interactions with the FCA; (e) any broader concerns about the types of products or services offered by the firm or the investment firm group, or the markets in which it operates; and (f) any concerns relating to the firm or investment firm group which may be notified to the FCA by other regulators (including non-financial services regulators). (2) In appropriate cases, the FCA may choose to conduct a review of a particular population of MIFIDPRU investment firms or investment firm groups that share common features (for example, because they are all active in a particular market sector). In such cases, the FCA may subsequently choose to issue guidance on a sectoral basis or to impose additional requirements on all, or only a subset of, the entities included within that review. (3) The scale of a SREP that the FCA carries out on an individual MIFIDPRU investment firm or investment firm group may vary, depending on the nature of the FCA’s concerns and the potential degree of risk posed by the firm or investment firm group. In certain cases, the FCA may limit its review to only a subset of the information and factors that it would normally consider under the general approach described in MIFIDPRU 7.10.4G and 7.10.5G. [Note: article 36 of the IFD.] Information and factors considered by the FCA when conducting a SREP 7.10.4 G When conducting a SREP, the FCA will take into account such information as it considers relevant, which may include the following: (1) the firm’s or investment firm group’s ICARA document;

FCA 2021/XX Page 158 of 233 (2) any relevant information provided by the firm or other members of its group as part of its reporting obligations under MIFIDPRU 9 or other obligations in the Handbook; (3) any other information or documents requested by the FCA for the purposes of the SREP; (4) interviews with members of the firm’s governing body, or its employees, advisors, service providers, and auditors; (5) information shared by other authorities; and (6) any other relevant information that the FCA holds. 7.10.5 G The following is a non-exhaustive list of factors that the FCA will normally consider when conducting its SREP: (1) the extent to which the firm’s or investment firm group’s risk management framework includes a clearly defined risk appetite; (2) the governance arrangements operated by the firm or investment firm group, including whether there are clear lines of accountability and evidence of appropriate senior management involvement; (3) whether the firm or investment firm group has appropriately identified and assessed the materiality of: (a) the harms that may arise from the ongoing operation of the firm’s or group’s business; (b) the harms that may result from a disorderly wind-down of the firm or other members of its group; (4) whether the firm or investment firm group has adequate systems and controls in place to monitor and manage the risks arising from its business; (5) whether the firm or investment firm group has properly integrated its ICARA process into day-to-day decision making within its business; (6) whether the firm, and where applicable, other individual members of its investment firm group, have adequate own funds and liquid assets to comply with the overall financial adequacy rule; (7) whether the capital and liquidity planning and business model analysis (and, where applicable, stress testing and reverse stress testing) conducted by the firm or investment firm group is based on plausible scenarios that are relevant to the business it undertakes; and

FCA 2021/XX Page 159 of 233 (8) whether the wind-down planning assessment conducted by the firm, and where applicable, other individual members of its investment firm group, is adequate, contains a clear explanation of the key steps needed to ensure an orderly wind-down and is based on realistic assumptions. [Note: article 36 of the IFD.] Examples of actions that the FCA may take following a SREP 7.10.6 G (1) Once the FCA has completed a SREP, it will consider whether any corrective action is necessary to ensure that (among other outcomes) a firm: (a) is complying with the overall financial adequacy rule; (b) has an appropriate plan in place to ensure an orderly wind￾down; and (c) is appropriately identifying and managing the material potential harms that may result from the ongoing operation of the firm’s business. (2) When considering the action that it may take, the FCA will have regard to all of the powers available to it and the potential harms that it has identified during the SREP. The following is a non￾exhaustive list of actions that the FCA may take: (a) requiring a firm to hold additional own funds or liquid assets; (b) requiring a firm to implement new risk management or governance arrangements; (c) requiring a firm to provide the FCA, within a specified period, an improvement plan to ensure that the firm complies with the applicable requirements in the Handbook or other legislation; (d) requiring a firm to apply a particular policy for provisioning or for the treatment of assets when calculating its own funds or own funds requirement; (e) restricting the activities that a firm may undertake as part of its business (which may be on a permanent basis, for a specified period of time, or until certain specified conditions are met); (f) requiring a firm to reduce the level of risk involved in the products or services it provides, including in relation to activities that it has outsourced to third parties;

FCA 2021/XX Page 160 of 233 (g) requiring a firm to reduce or limit the amount of variable remuneration it pays; (h) requiring a firm to reduce or limit its distributions of profits; (i) imposing additional or more frequent reporting requirements on a firm; (j) requiring a firm to hold an own funds or liquid assets buffer in excess of the amounts necessary to comply with the overall financial adequacy rule; (k) requiring a firm to make additional public disclosures; (l) requiring a firm to strengthen its data security, confidentiality or data protection processes; (m) requiring a firm to provide additional information to clients or counterparties; (n) withdrawing a permission previously granted under MIFIDPRU to apply a specific treatment (such as a K￾CMG permission, or a permission to use an internal model for the purposes of the K-NPR requirement); (o) requiring a firm to use a different wind-down trigger; (p) requiring a firm to modify its legal structure or the structure of its group, where doing so would improve the FCA’s ability to supervise the firm; (q) giving individual guidance to the firm on any of the above matters or on any other matter that the FCA considers is relevant. [Note: article 39 of the IFD.] 7.10.7 G While the FCA will have regard to all powers available to it, the FCA would generally expect to take the actions described in MIFIDPRU 7.10.6G by using one or more of the following approaches: (1) exercising the powers under section 55J of the Act permitting the FCA to vary or cancel a firm’s permission on the FCA’s own initiative; (2) inviting a firm to make a voluntary application for the imposition of a requirement under section 55L(5) of the Act; (3) imposing a requirement on a firm on the FCA’s own initiative under section 55L(3) of the Act;

FCA 2021/XX Page 161 of 233 (4) withdrawing a MIFIDPRU permission in accordance with the rules in MIFIDPRU; (5) imposing a requirement on a parent undertaking in accordance with [section 143K] of the Act; (6) requiring a firm or parent undertaking to provide additional information to the FCA under section 165 of the Act; (7) requiring a report by a skilled person in accordance with section 166 of the Act; or (8) giving individual guidance to a firm under section 139A of the Act, as further described in SUP 9.3. General FCA approach to requiring a firm to hold additional own funds or liquid assets 7.10.8 G (1) Following a SREP, the FCA may conclude that a firm should hold an additional amount of own funds or liquid assets to comply with the overall financial adequacy rule. (2) Where this is the case, the FCA will normally specify an amount of own funds and/or liquid assets that the firm should hold by: (a) issuing individual guidance; or (b) imposing a requirement on the firm. (3) The amount in (2) will typically represent the FCA’s assessment of the firm’s overall own funds threshold requirement or liquid assets threshold requirement. However, in some cases, it may be specified on a different basis (such as by reference to a specific component of the threshold requirement or to a particular risk or harm). (4) Where the FCA has undertaken a sectoral review, as described in MIFIDPRU 7.10.3G(2), it may issue guidance to, or impose a requirement on some or all firms that are active in that sector, without conducting an individual SREP in relation to each firm. The guidance or requirement may relate to: (a) additional amounts of own funds or liquid assets that such firms must hold; or (b) other actions that such firms must undertake. 7.10.9 G (1) The FCA will determine whether a requirement or guidance is more appropriate. Where the FCA chooses to issue guidance, this will normally explain how the FCA will approach supervising the overall financial adequacy rule in relation to the firm. The FCA

FCA 2021/XX Page 162 of 233 expects that the firm would normally confirm to the FCA that the firm will treat the amounts specified in that guidance as its threshold requirements going forward (and will therefore hold the relevant of own funds and liquid assets to comply with the overall financial adequacy rule), unless the firm subsequently determines under its ICARA process that higher amounts are required. (2) Where the FCA considers that it is appropriate to apply a requirement in connection with the overall financial adequacy rule, it may invite a firm to make a voluntary application under section 55L(5) of the Act to impose a requirement on the firm to hold the level of own funds or liquid assets that the FCA has assessed as being the firm’s threshold requirements. (3) If a firm declines to make a voluntary application to impose the relevant requirement, the FCA may use its powers under section 55L(3) of the Act to impose the requirement on the firm on the FCA’s own initiative. (4) In appropriate cases, the FCA will also consider whether it is appropriate to invite a parent undertaking of the firm to make a voluntary application under [section 143K(1)] of the Act, or to impose a requirement on such a parent undertaking on the FCA’s own initiative under [section 143K(3)] of the Act. Examples of when the FCA may choose to apply this approach include where: (a) an investment firm group is operating an ICARA process that covers multiple firms in accordance with MIFIDPRU 7.9; or (b) the FCA considers that the potential harms arising from a firm’s membership of its group can be addressed more effectively by imposing a requirement on the parent undertaking. (5) Guidance on a threshold requirement issued by the FCA (or, where applicable, a requirement to hold a minimum level of own funds or liquid assets imposed on a firm by the FCA) will apply until the FCA issues guidance on a revised threshold requirement (or varies or removes the requirement relating to own funds or liquid assets) in relation to the firm. (6) If a firm subsequently determines, as a result of its ICARA process, that it needs to hold a higher level of own funds or liquid assets to satisfy the overall financial adequacy rule, it must hold that higher level. This is because the FCA’s assessment of a firm’s threshold requirement (or a requirement applied to the firm by the FCA) reflects an assessment carried out at that point in time and does not relieve the firm of its obligation to ensure that it is meeting the overall financial adequacy rule at all times.

FCA 2021/XX Page 163 of 233 (7) A firm’s business model or operating model may undergo a significant change, with the result that the firm considers that the threshold requirement specified in the guidance issued by, or the requirement applied by, the FCA exceeds the amount of own funds or liquid assets that the firm requires to comply with the overall financial adequacy rule. In this case, the firm: (a) should undertake its own assessment of the amounts that the firm now requires to comply with the overall financial adequacy rule or, where applicable, to address the risks in relation to which the requirement was imposed; and (b) having undertaken the determination in (a), may contact the FCA to request a review of the existing guidance or requirement. 7.10.10 G The following is a non-exhaustive list of situations in which the FCA may assess that a firm must hold additional own funds to comply with the overall financial adequacy rule: (1) the business of the firm or investment firm group may result in material harm that is not sufficiently covered by the firm’s assessment of its own funds threshold requirement and has not otherwise been adequately mitigated; (2) the firm or investment firm group does not comply with the governance requirements in MIFIDPRU 7.2 or 7.3; (3) the firm’s or investment firm group’s ICARA process does not comply with the relevant requirements in MIFIDPRU 7; (4) the adjustments in relation to the prudent valuation of the firm’s or investment firm group’s trading book are insufficient to enable the firm or investment firm group to sell out or hedge its positions within a short period without incurring material losses under normal market conditions; (5) the review of the firm’s use of internal models or own estimates of delta for the purposes of the K-NPR requirement or K-TCD requirement indicates that non-compliance with the requirements for applying those models would be likely to lead to inadequate levels of own funds; (6) the manner in which the firm or investment firm group operates its business suggests that there is a significant risk that it will fail to comply with the overall financial adequacy rule in the foreseeable future; or (7) the firm’s wind-down plan does not identify realistic and credible actions for ensuring an orderly wind-down or is based on unreasonable or unrealistic assumptions.

FCA 2021/XX Page 164 of 233 [Note: article 40(1) of the IFD.] 7.10.11 G The FCA may provide guidance on a firm’s own funds threshold requirement (or, where applicable, impose a requirement) by reference to: (1) a percentage of the firm’s own funds requirement; (2) the requirement that would result from applying a modified co￾efficient to one or more K-factor metrics for the purposes of the firm’s K-factor requirement; and/or (3) a fixed amount. 7.10.12 G A firm will be required to meet any own funds threshold requirement with own funds that satisfy the conditions in MIFIDPRU 7.6.5R unless the FCA applies an alternative requirement to the firm. [Note: article 40(4) of the IFD.] 7.10.13 G The following is a non-exhaustive list of situations in which the FCA may assess that a firm needs to hold additional liquid assets to comply with the overall financial adequacy rule: (1) the business of the firm or investment firm group may result in material harm that is not sufficiently covered by the liquid assets threshold requirement as assessed by the firm and has not otherwise been adequately mitigated; (2) the firm or investment firm group does not comply with the governance requirements in MIFIDPRU 7.2 or 7.3 in one or more material respects; (3) the firm’s or investment firm group’s ICARA process does not comply with the requirements in MIFIDPRU 7; (4) the firm or investment firm group’s funding profile indicates that there may be a significant liquidity mismatch between amounts payable and receivables; (5) the manner in which the firm or investment firm group operates its business suggests that there is a significant risk that it will fail to comply with the overall financial adequacy rule in the foreseeable future; or (6) the firm’s wind-down plan does not identify realistic and credible actions for ensuring an orderly wind-down or is based on unreasonable or unrealistic assumptions. 7.10.14 G (1) A firm can normally meet its liquid assets threshold requirement with any type of liquid assets. This is subject to the overriding

FCA 2021/XX Page 165 of 233 requirement that in all cases, a firm must meet its basic liquid assets requirement with core liquid assets. (2) However, in appropriate cases, the FCA may require a firm to meet all or part of its liquid assets threshold requirement with a more limited subset of liquid assets. For example, in certain cases, the FCA may require a firm to hold core liquid assets to cover particular risks or may disallow the use of certain non-core liquid assets. (3) In appropriate cases, the FCA may: (a) require a firm to apply modified haircuts to non-core liquid assets; or (b) impose certain requirements relating to a firm’s funding profile and the matching of expected liquidity outflows and inflows. (4) Where the FCA wishes to apply the approaches in (2) or (3), it will normally invite the firm to apply for the imposition of a requirement to that effect under section 55L(5) of the Act. In appropriate cases, the FCA may impose such a requirement on its own initiative in accordance with section 55L(3) of the Act. 7 Annex 1 Guidance on assessing potential harms that is potentially relevant to all firms Purpose 1.1 G (1) This annex contains guidance on how a MIFIDPRU investment firm can assess the potential harms arising from its business as part of the ICARA process. (2) This guidance is designed to be of potential relevance to all firms, but not every aspect of this guidance will be relevant to every firm. A firm should consider this guidance in light of its particular business model. (3) Firms are reminded that their ICARA process must be proportionate to the nature, scale and complexity of their activities. This guidance should be interpreted by reference to what is proportionate and appropriate for a particular firm. General approach to assessing material potential harms 1.2 G (1) For the purposes of its ICARA process, a firm should identify potential harms by considering plausible hypothetical scenarios that might occur in relation to the activities that the firm carries on. The firm should also consider the possibility that certain

FCA 2021/XX Page 166 of 233 scenarios might occur at the same time or that there might be a correlation between connected scenarios. (2) A firm should generally estimate the nature and size of potential harms by using its own knowledge and experience. (3) Where appropriate, a firm may use peer analysis to estimate potential harms. When doing so, the firm should take into account any material differences between the firm’s business and the business carried on by its peer, and to the extent that it is aware of them, any material differences in their respective systems and controls. (4) A firm may, but is not required to, use statistical models to identify potential harms, but where it does so, the firm should consider the following factors: (a) the importance of ensuring that the statistical model is properly integrated into the firm’s wider approach to mitigating risk under the ICARA process and appropriately takes into account the guidance on assessing harm in MIFIDPRU 7; (b) the FCA’s expectation that relevant individuals within the firm who are responsible for the firm’s risk management function or for the oversight of that function should fully understand how the model operates, including any relevant assumptions or limitations and should be able to explain how this contributes to compliance with the overall financial adequacy rule; (c) the accuracy of the model depends on ensuring that the inputs into the model are appropriate and properly reflect the firm’s business; (d) the importance of periodically checking that the outputs of the model remain appropriate. This includes model validation; and (e) the fact that excessive reliance upon the model may result in the firm failing to operate wider risk management systems and controls. (5) In appropriate cases, it may be reasonable for a firm to take into account the impact of insurance when assessing potential harms and considering how the firm manages risks. However, firms should note that in many cases, insurance may not be an adequate substitute for financial resources that are required to address harm immediately. Firms should also consider the terms of any insurance, including any limitations or exclusions, when

FCA 2021/XX Page 167 of 233 assessing the extent to which insurance may be an appropriate and effective risk mitigant. Examples of situations that may result in material harm to clients 1.3 G In the FCA’s view, the following are non-exhaustive examples of risks to clients or to the market that may arise from a firm’s business: (1) breach of an investment mandate, resulting in clients being exposed to risks outside of their specified tolerance or to investments which are otherwise unsuitable for their objectives; (2) trading or dealing errors that result in losses to clients; (3) outages in, or other problems with, the firm’s systems that cause disruption to the continuity of the firm’s services (for example, by preventing the firm’s clients from being able to see the value of their investments or from being able to issue trading instructions), leading to financial losses for clients; (4) corporate finance advice which results in a legal claim against the firm; (5) losses to clients caused by the activities of the firm’s tied agents or appointed representatives (including in respect of any business which is not MiFID business for which the firm may be liable as principal) for which the firm is responsible; (6) provision of unsuitable investment advice, for example in relation to pension transfers or investments, resulting in clients suffering losses; (7) failure to comply with any applicable provisions of CASS, resulting in potential losses to clients; and (8) the inability to return money received by the firm by way of title transfer collateral arrangement promptly to a client when required. Examples of situations that may result in harm to the firm 1.4 G (1) Events that result in material harm to a firm may affect the viability of the firm’s business. In turn, that may affect the firm’s ability to meet its obligations to clients or to its other counterparties and may increase the risk of a disorderly wind￾down. (2) In the FCA’s view, the following are non-exhaustive examples of situations that could result in material harm to a firm:

FCA 2021/XX Page 168 of 233 (a) claims on tied agents or appointed representatives that result in the firm being liable as principal; (b) the failure of significant clients or counterparties upon which the firm relies to generate a significant proportion of its revenue; (c) significant operational events, such as the failure of key systems or internal fraud; and (d) obligations of the firm relating to liabilities under a defined benefit pension scheme. Assessing the harm that may result from insufficient liquidity 1.5 G When assessing potential harms that may occur in connection with its business, a firm should consider any potential impact on its liquid assets. Where a firm has insufficient liquid assets to cover the relevant harm, it may find itself unable to pay its debts as they fall due. In turn, this could trigger an unexpected insolvent wind-down, which has the potential to cause harm to clients, counterparties and the wider markets. 1.6 G (1) The systems that the firm uses to identify and monitor liquidity risk should be tailored to its business lines, the currencies in which it operates, its structure (taking into account, for example, whether it operates branches or supports subsidiaries or other group entities). In addition, those systems should consider liquidity costs, benefits and risks, including intra-day liquidity risks. (2) The FCA expects that the systems that a firm uses to identify and monitor liquidity risk will be proportionate to the complexity, size, structure and risk profile of the firm and the scope of its operations. 1.7 G When a firm is assessing the quality and amount of liquid assets that it has available, the FCA considers that the following are non-exhaustive factors that may be relevant: (1) the extent to which assets held by the firm can be converted into cash within a reasonable time period; (2) any legal or operational restrictions that may apply to the firm or to particular assets, which may affect the firm’s ability to realise assets or to access cash in a timely manner; (3) the extent to which liquid assets may be held, or the proceeds of the firm’s assets may be received, in currencies other than the expected currency of the firm’s liabilities and the ease with which those currencies can be converted (including in stressed market conditions); and

FCA 2021/XX Page 169 of 233 (4) any legal or practical restrictions on the transferability of funds between the firm and other members of its group, including in stressed market conditions. 1.8 G When a firm is assessing the amount of liquid assets it may need to address potential harms, the FCA considers that the following are non￾exhaustive factors that may be relevant: (1) any concentration of the firm’s funding arrangements, including in relation to: (a) counterparties (or groups of connected counterparties) providing funding; (b) products or facilities used to provide funding; and (c) currencies; (2) the extent to which the firm may be exposed to mismatches between the maturity of its assets and its liabilities; (3) whether stressed market conditions could lead to accelerated cash outflows from the firm or longer-term reductions in the availability of liquid assets; (4) whether intra-day obligations could affect the firm’s ability to meet its payment and settlement obligations in a timely manner (including potential margin calls in relation to the firm’s own positions, or positions of the firm’s clients in respect of which the firm has an obligation to meet the relevant margin call); (5) any requirements on the firm (whether or not they are legally binding) arising from any off-balance sheet arrangements, including: (a) commitments under any credit or liquidity facilities (including those which may be cancelled at any time) or guarantees; (b) obligations under any liquidity facilities supporting securitisation programmes; or (c) obligations in relation to client money; (6) payments that the firm may make to maintain its franchise, reputation or brand or to ensure the continued viability of its business, even though the firm may be under no legal obligation to make such payments; and (7) the possibility of other unexpected payment obligations, such as:

FCA 2021/XX Page 170 of 233 (a) direct or indirect costs arising from litigation; (b) redress payments; or (c) fines or penalties. 1.9 G (1) When considering liquidity risks and potential harms, a firm should consider whether it has sufficient diversification in funding sources. (2) A firm should consider whether there may be a correlation between different market conditions and the firm’s ability to access funding from different sources. (3) When analysing what level of funding diversification is appropriate for its business, a firm should consider the following: (a) the maturity date of any funding arrangements; (b) the nature of the counterparty providing the funding; (c) whether the funding arrangement is secured or unsecured; (d) if the funding arrangement is in the form of a financial instrument, the relevant type of instrument; (e) the currency of the funding arrangement; and (f) the geographical market of the funding arrangement. (4) A firm should regularly assess whether its ability to raise short, medium and long-term liquidity is sufficient for its ongoing requirements. 1.10 G (1) A firm should consider whether it has appropriately addressed potential harms arising from liquidity risks in relation to the following aspects of the firm’s significant business activities: (a) product pricing; (b) performance measurement and incentives; and (c) the approval process for new products. (2) The FCA expects that a firm would take into account the liquidity risks arising from any significant business activities and product lines, whether or not they are accounted for on the firm’s balance sheet.

FCA 2021/XX Page 171 of 233 (3) The FCA also expects that firms will have clearly identified the liquidity costs and benefits attributable to particular significant business and product lines and that relevant individuals within business line management for those areas will have an appropriate understanding of such costs and benefits. (4) A firm should address all significant business activities, including those that involve the creation of contingent exposures which may not have an immediate balance sheet impact. (5) Incorporating liquidity pricing into a firm’s processes may assist in aligning the risk-taking incentives of individual business lines within a firm with the liquidity risk and potential harms that may result from the activities of those business lines. 1.11 G (1) Firms should consider intra-day liquidity positions when considering liquidity risks and potential harms that may result from their operations. (2) As part of their ICARA process, the FCA would expect firms to identify: (a) any significant time-critical payment or settlement obligations and any arrangements that are in place to prioritise such payments; (b) any significant payment or settlement obligations that the firm may have as a result of acting as a custodian or a settlement agent; (c) any potential net funding shortfalls that the firm may have at different points during the day; (d) potential significant disruptions to its intra-day liquidity flows and any arrangements in place to deal with these; and (e) any arrangements necessary to ensure the proper management of collateral. 1.12 G When identifying liquidity risks and potential material harms that may result in relation to a firm’s use and management of collateral, the FCA expects that the following considerations will be relevant: (1) the firm’s ability to distinguish clearly at any time between encumbered assets and assets that are unencumbered and available to meet the firm’s liquidity needs, particularly in an emergency situation;

FCA 2021/XX Page 172 of 233 (2) the jurisdiction in which the assets are based or registered and any legal or regulatory restrictions that may apply to the availability or use of the assets as a result; (3) any operational restrictions that may apply in relation to the assets; (4) the extent to which collateral deposited by the firm with a counterparty or third party may have been rehypothecated; (5) the extent to which the assets available to the firm to use as collateral are likely to be acceptable to the firm’s major counterparties and liquidity providers; (6) the impact of any existing financing or security arrangements entered into by the firm (which may contain financial covenants, warranties, events of default or negative pledge clauses) on the firm’s ability to provide collateral; and (7) the potential impact of severe but plausible stressed scenarios on the firm’s ability to provide collateral where necessary and on any collateral received by the firm. 1.13 G A firm that has significant positions in foreign currencies should consider the liquidity risk and potential harms that may arise as a result of such positions. 1.14 G As part of its assessment under MIFIDPRU 7.9.2R, a firm that forms part of a group should consider the extent to which membership of that group might have an impact on the firm’s own liquidity position. In-depth stress testing and reverse stress testing 1.15 G The guidance in MIFIDPRU 7 Annex 1.16G to MIFIDPRU 7 Annex 1.20G is relevant to firms with larger or more complex businesses. 1.16 G The FCA would normally expect that stress testing carried out by a firm would involve the following: (1) identifying severe but plausible adverse scenarios which are relevant to the firm and the market in which it operates; (2) stating clear assumptions, when compared to the firm’s business￾as-usual projections, which are consistent with the scenarios identified in (1); (3) considering the impact of the scenarios identified in (1) against the firm’s own risk appetite, by reference to: (a) individual business lines or portfolios; and

FCA 2021/XX Page 173 of 233 (b) the overall position of the firm as a whole; (4) assessing the impact of the scenarios in (1) on the firm’s: (a) available own funds and liquid assets; and (b) own funds requirement and basic liquid assets requirement; (5) estimating the effects of scenarios identified in (1) on each of the following as they relate to the firm, both before and after taking into account any realistic management actions: (a) profits and losses; (b) cash flows; (c) the liquidity position; and (d) the overall financial position; and (6) the firm’s governing body regularly reviewing the scenarios identified in (1) to ensure that their nature and severity remain appropriate and relevant to the firm. 1.17 G When considering the impact of the scenarios in MIFIDPRU 7 Annex 1.16G(1) on a firm’s available liquid assets, the FCA considers that the following factors may be relevant: (1) correlations between funding markets; (2) the effectiveness of diversification across the firm’s chosen sources of funding; (3) any potential additional margin calls or collateral requirements; (4) contingent claims, including potential draws on committed lines extended to third parties or other entities within the firm’s group; (5) liquid assets absorbed by off-balance sheet vehicles and activities (including conduit financing); (6) the transferability of liquid assets; (7) access to central bank market operations and liquidity facilities; (8) estimates of future balance sheet growth; (9) the continued availability of market liquidity in a number of currently highly liquid markets; (10) the ability to access secured and unsecured funding;

FCA 2021/XX Page 174 of 233 (11) currency convertibility; and (12) access to payment or settlement systems on which the firm relies. 1.18 G The FCA would normally expect that reverse stress testing carried out by a firm would involve the following: (1) identifying a range of adverse circumstances which would cause the firm’s business model to become unviable; (2) assessing the likelihood that the adverse circumstances in (1) will occur; (3) determining whether the risk of the firm’s business model becoming unviable is unacceptably high when compared with the firm’s risk appetite or tolerance; and (4) where the firm determines under (3) that the risk is unacceptably high, adopting effective arrangements, processes, systems or other measures to prevent or mitigate that risk. This may include making appropriate changes to the firm’s business model or operating model. 1.19 G For the purposes of reverse stress testing, the FCA considers that the following are non-exhaustive examples of when a firm’s business model may become unviable: (1) all or a substantial portion of the firm’s counterparties being unwilling to continue transacting with the firm or seeking to terminate their contracts with it. In some circumstances, the failure of a single major counterparty or client may cause a firm’s business to become unviable, particularly if this could result in wider market disruption; (2) another member of the firm’s group becoming unable or unwilling to provide the support which is necessary for the firm to continue its business (for example, by withdrawing access to shared services or funding arrangements); (3) the firm’s existing shareholders or owners being unwilling to provide new capital when required; or (4) a sustained and continued reliance on income or revenue generated from a peripheral activity (for example, interest income derived from client money). 1.20 G The following table is a simple example of how a firm might analyse and record the outcome of stress testing using the guidance in MIFIDPRU 7 Annex 1.18G.

FCA 2021/XX Page 175 of 233 Example scenario Likelihood Mitigants Failure of a significant counterparty leads to a liquidity shortfall that causes the firm to default on its own obligations Medium – above firm’s risk appetite Contingency funding plan 30% drop in revenue over a 6-month period leads to sustained losses and management actions have little impact Low – in line with firm’s risk appetite Management actions after a stress event fail to rebuild capital and the firm’s group and shareholders are unwilling to inject further capital Low – in line with firm’s risk appetite Large numbers of staff and outsourced providers are absent due to illness during a pandemic and the firm is not able to operate revenue￾generating activities for a month High – above firm’s risk appetite Identify back up outsourcing providers and enable staff to work from home Cyber-attack results in the firm being unable to access systems and provide services for 3 weeks. This results in loss of revenue, a liquidity shortfall and fines from regulators Medium – above firm’s risk appetite Improvements to cyber resilience 1.21 G A firm’s business model may become unviable long before the firm’s financial resources have been exhausted. The FCA recognises that not every business failure is the result of a lack of financial resources and

FCA 2021/XX Page 176 of 233 individual firms may vary in their assessment of when they would be unwilling or unable to continue carrying on their activities. Non￾exhaustive examples of where a firm’s business model may become unviable before its financial resources are exhausted include: (1) the firm has a sustained and continued reliance on income or revenue generated from a peripheral or ancillary activity, such as interest income derived from client money; or (2) where the firm is reliant on title transfer collateral arrangements to meet its basic liquid assets requirement on a sustained basis. 7 Annex 2 Additional guidance on assessing potential harms that is relevant for firms dealing on own account or firms with significant investments on their balance sheet Purpose 2.1 G (1) This annex contains guidance on how a MIFIDPRU investment firm can assess the potential harms arising from its business as part of its ICARA process. This guidance is primarily intended to be relevant to firms that deal on own account or hold significant investments on their balance sheets. It should be interpreted in light of the firm’s individual business model. (2) Firms are reminded that their ICARA process must be proportionate to the nature, scale and complexity of their activities. This guidance should be interpreted by reference to what is proportionate for a particular firm. 2.2 G Firms that deal on own account or hold significant investments on their balance sheets may be at increased risk of events that result in significant losses or other harm to the firm. In turn, this may increase the risk of a firm defaulting on its obligations to counterparties or becoming insolvent and entering a disorderly wind-down. Examples of situations that may result in material harm to the firm 2.3 G In the FCA’s view, the following are non-exhaustive examples of situations that may result in harm to the firm: (1) material adverse changes in the book value of the firm’s assets; (2) the failure of the firm’s clients or counterparties; and (3) losses incurred or payments due in connection with positions taken by the firm in financial instruments, foreign currencies and commodities (irrespective of whether those positions form part of the firm’s trading book or not).

FCA 2021/XX Page 177 of 233 2.4 G When a firm is assessing potential harms connected with material changes in the book value of the firm’s assets, the following are non￾exhaustive factors that may be relevant: (1) changes in the creditworthiness or the default of a client or counterparty, where that change or default may result in the firm realising assets below their book value or recording impairments, revaluations or write-downs; (2) changes in market conditions which may affect relevant prices, indices or rates, including changes in equity, debt or foreign exchange markets or interest rates; (3) operational events or natural disasters that may affect the value of the firm’s assets; (4) any concentration of the firm’s assets in relation to a specific: (a) client or counterparty (or group of connected clients or counterparties); (b) economic sector or sub-sector; or (c) geographical market. In the FCA’s view, this concentration assessment should not be limited to the particular risks covered by the requirements in MIFIDPRU 5, but should involve a broader assessment of the risks that may arise in relation to any such concentration; (5) whether any of the firm’s assets are, or have a value which is dependent upon, complex products, such as interests in securitisations or structured products which are complex or opaque; (6) the extent to which the firm has used leverage (including contingent leverage); and (7) whether the firm has any exposures under off-balance sheet items, such as commitments or guarantees. 2.5 G When a firm is assessing potential harms arising from the failure of its clients or counterparties, the FCA considers that the following are non￾exhaustive factors that may be relevant: (1) changes in the creditworthiness or the default of a client or counterparty, which may result in direct losses for the firm or the need to revalue or replace transactions;

FCA 2021/XX Page 178 of 233 (2) changes in market conditions which may result in the firm incurring greater costs to replace a transaction that the client or counterparty has failed to settle; (3) the risk that collateral received from the client or counterparty may not be as effective as expected at covering the losses arising from that client or counterparty’s failure or default; and (4) any concentration of the firm’s exposures in relation to the client or counterparty or the economic sector or geographical market in which that client or counterparty is active. 2.6 G Where a firm is subject to the K-TCD requirement or the K-CON requirement, the FCA would generally expect the firm to consider whether those requirements are sufficient to cover the harms that may result from the failure of its clients or counterparties to fulfil their obligations. In some cases, those requirements may not apply in relation to the client, counterparty or position in question, or may not adequately address the relevant risks. Where this is the case, the firm should consider other measures to address the potential harm. 2.7 G Where a firm is assessing potential harms arising from the firm’s positions in financial instruments, foreign currencies and commodities, the FCA considers that the following are non-exhaustive factors that may be relevant: (1) the extent to which the relevant position may involve risks that are not adequately captured by the firm’s K-NPR requirement, K-CMG requirement or K-CON requirement, such as: (a) basis risk between certain products; (b) risks arising from approximate valuations applied to non￾linear products; (c) the risk that large movements in pegged currencies may be underestimated; or (d) risks arising from inadequate proxy market data; (2) whether a position is illiquid or distressed, or whether it may become so under severe but plausible market conditions, and how this may affect the expected holding period for that position; (3) the extent to which it is possible to hedge a position under both normal, and severe but plausible, market conditions; (4) whether a position is difficult to value because of a lack of recent observable market data;

FCA 2021/XX Page 179 of 233 (5) whether the intra-day exposure associated with a position differs significantly from the end-of-day exposure; (6) any known weaknesses in any model used by the firm to assess the risks arising from the position; and (7) the concentration of the portfolio in which the position is held, including by reference to: (a) issuers or counterparties; (b) economic sectors or sub-sectors; and (c) geographical markets. 7 Annex 3 Notification under MIFIDPRU 7.6.11R in relation to level of own funds R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] 7 Annex 4 Notification under MIFIDPRU 7.7.14R in relation to level of liquid assets R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] 7 Annex 5 Notification under MIFIDPRU 7.8.5R of submission date of data item MIF007 R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] 7 Annex 6 Notification under MIFIDPRU 7.1.9R in relation to non-SNI thresholds for applying committee requirements and extended remuneration requirements R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] 7 Annex 7 Map of rules and guidance relating to the ICARA process 7.1 G (1) The table in this annex identifies the rules in MIFIDPRU 7 that impose obligations relating to the ICARA process and the guidance provisions corresponding to those rules.

FCA 2021/XX Page 180 of 233 MIFIDPRU rule Basic obligation Associated guidance Content of guidance MIFIDPRU 7.4: baseline ICARA obligations MIFIDPRU 7.4.7R The overall financial adequacy rule MIFIDPRU 7.4.8G Explanation of the link between the overall financial adequacy rule and the ICARA process MIFIDPRU 7.4.9R The requirement to operate an ICARA process to identify, monitor and, if proportionate, reduce all material potential harms relevant to the firm MIFIDPRU 7.4.16G Guidance on how firms should seek to mitigate the risk of potential harms MIFIDPRU 7.4.10R The requirement for the ICARA process to be proportionate to the nature, scale and complexity of the firm’s business MIFIDPRU 7.4.11R The requirement for the ICARA process to be internally consistent MIFIDPRU 7.4.12G Explanation of the FCA’s expectations in relation to consistency and coherency of the ICARA process MIFIDPRU 7.4.13R The requirement to identify all material harms MIFIDPRU 7.4.14G Explanation of the basic factors that will be relevant when (2) MIFIDPRU investment firms may find this annex helpful when designing and reviewing their ICARA processes to ensure that all mandatory requirements have been met. (3) Firms should not use this table as a substitute for reading and applying the detailed rules and guidance in MIFIDPRU 7.

FCA 2021/XX Page 181 of 233 that may result from the firm’s business identifying potential harms MIFIDPRU 7.4.15G Cross-reference to additional guidance in MIFIDPRU 7 Annex 1R and MIFIDPRU 7 Annex 2R MIFIDPRU 7 Annex 1G General guidance on identifying potential harms that may be relevant to all firms MIFIDPRU 7 Annex 2G Additional guidance on identifying potential harms that may be relevant for a firm that is dealing on own account or that has significant balance sheet positions MIFIDPRU 7.5: Capital and liquidity planning, stress testing, wind-down planning and recovery planning MIFIDPRU 7.5.2R Business model assessment and capital and liquidity planning requirements, including stress testing MIFIPRU 7.5.3G Guidance referring to Finalised Guidance FG20/1 MIFIDPRU 7.5.4G Guidance on stress testing obligations and reverse stress testing for larger or more complex firms MIFIDPRU 7 Annex 1.15G to 7 Annex 1.20G Additional guidance on more in-depth stress testing and reverse stress testing MIFIDPRU 7.5.5R Recovery planning requirements MIFIDPRU 7.5.6G Guidance on issues that may be relevant when assessing potential recovery actions

FCA 2021/XX Page 182 of 233 MIFIDPRU 7.5.7R Wind-down planning requirements MIFIDPRU 7.5.8G Guidance referring to the Wind-Down Planning Guide and Finalised Guidance FG20/1 MIFIDPRU 7.5.9R Requirement to use wind-down analysis to assess levels of own funds and liquid assets required under overall financial adequacy rule MIFIDPRU 7.5.10G Explanation of the interaction between the overall financial adequacy rule and the wind-down triggers MIFIDPRU 7.6: Assessing and monitoring the adequacy of own funds MIFIDPRU 7.6.2R Requirement to produce a reasonable estimate of impact of potential harms on own funds MIFIDPRU 7.6.4G Guidance on how the assessment of potential harms interacts with the own funds threshold requirement and the overall financial adequacy rule and how the firm should conduct its assessment MIFIDPRU 7.6.3R Requirement to use assessment under MIFIDPRU 7.6.2R to assess if additional own funds required to meet overall financial adequacy rule MIFIDPRU 7.6.6G Guidance explaining the circumstances in which the guidance in MIFIDPRU 7.6.7G to MIFIDPRU 7.6.10G is relevant MIFIDPRU 7.6.7G Guidance on how a non-SNI MIFIDPRU investment firm should assess whether harms may be covered by its own funds requirement MIFIDPRU 7.6.8G Guidance on circumstances in which harms may not be covered by a non￾SNI MIFIDPRU

FCA 2021/XX Page 183 of 233 investment firm’s own funds requirement MIFIDPRU 7.6.9G Guidance on how an SNI MIFIDPRU investment should assess whether harms may be covered by its own funds requirement MIFIDPRU 7.6.10G Guidance on how a firm’s assessment of potential harms contributes to determining its own funds threshold requirement MIFIDPRU 7.6.5R Requirement to meet own funds threshold requirement with specified types of own funds MIFIDPRU 7.6.11R Notification requirements when a firm’s own funds reach certain levels MIFIDPRU 7.6.12G Guidance on the FCA’s ability to set an alternative early warning indicator MIFIDPRU 7.6.13G Guidance explaining how notifications under MIFIDPRU 7.6.11R interact with general notification obligations under Principle 11 or SUP 15.3 MIFIDPRU 7.6.14G and MIFIDPRU 7.6.15G Explanation of FCA’s approach to intervention when firm’s own funds reach certain levels MIFIDPRU 7.7: Assessing and monitoring the adequacy of liquid assets MIFIDPRU 7.7.2R Requirement to produce reasonable MIFIDPRU 7.7.3G Guidance on the interaction between the overall financial

FCA 2021/XX Page 184 of 233 estimate of liquid assets required by the firm adequacy rule and the liquid assets that a firm must hold MIFIDPRU 7.7.4G Guidance on how a firm should assess the liquid assets required for the ongoing operation of its business MIFIDPRU 7.7.5G Guidance on the basic liquid assets requirement and how to determine the firm’s liquid assets threshold requirement MIFIDPRU 7.7.6R Requirement to meet liquid assets threshold requirement with core liquid assets and non-core liquid assets MIFIDPRU 7.7.7G General principles applicable to non￾core liquid assets MIFIDPRU 7.7.8R Basic definition of non-core liquid assets MIFIDPRU 7.7.9G Guidance on exclusions for non￾core liquid assets MIFIDPRU 7.7.10R Requirement to apply appropriate haircut to non￾core liquid assets MIFIDPRU 7.7.11G and 7.7.12G Guidance on minimum haircuts for non-core liquid assets MIFIDPRU 7.7.13G Guidance on approach to applying haircuts to shares or units in collective investment undertakings MIFIDPRU 7.7.14R Notification requirements when a firm’s liquid assets reach certain levels MFIIDPRU 7.7.15G Guidance explaining how notifications under MIFIDPRU 7.6.14R interact with general notification obligations under Principle 11 or SUP 15.3

FCA 2021/XX Page 185 of 233 MIFIDPRU 7.7.16G and 7.7.17G Explanation of FCA’s approach to intervention when firm’s liquid assets reach certain levels MIFIDPRU 7.8: Reviewing and documenting the ICARA process MIFIDPRU 7.8.2R Requirement to review the ICARA process at least annually MIFIDPRU 7.8.3G Guidance about when a large or complex firm should review its ICARA process more frequently MIFIDPRU 7.8.4G Guidance on reviewing the ICARA process following a material change in the firm’s business MIFIDPRU 7.8.5R Requirement for firm to notify the FCA of the submission date of the firm’s MIF007 (ICARA assessment questionnaire) return MIFIDPRU 7.8.6G Guidance on interaction between the firm’s ICARA review and its submission date for its MIF007 return MIFIDPRU 7.8.7R Requirement to submit MIF007 return following review of ICARA process due to a material change in the firm’s business MIFIDPRU 7.8.8R Requirement to document review of the ICARA process and minimum contents of review document MIFIDPRU 7.8.9R Requirement for firm’s governing body to review MIFIDPRU 7.8.10G Guidance on the interaction between the obligations in

FCA 2021/XX Page 186 of 233 and approve the ICARA document COCON and the ICARA process MIFIDPRU 7.8.11R Record keeping requirements in relation to the ICARA process MIFIDPRU 7.9: Firms forming part of a group MIFIDPRU 7.9.2R Requirement for any firm that forms part of a group to assess risks arising from that group or its other members MIFIDPRU 7.9.3G Guidance on the entities included within a firm’s assessment of group risk MIFIDPRU 7.9.5R Ability of investment firm group to operate the ICARA process on a group-level basis MIFIDPRU 7.9.4G Guidance that an investment firm group is not required to operate an ICARA process on a consolidated basis MIFIDPRU 7.9.6R Disapplication of individual ICARA process requirement in relation to MIFIDPRU investment firm included in a group ICARA process MIFIDPRU 7.9.7R Circumstances in which a group ICARA process cannot be used MIFIDPRU 7.9.9G Guidance on when the FCA might prohibit the use of a group-level ICARA process in relation to one or more firms MIFIDPRU 7.9.8R Application of requirements in MIFIDPRU 7.4 to MIFIDPRU 7.8 to an investment firm

FCA 2021/XX Page 187 of 233 group operating a group ICARA process MIFIDPRU 7.9.10R Ability to include multiple firms within one ICARA document MIFIDPRU 7.9.11G Guidance on when a single ICARA document can be used In the following text, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. (A) Data item (B) Data item description (C) Reporting frequency (D) Reporting reference dates (E) Submission deadline … … … … … MIF005 K-CON concentration risk reporting Quarterly Last business day in: (1) March; (2) June; (3) September; (4) December 20 business days after the reporting reference date MIF007 (note 1) ICARA assessment questionnaire Annually (note 2) The reference date according to which the firm reviews the adequacy of its ICARA process under The date notified to the FCA by the firm under MIFIDPRU 7.8.5R (or such other date as 9 Reporting … 9.2 Periodic reporting requirements … … 9.2.2 R The following table belongs to MIFIDPRU 9.2.1R:

FCA 2021/XX Page 188 of 233 MIFIDPRU 7.8.2R directed by the FCA) Note 1 Where a firm is included in a group ICARA process in accordance with MIFIDPRU 7.9.5R, the firm must still submit data item MIF007 on an individual basis, containing information about the firm that has been derived from that group ICARA process. Data item MIF007 does not apply on a consolidated basis. Note 2 Under MIFIDPRU 7.8.2R, in certain circumstances, a firm may carry out a review of its ICARA process more frequently than the minimum required annual frequency. If so, the firm must submit data item MIF007 separately after each review. (A) Data item (B) Data item description (C) Reporting frequency (D) Reporting reference dates (E) Submission deadline … … … … … MIF003 Metrics monitoring Quarterly Last business day in: (1) March; (2) June; (3) September; (4) December 20 business days after the reporting reference date MIF007 (note 2) ICARA assessment questionnaire Annually (note 3) The reference date according to which the firm reviews the adequacy of its ICARA process under MIFIDPRU 7.8.2R The date notified to the FCA by the firm under MIFIDPRU 7.8.5R (or such other date as directed by the FCA) … 9.2.4 R The following table belongs to MIFIDPRU 9.2.3R:

FCA 2021/XX Page 189 of 233 Note 1 If, exceptionally, the FCA has exempted an SNI MIFIDPRU investment firm from the liquidity requirements in MIFIDPRU 6, the firm is not required to submit MIF002. Note 2 Where a firm is included in a group ICARA process in accordance with MIFIDPRU 7.9.5R, the firm must still submit data item MIF007 on an individual basis, containing information about the firm that has been derived from that group ICARA process. Data item MIF007 does not apply on a consolidated basis. Note 3 Under MIFIDPRU 7.8.2R, in certain circumstances, a firm may carry out a review of its ICARA process more frequently than the minimum required annual frequency. If so, the firm must submit data item MIF007 separately after each review. Insert the following new chapter, MIFIDPRU 10, after MIFIDPRU 9 (Reporting). The text is not underlined. … 10 Firms acting as clearing members and indirect clearing firms 10.1 Application 10.1.1 R This chapter applies to a MIFIDPRU investment firm that is: (1) a clearing member; or (2) an indirect clearing firm. 10.1.2 R This chapter also applies to the UK parent entity of an investment firm group that contains a clearing member or an indirect clearing firm. 10.2 Categorisation of clearing firms as non-SNI MIFIDPRU investment firms 10.2.1 R (1) A MIFIDPRU investment firm that is a clearing member or an indirect clearing firm is a non-SNI MIFIDPRU investment firm. (2) The classification in (1) applies irrespective of whether the firm satisfies the conditions in MIFIDPRU 1.2 (SNI MIFIDPRU investment firms) or not. 10.2.2 R (1) This rule applies where: (a) an investment firm group contains a clearing member or an indirect clearing firm; and (b) the UK parent entity of the investment firm group in (a) is subject to prudential consolidation in accordance with MIFIDPRU 2.5 (Prudential consolidation).

FCA 2021/XX Page 190 of 233 (2) Where this rule applies, the UK parent entity in (1) must comply with the relevant obligations in MIFIDPRU on a consolidated basis as if it were a non-SNI MIFIDPRU investment firm. (3) The requirement in (2) applies irrespective of whether the UK parent entity satisfies the conditions in MIFIDPRU 2.5.21R or not. 10.2.3 G (1) The effect of MIFIDPRU 10.2.1R is that a firm that acts as a clearing member or indirect clearing firm will always be a non￾SNI MIFIDPRU investment firm. This is the case even where the firm might otherwise satisfy all the other criteria in MIFIDPRU 1.2 to be classified as an SNI MIFIDPRU investment firm. (2) The effect of MIFIDPRU 10.2.2R is that where the consolidated situation of a UK parent entity includes a clearing member or indirect clearing firm, that UK parent entity will always be a non￾SNI MIFIDPRU investment firm on a consolidated basis. (3) MIFIDPRU 10.2.1R applies equally to a firm that is a self￾clearing firm. 10.3 Application of K-DTF requirement to clearing activities 10.3.1 R (1) This rule applies to transactions in financial instruments in relation to which a MIFIDPRU investment firm provides clearing services in its capacity as a clearing member or an indirect clearing firm. (2) Except where MIFIDPRU 10.3.2R applies, a firm must include the transactions in (1) in its calculation of DTF for the purposes of the K-DTF requirement in accordance with the remainder of this rule. (3) The transactions in (1) must be included in a firm’s DTF on the following basis: (a) where the order that gave rise to the clearing transaction was a cash trade, the clearing transaction must also be treated as if it were a cash trade (irrespective of whether it would otherwise meet that definition); and (b) where the order that gave rise to the clearing transaction was a derivatives trade, the clearing transaction must also be treated as if it were a derivatives trade (irrespective of whether it would otherwise meet that definition). 10.3.2 R (1) This rule applies where a firm: (a) executes an order:

FCA 2021/XX Page 191 of 233 (i) in its own name (whether for its own account or on behalf of a client); or (ii) in the name of a client; and (b) also provides clearing services in its capacity as a clearing member or indirect clearing firm in relation to a transaction that results from the order in (a). (2) Where this rule applies, the value of the relevant order in (1)(a) is not included in the firm’s measurement of DTF attributable to clearing services under MIFIDPRU 10.3.1R, provided that the value of the order has already been included in one of the following in relation to the firm’s execution services: (a) the calculation of the firm’s COH under MIFIDPRU 4.10 (K-COH requirement); or (b) the calculation of the firm’s DTF under MIFIDPRU 4.15 (K-DTF requirement). 10.3.3 G (1) MIFIDPRU 10.3.1R requires a MIFIDPRU investment firm to calculate an additional K-DTF requirement in relation to any clearing transactions it undertakes in relation to financial instruments. (2) MIFIDPRU 10.3.2R applies to a MIFIDPRU investment firm that both executes an order and subsequently provides clearing services in relation to the resulting transaction (including where the firm is acting as a self-clearing firm). In this scenario, the firm is not required to include the clearing transaction in its calculation of DTF, provided that the value of the original executed order has already been included in either the firm’s measurement of its DTF or COH. (3) The intention of MIFIDPRU 10.3.2R is that a firm is not required to “double-count” the value of the original order and the resulting clearing transaction where the firm is involved in both executing and clearing the same trade. 10.3.4 R Where prudential consolidation applies to a UK parent entity under MIFIDPRU 2.5.7R, the UK parent entity must include within the calculation of its consolidated K-DTF requirement any transactions that are cleared by clearing members or indirect clearing firms that are included within its consolidated situation. 10.4 Own funds requirement for CCP default fund exposures 10.4.1 R This section applies to: (1) a MIFIDPRU investment firm that is a clearing member; and

FCA 2021/XX Page 192 of 233 (2) a UK parent entity to which consolidation under MIFIDPRU 2.5.7R applies, where the relevant investment firm group includes one or more clearing members. 10.4.2 R (1) A MIFIDPRU investment firm must include its pre-funded contributions to the default fund of a CCP in the calculation of its K-TCD requirement in accordance with the remainder of this rule. (2) The firm must apply the rules and guidance in MIFIDPRU 4.14 (K-TCD requirement) in relation to the relevant default contribution with the following modifications: (a) the transactions specified in MIFIDPRU 4.14.3R shall be deemed to include pre-funded contributions made by the firm to the default fund of a CCP; (b) for the purposes of MIFIDPRU 4.14.9R, the replacement cost (RC) of the default fund contribution shall be the book value of that asset in accordance with the applicable accounting framework; (c) for the purposes of MIFIDPRU 4.14.29R, the applicable risk factor shall be 8%; and (d) for the purposes of MIFIDPRU 4.14.30R, the credit valuation adjustment (CVA) shall be 1. 10.4.3 G (1) For the avoidance of doubt, where a MIFIDPRU investment firm that is a clearing member or an indirect clearing firm has trade exposures to a CCP, it should consider whether such exposures arise from a transaction listed in MIFIDPRU 4.14.3R as being within scope of the K-TCD requirement. MIFIDPRU 4.14.3R(1)(a) and MIFIDPRU 4.14.4R exclude from the scope of the K-TCD requirement derivatives contracts that are directly or indirectly cleared through an authorised central counterparty. (2) However, the exclusion in (1) does not apply to a pre-funded contribution of a clearing member to the default fund of a CCP, as such an exposure is not a contract cleared through the authorised central counterparty. MIFIDPRU 10.4.2R explains how a firm should calculate the K-TCD requirement in relation to such a contribution. 10.4.4 R Where this section applies to a UK parent entity in accordance with MIFIDPRU 10.4.1R(2), the requirement in MIFIDPRU 10.4.2R and the modifications it makes to the rules and guidance in MIFIDPRU 4.14 apply to that UK parent entity in relation to any pre-funded contributions to the default fund of a CCP made by any entities included within the consolidated situation.

FCA 2021/XX Page 193 of 233 In the following text, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. (A) IFPRU notification submitted before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] (B) Deemed notification for the purposes of MIFIDPRU on or after [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] IFPRU 3.2.10R: notification of issuance of own funds instruments MIFIDPRU 3.6.5R(1) (for a MIFIDPRU investment firm) MIFIDPRU 3.6.8R(1)(b) (for a UK parent entity to which consolidation under MIFIDPRU 2.5.7R applies) TP 1 Own funds transitional provisions Application 1.1 R MIFIDPRU TP 1 applies to: (1) a MIFIDPRU investment firm; and (2) a UK parent entity that is required by MIFIDPRU 2.5.7R to comply with MIFIDPRU 3 on the basis of its consolidated situation.; and (3) a parent undertaking to which the group capital test applies. … Continuing validity of IFPRU own funds notifications 1.12 R (1) This rule applies to any notification listed in column (A) of the table in MIFIDPRU TP 1.13R, where that notification was validly submitted by a firm or parent undertaking to the FCA for the purposes of the relevant rule in the IFPRU sourcebook before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply]. (2) Where this rule applies, a notification in column (A) of the table in MIFIDPRU TP 1.13R shall be deemed to have been a valid notification for the purposes of the corresponding provision in column (B) in the same row of that table. 1.13 R The table belongs to MIFIDPRU TP 1.12R.

FCA 2021/XX Page 194 of 233 MIFIDPRU 3.7.4R(1)(b) (for a parent undertaking to which the group capital test applies) IFPRU 3.2.13R: notification of issuance of ordinary shares or debt instruments under a debt securities programme MIFIDPRU 3.6.5R(1) (for a MIFIDPRU investment firm) MIFIDPRU 3.6.8R(1)(b) (for a UK parent entity to which consolidation under MIFIDPRU 2.5.7R applies) MIFIDPRU 3.7.4R(1)(b) (for a parent undertaking to which the group capital test applies) 1.14 G The effect of MIFIDPRU TP 1.12R and 1.13R is that a notification that was validly submitted for the purposes of the rules relating to the issuance of own funds in IFPRU continues to be valid for the purposes of the notification requirements relating to the issuance of own funds in MIFIDPRU 3.6 or 3.7 (as applicable). This means that: (1) a MIFIDPRU investment firm or parent undertaking to which IFPRU applied is not required to submit another notification to the FCA in relation to pre-existing instruments in order to treat those instruments as additional tier 1 instruments or tier 2 instruments under MIFIDPRU; and (2) where the MIFIDPRU investment firm or parent undertaking issues the same class of instruments on or after [Editor’s note: insert date that MIFIDPRU begins to apply], it can rely on the exemption from the notification requirement in MIFIDPRU 3.6.5R(2), provided that such instruments are identical in all material respects to the previous issuance notified to the FCA under IFPRU. 1.15 G For the avoidance of doubt, MIFIDPRU TP 1.12R and 1.13R do not affect the underlying criteria in MIFIDPRU 3 for classifying an instrument as own funds. Instead, those provisions merely deem existing notifications to be notifications for equivalent purposes under MIFIDPRU. This means that if the instruments that are the subject of the notifications do not meet the criteria in MIFIDPRU 3 to be classified as own funds, a firm or parent undertaking must not treat those instruments as such. It is the responsibility of the firm or parent undertaking relying on the transitional provisions in this annex to assess whether the relevant criteria are met in relation to any particular instrument. TP 2 Own funds requirements: transitional …

FCA 2021/XX Page 195 of 233 Transitional for fixed overheads requirement and K-factor requirement for former IFPRU investment firms and BIPRU firms 2.7 R … (2) A firm may substitute the alternative requirement in (3) for each of: (a) its fixed overheads requirement under MIFIDPRU 4.5; and (b) to the extent applicable, its K-factor requirement under MIFIDPRU 4.6. … … Transitional for fixed overheads requirement and K-factor requirement for former exempt CAD firms 2.10 R … (2) A firm may substitute the alternative requirement in (3) in place of each of: (a) its fixed overheads requirement under MIFIDPRU 4.5; and (b) to the extent applicable, its K-factor requirement under MIFIDPRU 4.6. … Transitional for K-factor requirement for firms not in existence before [Editor’s note: insert the date on which MIFIDPRU begins to apply] 2.11 R … (3) The alternative requirement is an amount equal to twice the fixed overheads requirement of the firm, as calculated in accordance with MIFIDPRU 4.5 from time to time. … … Transitional for fixed overheads and K-factor requirements: exempt commodities firms 2.21 R …

FCA 2021/XX Page 196 of 233 (A) UK CRR permission granted before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] (B) Effect of permission under MIFIDPRU on or after [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] Articles 329, 352(1) or 358 UK CRR: permission to use own estimates for delta for the purposes of the standardised approach for the market risk of options The permission in column (A) shall be deemed to be a valid notification under MIFIDPRU 4.12.10R for equivalent purposes. Article 331 UK CRR: permission to use sensitivity models to calculate interest rate risk The permission in column (A) shall be deemed to have been granted on equivalent terms for its remaining duration under MIFIDPRU 4.12.66R.5 5 Editor’s note: The FCA will explain its approach to sensitivity model permissions in the policy statement responding to CP20/24 and the near-final rules that will be published alongside that policy statement. (2) A firm may substitute the alternative requirement in (3) in place of each of: (a) its fixed overheads requirement under MIFIDPRU 4.5; and (b) to the extent applicable, its K-factor requirement under MIFIDPRU 4.6. … … Continuing validity of UK CRR market risk permissions 2.24 R (1) This rule applies to any permission listed in column (A) of the table in MIFIDPRU TP 2.25R, where that permission was granted to a firm by the FCA for the purposes of the UK CRR before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply]. (2) Where this rule applies, a permission in column (A) of the table in MIFIDPRU TP 2.25R shall be deemed to have the effect described in column (B) in the same row of that table. 2.25 R This table belongs to MIFIDPRU TP 2.24R. 2.26 G (1) MIFIDPRU 4.12.10R requires a MIFIDPRU investment firm that wishes to use its own estimates of delta for the purposes

FCA 2021/XX Page 197 of 233 of the standardised approach for the market risk of options to notify the FCA that it meets certain minimum standards before doing so. Previously, firms that were subject to the UK CRR were required to seek the FCA’s permission before using their own estimates of delta for these purposes. The effect of MIFIDPRU TP 2.24R and 2.25R is that any permission granted for these purposes to a former CRR firm that has subsequently become a MIFIDPRU investment firm will be treated as a valid notification for the purposes of MIFIDPRU 4.12.10R. This means that the firm does not need to submit a new notification under MIFIDPRU 4.12.10R in order to use its own estimates of delta under that rule for which the firm previously had permission. (2) The effect of MIFIDPRU TP 2.24R and 2.25R is that a former CRR firm that was granted a permission to use interest rate sensitivity models under article 331 UK CRR and that has subsequently become a MIFIDPRU investment firm can treat that permission as having been granted on equivalent terms for the purposes of the corresponding requirement under MIFIDPRU. The duration of the original permission is not affected. For example, if a firm was granted permission to use an interest rate sensitivity model on 1 June 2021 for a one￾year duration, that permission will be treated from [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] as if it had been granted under MIFIDPRU, but will still expire on 1 June 2022. … TP 4 K-factor metric calculations: transitional … Purpose 4.3 G (1) The standard rules in MIFIDPRU 4 require a MIFIDPRU investment firm to collect data on the K-factor metrics that are relevant to the investment services and/or activities that the firm carries on. Certain K-factor metric K-factor average metric calculations are based on average values and require a minimum level of historical data. (2) MIFIDPRU TP 4 contains transitional rules for the calculation of a firm’s K-factor requirement where a firm was carrying on investment services and/or activities immediately before MIFIDPRU began to apply, but does not have the historical data necessary to calculate the relevant K-factor metric K-factor average metric.

FCA 2021/XX Page 198 of 233 … (4) MIFIDPRU TP 4 does not apply to the extent that a firm modifies its permissions on or after [Editor’s note: insert the date on which MIFIDPRU begins to apply] to carry on new investment services and/or activities. In that case, to the extent relevant to the new activity, the rules in MIFIDPRU 4 specify that the firm should use the information in the business projections submitted with its application for a variation of permission to calculate the relevant K-factor metric K-factor average metric until historical data becomes available. Duration 4.4 G The duration of the transitional arrangements in MIFIDPRU TP 4 depends on the relevant K-factor metric K-factor average metric. Under MIFIDPRU TP 4.5.R(3), the transitional arrangements cease to apply once a firm has (or should have) collected sufficient historical information to perform the necessary calculations in accordance with the standard calculation rules for the relevant K-factor metric K-factor average metric in MIFIDPRU 4. Missing historical data for K-factor calculations: transitional for individual MIFIDPRU firms 4.5 R (1) This rule applies to the extent that a MIFIDPRU investment firm does not have the necessary historical data to calculate the K￾factor metric K-factor average metric required for any of the following in accordance with the relevant rules in MIFIDPRU 4: (a) its K-AUM requirement; (b) its K-CMH requirement; (c) its K-ASA requirement; (d) its K-COH requirement; (e) its K-DTF requirement; or (d) its K-CMG requirement. (2) Subject to MIFIDPRU TP 4.13R(2)(a), where this rule applies, a firm may either: (a) use reasonable estimates to fill any missing historical data points in the calculation of the relevant K-factor metric K￾factor average metric; or (b) by way of derogation from the standard calculation rules in MIFIDPRU 4, use the modified calculation in

FCA 2021/XX Page 199 of 233 MIFIDPRU TP 4.11R to calculate the relevant K-factor metric K-factor average metric. (3) This rule ceases to apply in relation to a K-factor metric on the earlier of the following: (a) the date on which the firm has collected sufficient historical information to calculate the K-factor metric K￾factor average metric in accordance with the standard calculation rules in MIFIDPRU 4; or (b) the date that falls n months after the date on which MIFIDPRU first began to apply, where n is the number of months’ worth of data points required to calculate that K￾factor metric K-factor average metric in accordance with the standard calculation rules in MIFIDPRU 4. 4.6 G (1) MIFIDPRU TP 4.5R(3) specifies the date on which the transitional arrangements for calculating a K-factor metric K￾factor average metric will cease to apply and the firm will therefore need to use the standard calculation rules in MIFIDPRU 4 in relation to that K-factor metric K-factor average metric. This date may vary depending on the position of the individual firm. (2) Under MIFIDPRU TP 4.5R(3)(a), once a firm has sufficient historical information to perform the calculation in the standard way, it is no longer permitted to use either reasonable estimates for missing data points or to use the modified calculation in MIFIDPRU 4.11R. For example, on the date on which MIFIDPRU begins to apply, Firm A already has historical data on its AUM covering the previous 10 months. The standard calculation of AUM average AUM in MIFIDPRU 4 requires 15 months of historical data. Since the firm must begin collecting AUM data no later than the date that MIFIDPRU begins to apply, the firm will have sufficient data to perform the standard calculation 5 months later. At that point, the transitional arrangements under MIFIDPRU TP 4 will no longer apply to the firm’s calculation of AUM average AUM. (3) MIFIDPRU TP 4.5R(3)(b) acts as a “long-stop” date for the transitional arrangements under MIFIDPRU TP 4. Since a firm must begin collecting data on its K-factor metrics no later than the date that MIFIDPRU begins to apply, all MIFIDPRU investment firms should have sufficient historical data to perform the standard calculation of a K-factor metric once sufficient months have elapsed to cover at least the standard calculation period for that K-factor metric. For example, the standard calculation for CMH average CMH requires 9 months of historical data. For the purposes of MIFIDPRU TP 4.5.R(3)(b), the value of n is therefore 9, and the transitional arrangements

FCA 2021/XX Page 200 of 233 under MIFIDPRU TP 4 will cease to apply in relation to the calculation of CMH average CMH 9 months after MIFIDPRU first begins to apply. 4.7 R (1) A firm must apply its chosen approach under MIFIDPRU TP 4.5R(2) consistently in relation to a specific K-factor metric K￾factor average metric. (2) A firm may apply different approaches under MIFIDPRU TP 4.5R(2) in relation to different K-factor metrics K-factor average metric. 4.8 G MIFIDPRU TP 4.7R prevents a firm from changing its approach to missing historical data points in relation to a particular K-factor K-factor average metric. For example, if a firm is missing the necessary historical data points and chooses to apply the modified calculation in MIFIDPRU TP 4.11R to determine AUM average AUM, it cannot subsequently decide to estimate the missing values for AUM average AUM instead. However, a firm may choose, for example, to use reasonable estimates for missing values for AUM average AUM, but to apply the modified calculation in MIFIDPRU TP 4.11R for the purposes of missing values for COH average COH. In the example, this could reflect the fact that the firm has a reasonable basis on which to estimate AUM, but is unable to produce reasonable estimates for COH. … 4.10 G If a firm does not have a reasonable basis on which to estimate missing historical data points in relation to a K-factor metric K-factor average metric, it should apply the modified calculation in MIFIDPRU TP 4.11R. 4.11 R (1) A firm that is using the modified calculation for determining a K￾factor metric K-factor average metric, other than in relation to the K-CMG requirement, must apply the following requirements: … (d) x is a fixed value, being: (i) 12 in the case of AUM average AUM; (ii) 6 in the case of CMH, ASA or DTF average CMH, average ASA or average DTF; and (iii) 3 in the case of COH average COH. … 4.12 G (1) The following are worked examples of the modified calculation in MIFIDPRU TP 4.11R.

FCA 2021/XX Page 201 of 233 (2) Firm A has chosen to apply the modified calculation in relation to AUM average AUM. MIFIDPRU has been in force for 6 months. Firm A would calculate its AUM average AUM as follows: (i)(a) The value of n is 6, being the length of time that MIFIDPRU has been in force. (ii) (b) The value of y is zero, as zero is greater than n minus x (i.e. 6 minus 12). This means that Firm A must not exclude any of the most recent months of daily figures. (iii) (c) When calculating AUM average AUM for present purposes, Firm A must therefore calculate the arithmetic mean of the previous 6 months of daily values for AUM. (3) Firm B applies the modified calculation in relation to COH average COH, as it is unable to generate reasonable estimates for missing data points for COH. MIFIDPRU has been in force for 4 months. Firm B would calculate its COH average COH as follows: (i)(a) The value of n is 4, being the length of time that MIFIDPRU has been in force. (ii) (b) The value of y is 1, as n minus x (i.e. 4 minus 3) is greater than zero. (iii) (c) When calculating COH average COH for present purposes, Firm B must therefore calculate the arithmetic mean of the previous 4 months of daily values for COH, excluding the values for the most recent month. (4) MIFIDPRU has been in force for 10 months. Although Firm C would like to apply the modified calculation in relation to CMH average CMH, under MIFIDPRU TP 4.5R(3)(b), this is not permitted. This is because the standard calculation of CMH average CMH under MIFIDPRU 4 requires only 9 months of daily values. Firm C should therefore have collected sufficient data by that time to be able to apply the standard calculation. Missing historical data for K-factor calculations: transitional for investment firm groups to which consolidation applies 4.13 R (1) If the conditions in (2) are met, a UK parent entity may apply the transitional arrangements in MIFIDPRU TP 4.5R to 4.11R, as modified by MIFIDPRU TP 4.14R, when calculating K-factor metrics K-factor average metrics on a consolidated basis. (2) The conditions are as follows:

FCA 2021/XX Page 202 of 233 The following text is new and is not underlined. (a) to the extent that it is relying on the transitional arrangements in MIFIDPRU TP 4, each MIFIDPRU investment firm in the investment firm group must apply the same approach under MIFIDPRU TP 4.5R(2) in relation to calculating a specific K-factor metric K-factor average metric on an individual basis; and (b) the UK parent entity must apply the same approach under MIFIDPRU TP 4.5R(2) in relation to calculating a specific K-factor metric K-factor average metric on a consolidated basis as the firms in (a) have applied on an individual basis. 4.14 R Where a UK parent entity is applying MIFIDPRU TP 4.5R to 4.11R in accordance with MIFIDPRU TP 4.13R, the following modifications apply: (1) references to a “K-factor metric” or a “K-factor average metric” shall be read as references to that K-factor metric or K-factor average metric as it applies on a consolidated basis; … … TP 6 Application of criteria to be classified as an SNI MIFIDPRU investment firm: transitional Application 6.1 R MIFIDPRU TP 6 applies to the following: (1) a MIFIDPRU investment firm; and (2) a UK parent entity, in accordance with MIFIDPRU TP 6.9R. Purpose 6.2 G (1) MIFIDPRU TP 6 explains how a MIFIDPRU investment firm, or a UK parent entity which is applying MIFIDPRU 1.2 on a consolidated basis, should determine whether it meets the conditions to be classified as an SNI MIFIDPRU investment firm on the date on which MIFIDPRU begins to apply. (2) Under MIFIDPRU TP 6.4R, a MIFIDPRU investment firm or a UK parent entity may use either the reasonable estimates approach or the alternative calculation in MIFIDPRU TP 4.5R(2) to determine missing historical data points for the

FCA 2021/XX Page 203 of 233 purposes of applying the average AUM or average COH conditions under MIFIDPRU 1.2.1R(1) and (2). (3) Under MIFIDPRU TP 6.7R, a MIFIDPRU investment firm or a UK parent entity must use its best efforts to estimate any missing historical data points for the purposes of applying the condition relating to total annual gross revenue from investment services and/or activities in MIFIDPRU 1.2.1R(7). (4) For the avoidance of doubt, the transitional arrangements in MIFIDPRU TP 6 apply only to the extent that the firm has missing historical data points. If a firm has observed historical data covering any part of the relevant period, the firm should use those data points when applying the relevant calculations. Duration 6.3 G The duration of the transitional arrangements in MIFIDPRU TP 6 depends upon the relevant condition for classification as an SNI MIFIDPRU investment firm under MIFIDPRU 1.2. Under MIFIDPRU TP 6.4R(5) and MIFIDPRU TP 6.7R(3), the transitional arrangements cease to apply once a firm or UK parent entity has (or should have) collected sufficient historical information to apply the relevant condition in accordance with the applicable methodology in MIFIDPRU 1.2. Missing historical data for application of SNI classification criteria: transitional for individual MIFIDPRU investment firms 6.4 R (1) This rule applies to the extent that a MIFIDPRU investment firm does not have the necessary historical data to determine if the following conditions are met: (a) the average AUM condition in MIFIDPRU 1.2.1R(1); or (b) the average COH condition in MIFIDPRU 1.2.1R(2). (2) If a firm has chosen to apply the alternative approach in MIFIDPRU 1.2.4R for the purposes of assessing whether a condition in (1) is met, this rule applies to the extent that the firm does not have the necessary historical data to apply that alternative approach to the relevant condition. (3) Where this rule applies, a firm may (subject to (4) and to MIFIDPRU TP 6.5R) use either of the approaches set out in MIFIDPRU TP 4.5R(2) to assess whether the relevant condition in (1) is met. (4) A firm’s choice of approach under (3) must be consistent with any choice that the firm has made under MIFIDPRU TP 4.5R(2) in relation to the same K-factor average metric for the

FCA 2021/XX Page 204 of 233 purposes of applying the transitional arrangements in MIFIDPRU TP 4. (5) This rule ceases to apply in relation to a condition in (1) on the earlier of the following: (a) the date on which the firm has collected sufficient historical information necessary to apply the condition in accordance with the applicable methodology under MIFIDPRU 1.2; or (b) the date that falls n months after the date on which MIFIDPRU first began to apply, where n is the number of months’ worth of data points required to apply that condition in accordance with the applicable methodology under MIFIDPRU 1.2. 6.5 R (1) This rule applies where, for the purpose of determining whether the average AUM condition in MIFIDPRU 1.2.1R(1) or the average COH conditions in MIFIDPRU 1.2.1R(2) is met, a firm has chosen to apply both: (a) the alternative approach in MIFIDPRU 1.2.4R; and (b) the modified calculation under MIFIDPRU TP 4.5R(2)(b). (2) Where this rule applies, the modified calculation applies as if: (a) in MIFIDPRU TP 4.11R(1)(a), the words “excluding the most recent y months” were deleted; and (b) MIFIDPRU TP 4.11R(1)(c) and (d) were omitted. 6.6 R (1) A firm must apply its chosen approach under MIFIDPRU TP 6.4R(2) consistently in relation to a specific condition in MIFIDPRU TP 6.4R(1). (2) A firm may apply different approaches under MIFIDPRU TP 6.4R(2) in relation to different conditions in MIFIDPRU TP 6.4R(1). 6.7 R (1) This rule applies to the extent that a MIFIDPRU investment firm does not have the necessary historical data to determine if the condition relating to the total annual gross revenue from investment services and/or activities in MIFIDPRU 1.2.1R(7) is met. (2) Where this rule applies, a firm must use its best efforts to estimate any missing historical data points for the calculation of the condition in (1).

FCA 2021/XX Page 205 of 233 (3) This rule ceases to apply in relation to a condition in (1) on the earlier of the following: (a) the date on which the firm has collected sufficient historical information necessary to apply the condition in accordance with the standard methodology under MIFIDPRU 1.2; or (b) the date on which two complete financial years for the firm have elapsed after the date that MIFIDPRU first began to apply. 6.8 R A firm must, upon request, provide a reasonable explanation to the FCA of how the firm has determined any estimate under MIFIDPRU TP 6.4R(3) or MIFIDPRU TP 6.7R(2). 6.9 G (1) In the FCA’s view, it is unnecessary to provide transitional arrangements for the following conditions: (a) the average ASA condition in MIFIDPRU 1.2.1R(3); (b) the average CMH condition in MIFIDPRU 1.2.1R(4); (c) whether the firm has permission to deal on own account in MIFIDPRU 1.2.1R(5); and (d) the condition relating to the balance sheet total of the firm in MIFIDPRU 1.2.1R(6). (2) The average ASA and average CMH conditions require that the firm has not held any MiFID client money, or any client assets in the course of MiFID business, during the preceding 9 months, excluding the most recent 3 months. The FCA considers that a firm should already have information on whether it has held client money or client assets in the past. If the firm is unable to determine if any amounts of client money or client assets were held in connection with MiFID business, it should apply MIFIDPRU 4.8.6R or MIFIDPRU 4.9.6R and treat such amounts as if they were held in connection with MiFID business for these purposes. (3) The conditions in (1)(c) and (1)(d) do not rely on historical information and therefore can be assessed by the firm at the point at which MIFIDPRU first begins to apply without any need for transitional arrangements. 6.10 G (1) MIFIDPRU TP 6.4R(5) and MIFIDPRU TP 6.6R(2) specify the date on which the transitional arrangements for applying certain conditions under MIFIDPRU 1.2.1R will cease to apply. From that date onwards, the firm will need to apply the standard methodology for determining whether it meets the

FCA 2021/XX Page 206 of 233 relevant condition. This date may vary depending on the position of the individual firm and the relevant condition. (2) Under MIFIDPRU TP 6.4R(5)(a), once a firm has sufficient historical information to apply a condition in MIFIDPRU TP 6.4R(1), it is no longer permitted to rely on the transitional arrangements. The following are examples of how this requirement applies: (a) Example 1: On the date on which MIFIDPRU begins to apply, Firm A already has historical data on its AUM covering the previous 10 months. Assuming that the firm is applying the standard criteria under MIFIDPRU 1.2.1R (and not the alternative approach in MIFIDPRU 1.2.4R), the average AUM condition under MIFIDPRU 1.2.1R(1) requires 15 months of historical data. Since the firm must be collecting AUM data once MIFIDPRU begins to apply, Firm A will have sufficient data to apply the standard calculation for the average AUM condition 5 months later. At that point, the firm will no longer be able to rely on the transitional arrangements under MIFIDPRU TP 6, but will instead need to use the observed historical data to determine if the condition in MIFIDPRU 1.2.1R(1) is met. (b) Example 2: Firm B has notified the FCA under MIFIDPRU 1.2.4R that it is using the alternative approach to applying the average AUM condition in MIFIDPRU 1.2.1R. Firm B has 13 months of historical data on its AUM. Under MIFIDPRU 6.4R(5)(a), Firm B is prohibited from relying on the transitional arrangements in MIFIDPRU TP 6. Although the standard calculation for the AUM condition in MIFIDPRU 1.2.1R(1) would require 15 months of historical data, the alternative approach under MIFIDPRU 1.2.4R(2) requires only 12 months of data. As Firm B has sufficient observed historical data to apply its chosen methodology, the transitional arrangements do not apply. 6.11 G (1) MIFIDPRU 6.4R(4) and 6.6R are designed to ensure consistency in a firm’s approach to applying the transitional arrangements in MIFIDPRU TP 4 and MIFIDPRU TP 6. (2) MIFIDPRU TP 6.4R(4) requires a firm to be consistent in its choice of approaches for the purposes of MIFIDPRU TP 4 and MIFIDPRU TP 6. For example, Firm A does not have sufficient information to calculate its average AUM for the purposes of the condition in MIFIDPRU 1.2.1R(1) and the K￾AUM requirement under MIFIDPRU 4.7. If Firm A chooses

FCA 2021/XX Page 207 of 233 to use the reasonable estimates approach under MIFIDPRU TP 4.5R(2) to calculate its K-AUM requirement, the firm must also use the reasonable estimates approach under MIFIDPRU TP 6.4R(3) to apply the average AUM condition in MIFIDPRU 1.2.1R(1). The estimates that Firm A uses for both purposes should be consistent. (3) MIFIDPRU TP 6.6R prevents a firm from alternating between approaches for the purposes of MIFIDPRU TP 6. For example, Firm B chooses under MIFIDPRU TP 6.4R(3) to apply the alternative calculation in MIFIDPRU TP 4.11R for the purposes of the determining whether the average COH condition in MIFIDPRU TP 6.4R(1) is met. Firm B cannot later decide to switch to applying the reasonable estimates approach to determine whether that condition is met. 6.12 G MIFIDPRU investment firms are reminded that under MIFIDPRU TP 5, they are required to collect at least 1 month of K-factor metrics that are relevant to any investment services and/or activities they carry on before MIFIDPRU begins to apply in full. When determining any estimate for the purposes of MIFIDPRU TP 6.4R(3) or MIFIDPRU 6.7R(2), a firm should have regard to any observed historical data that is available. Where the observed historical data covers a short period, a firm should take into account possible seasonal variations in figures or other factors which might be relevant to the accuracy of the estimate. Missing historical data for application of SNI classification criteria: transitional for investment firm groups to which consolidation applies 6.13 R (1) A UK parent entity to which consolidation under MIFIDPRU 2.5 applies may apply the transitional arrangements in MIFIDPRU TP 6.4R to 6.12G to its consolidated situation in accordance with this rule. (2) Where a UK parent entity is applying MIFIDPRU TP 6.4R to 6.12G in accordance with (1), the following modifications apply: (a) references to a condition in MIFIDPRU 1.2.1R shall be read as references to that condition as it applies on a consolidated basis; and (b) references to a “MIFIDPRU investment firm” or a “firm” shall be read as references to the UK parent entity. (3) Any estimate produced by the UK parent entity of an investment firm group under MIFIDPRU TP 6.4R(3) or MIFIDPRU TP 6.7R(2) for the purposes of its consolidated situation must be consistent with any estimates produced on

FCA 2021/XX Page 208 of 233 an individual basis by any MIFIDPRU investment firms forming part of that investment firm group. TP 7 Former non-CRR firms and parent undertakings: transitional for own funds instruments Application 7.1 R MIFIDPRU TP 7 applies to a MIFIDPRU investment firm that, immediately before [Editor’s note: insert date that MIFIDPRU begins to apply]: (1) was an authorised person; and (2) was not classified as a CRR firm in accordance with the rules then in force. 7.2 R (1) MIFIDPRU TP 7 also applies to the following if the conditions in (2) are met: (a) a UK parent entity to which MIFIDPRU 3 applies on a consolidated basis in accordance with MIFIDPRU 2.5.7R; and (b) a parent undertaking to which the group capital test applies. (2) The conditions are that immediately before [Editor’s note: insert date that MIFIDPRU begins to apply] the UK parent entity or parent undertaking: (a) formed part of the same investment firm group as a firm, which, on [Editor’s note: insert date that MIFIDPRU begins to apply] became a MIFIDPRU investment firm; and (b) was not required to hold own funds on either an individual or a consolidated basis in accordance with the UK CRR. Purpose 7.3 G (1) Before MIFIDPRU began to apply, certain firms that subsequently became MIFIDPRU investment firms determined their available capital resources according to various provisions in GENPRU or IPRU-INV. In addition, certain other firms may not have been subject to a dedicated prudential sourcebook in the FCA Handbook that contained a detailed regime for recognising the eligibility of capital resources.

FCA 2021/XX Page 209 of 233 (2) The rules on own funds in MIFIDPRU 3 broadly replicate the approach to recognising capital resources under the UK CRR. The purpose of MIFIDPRU TP 7 is to permit firms that were not CRR firms immediately before MIFIDPRU began to apply to recognise instruments as own funds under MIFIDPRU without requiring separate permission from, or notification to, the FCA if those instruments: (a) were issued before MIFIDPRU began to apply; and (b) meet the conditions to be classified as own funds under MIFIDPRU 3 (other than the conditions relating to the requirements to seek prior FCA consent or to notify the FCA). (3) MIFIDPRU investment firms that were classified as CRR firms immediately before MIFIDPRU began to apply are reminded that under MIFIDPRU TP 1, a previous permission recognising the issuance of capital instruments as common equity tier 1 capital under the UK CRR will be deemed to be an equivalent permission under MIFIDPRU. The notifications previously made by such firms in relation to the issuance of additional tier 1 instruments and tier 2 instruments will continue to be valid. (4) MIFIDPRU TP 7 also applies to UK parent entities to which MIFIDPRU 3 applies on a consolidated basis and parent undertakings to which the group capital test applies, where those entities were not required to hold own funds on an individual or consolidated basis under the UK CRR immediately before MIFIDPRU came into force. This means that provided that the existing instruments issued by such entities meet the relevant conditions in MIFIDPRU 3, they can be treated as own funds for the purposes of the application of MIFIDPRU 3 on a consolidated basis or the group capital test as long as the entity complies with MIFIDPRU TP 7. Eligibility of pre-MIFIDPRU capital resources meeting requirements in MIFIDPRU 3 to qualify as own funds under MIFIDPRU without a separate permission or notification 7.4 R (1) This rule applies to any capital instrument that: (a) was issued by a firm, UK parent entity or parent undertaking before [Editor’s note: insert date on which MIFIDPRU begins to apply]; and (b) was still in issue on [Editor’s note: insert date on which MIFIDPRU begins to apply].

FCA 2021/XX Page 210 of 233 (A) Requirement for permission or notification with which the firm, UK parent entity or parent undertaking is deemed to have complied (B) Conditions for deemed compliance to apply Individual MIFIDPRU investment firms Article 26(3) UK CRR (as applied and modified by MIFIDPRU 3.3.1R) and MIFIDPRU 3.3.3R: Requirement for prior FCA permission to classify an issuance of Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as common equity tier 1 capital in MIFIDPRU 3.3, except for the requirement for prior FCA permission (2) The firm, UK parent entity or parent undertaking in (1)(a) shall be deemed to have been granted the permission, or to have complied with the notification obligation, in column (A) of the table in MIFIDPRU 7.5R in relation to a capital instrument where the following conditions are met: (a) the conditions in column (B) of the same row of the table in MIFIDPRU 7.5R are satisfied in relation to that instrument; and (b) the firm has submitted the notification in MIFIDPRU TP 7 Annex 1R via the online notification and application system by no later than [Editor’s note: insert date on which MIFIDPRU begins to apply]. (3) A deemed permission or notification under (2) shall cease to apply in relation to a capital instrument if the terms of that instrument are varied on or after [Editor’s note: insert date on which MIFIDPRU begins to apply] and the instrument ceases to meet: (a) in relation to an instrument being treated as common equity tier 1 capital, the conditions in MIFIDPRU 3.3 (other than the condition for prior FCA permission to classify the instrument as common equity tier 1 capital); (b) in relation to an instrument being treated as additional tier 1 capital, the conditions in MIFIDPRU 3.4; and (c) in relation to an instrument being treated as tier 2 capital, the conditions in MIFIDPRU 3.5. 7.5 R This table belongs to MIFIDPRU TP 7.4R.

FCA 2021/XX Page 211 of 233 capital instruments by a firm as common equity tier 1 capital under article 26(3) of the UK CRR and MIFIDPRU 3.3.3R MIFIDPRU 3.6.5R(1)(a): Requirement to notify the FCA of the intention to issue additional tier 1 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as additional tier 1 capital in MIFIDPRU 3.4 MIFIDPRU 3.6.5R(1)(b): Requirement to notify the FCA of the intention to issue tier 2 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as tier 2 capital in MIFIDPRU 3.5 UK parent entities to which consolidation under MIFIDPRU 2.5.7R applies Article 26(3) UK CRR (as applied and modified by MIFIDPRU 3.3.1R) and MIFIDPRU 3.3.3R, as they apply on a consolidated basis under MIFIDPRU 2.5.7R(1): Requirement for prior FCA permission to classify an issuance of capital instruments by a UK parent entity as common equity tier 1 capital Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as common equity tier 1 capital in MIFIDPRU 3.3 (as it applies on a consolidated basis), except for the requirement for prior FCA permission under article 26(3) of the UK CRR and MIFIDPRU 3.3.3R MIFIDPRU 3.6.5R(1)(a), as modified by MIFIDPRU 3.6.7R: Requirement to notify the FCA of the intention to issue additional tier 1 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as additional tier 1 capital in MIFIDPRU 3.4 (as it applies on a consolidated basis) MIFIDPRU 3.6.5R(1)(b), as modified by MIFIDPRU 3.6.7R: Requirement to notify the FCA of the intention to issue tier 2 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as tier 2 capital in MIFIDPRU 3.5 (as it applies on a consolidated basis) Parent undertakings to which the group capital test applies Article 26(3) UK CRR (as applied and modified by MIFIDPRU 3.3.1R) and MIFIDPRU 3.3.3R, as they apply to a parent undertaking under MIFIDPRU 3.7.4R(1)(a): Requirement for prior FCA permission to classify an issuance of capital instruments by a parent Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as common equity tier 1 capital in MIFIDPRU 3.3, except for the requirement for prior FCA permission under article 26(3) of the UK CRR and MIFIDPRU 3.3.3R

FCA 2021/XX Page 212 of 233 undertaking as common equity tier 1 capital MIFIDPRU 3.6.5R(1)(a), as modified by MIFIDPRU 3.7.4R(1)(b): Requirement to notify the FCA of the intention to issue additional tier 1 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as additional tier 1 capital in MIFIDPRU 3.4 MIFIDPRU 3.6.5R(1)(b), as modified by MIFIDPRU 3.7.4R(1)(b): Requirement to notify the FCA of the intention to issue tier 2 instruments Immediately before MIFIDPRU began to apply, the capital instruments met the conditions to be classified as tier 2 capital in MIFIDPRU 3.5 (1) (2) Material to which the transitional provision applies (3) (4) Transitional provision (5) Transitional provision: dates in force (6) Handbook provision: coming into force

1. MIFIDPRU 6 R The rules and guidance in MIFIDPRU 6 Until [Editor’s note: insert [Editor’s note: insert the date on 7.6 G Where a firm, UK parent entity or parent undertaking is deemed under MIFIDPRU TP 7.3R and 7.4R to have notified the FCA of its intention to issue additional tier 1 instruments or tier 2 instruments, MIFIDPRU 3.6.5R(2)(a) will apply to a subsequent issuance of the same class of instruments. In practice, this means that provided that the subsequent issuance of the same class is on terms that are identical in all material respects to the existing class of those instruments, no further notification to the FCA under MIFIDPRU 3.6.5R(1) will be required. TP 7 Annex 1 Notification under MIFIDPRU TP 7.4R(2)(b) on treating pre￾MIFIDPRU capital instruments as own funds under MIFIDPRU 3 R [Editor’s note: The form can be found at this address: https://www.fca.org.uk/publication/forms/[xxx]] TP 8 Commodity and emission allowance dealers 8.1 R

FCA 2021/XX Page 213 of 233 do not apply to a commodity and emission allowance dealer. date five years after the date on which MIFIDPRU begins to apply]. which MIFIDPRU begins to apply] [Note: article 57(1) of the IFR.] TP 9 IFPRU waivers: transitional Application 9.1 R MIFIDPRU TP 9 applies to a non-SNI MIFIDPRU investment firm. 9.2 R MIFIDPRU TP 9 applies where, immediately before 1 January 2022, a waiver given in relation to a rule listed in column A of the table in MIFIDPRU TP 9.5R has effect. Duration of transition 9.3 R This section applies to each waiver in MIFIDPRU TP 9.2R, until the direction given in respect of that waiver ceases to have effect on its terms, or is revoked, whichever is the earlier. Transitional 9.4 R Each waiver given in relation to a rule listed in column A of the table in MIFIDPRU TP 9.5R is treated as a waiver given to the firm in relation to the rule listed in the same row in column B of the table. Table 9.5 R Table of FCA rules Column A Column B SYSC 4.3A.8R MIFIDPRU 7.3.5R SYSC 7.1.18R MIFIDPRU 7.3.3R SYSC 19A.5.12R MIFIDPRU 7.3.1R

FCA 2021/XX Page 214 of 233 Handbook reference Subject of record Contents of record When record must be made Retention period MIFIDPRU 4.7.5R Currency conversion rate The market rate chosen to convert AUM amounts in foreign currencies into the firm’s functional currency At the time of the relevant measurement Not specified MIFIDPRU 4.10.23R(4) Basis on which firm has applied the alternative approach in MIFIDPRU 4.10.23R to determine the value of an order when measuring COH The basis in MIFIDPRU 4.10.23R(3) on which the firm is applying the alternative approach in MIFIDPRU 4.10.23R to determine the value of an order when measuring COH At the time that the firm decides to apply the alternative approach Not specified MIFIDPRU 7.1.4R(3) Currency conversion rate The market rate chosen to convert the value of amounts in foreign currencies into pounds sterling for the purposes of determining the application of certain governance requirements under MIFIDPRU 7 At the time of the relevant measurement Not specified Sch 1 Record keeping requirements Sch 1.1 G (1) The aim of the guidance in the following table is to give the reader an overview of the relevant record keeping requirements in MIFIDPRU. (2) It is not a complete statement of those requirements and should not be relied on as if it were.

FCA 2021/XX Page 215 of 233 MIFIDPRU 7.8.11R ICARA document approval The firm’s ICARA document and records of the governing body review and approval under MIFIDPRU 7.8.9R At the time that the governing body approves the ICARA document under MIFIDPRU 7.8.9R 3 years from the date on which the governing body gave its approval under MIFIDPRU 7.8.9R Handbook reference6 Subject of notification Trigger events Time allowed MIFIDPRU 1.2.4R(3) Applying alternative calculation for AUM or COH for SNI MIFIDPRU investment firm criteria Decision to apply alternative approach Not applicable MIFIDPRU 1.2.4R(4) Ceasing to apply alternative calculation for AUM or COH for SNI MIFIDPRU investment firm criteria Decision to cease applying alternative approach Not applicable MIFIDPRU 1.2.7R(2) Use of end-of-day value for calculating average CMH for Record-keeping or reconciliation error as described in Immediate notification 6 Editor’s note: This notifications table includes notification requirements that were published in CP20/24. In some cases, these requirements will be updated in the forthcoming policy statement containing the near-final rules resulting from that consultation. Where relevant, the rule references in this table should therefore be read alongside the near-final rules in that policy statement. Sch 1.2 G MIFIDPRU investment firms are also reminded of the general record keeping obligations that apply under SYSC 9 (Record keeping). Sch 2 Notification requirements Sch 2.1 G (1) The aim of the guidance in the following table is to give the reader an overview of the relevant notification requirements in MIFIDPRU. (2) It is not a complete statement of those requirements and should not be relied on as if it were.

FCA 2021/XX Page 216 of 233 SNI MIFIDPRU investment firm criteria MIFIDPRU 1.2.7R(1) MIFIDPRU 1.2.13R(3)(b) Non-SNI investment firm meeting criteria to be classified as an SNI MIFIDPRU investment firm Meeting SNI MIFIDPRU investment firm criteria for at least 6 months Not applicable MIFIDPRU 1.2.16R Firm ceasing to meet one of the criteria to be classified as an SNI MIFIDPRU investment firm Ceasing to meet one or more of the SNI MIFIDPRU investment firm criteria Prompt notification MIFIDPRU 2.5.17R(2)(f) Application of proportional consolidation to a participation meeting the conditions in MIFIDPRU 2.5.17R Decision to apply proportional consolidation Not applicable MIFIDPRU 3.3.3R(2) Notification of subsequent issuance of capital instruments qualifying as common equity tier 1 capital Proposed issuance of capital instruments of an existing class of common equity tier 1 capital No fewer than 20 business days before the issuance MIFIDPRU 3.6.3R Notification of proposed reduction, repurchase, call or redemption of own funds instruments where conditions in MIFIDPRU 3.6.4R are met Proposed redemption of own funds instruments where conditions in MIFIDPRU 3.6.4R are met No later than the 20th business day before the day on which the reduction, repurchase, call or redemption will occur MIFIDPRU 3.6.5R Notification of proposed issuance of additional tier 1 instruments or tier 2 instruments Proposed issuance of additional tier 1 instruments or tier 2 instruments At least 20 business days before the

FCA 2021/XX Page 217 of 233 intended issuance date MIFIDPRU 4.12.7R Notification of non-material change or non-material extension in use of an internal model for the K-NPR requirement Proposal to implement a non￾material change to a model or to extend the use of a model in a non￾material manner Not applicable MIFIDPRU 4.12.10R Use of own estimates for delta for standardised approach to market risk of options Decision to apply own estimates for delta where conditions in MIFIDPRU 4.12.10R are met Not applicable MIFIDPRU 4.13.10R Notification that conditions for use of K-CMG permission are no longer met Portfolio ceasing to meet conditions in MIFIDPRU 4.13.9R for use of a K-CMG permission Immediate notification MIFIDPRU 4.13.20R Notification that firm will calculate the K-NPR requirement for a portfolio for which it previously had a K￾CMG permission Decision to calculate the K￾NPR requirement for a portfolio where conditions in MIFIDPRU 4.13.19R are met Not applicable MIFIDPRU 5.6.3R Notification that concentration risk soft limit has been exceeded Exceeding concentration risk soft limit for a client or group of connected clients as specified in MIFIDPRU 5.6.2R Notification without delay

FCA 2021/XX Page 218 of 233 MIFIDPRU 5.9.3R Notification that “hard” exposure limits in MIFIDPRU 5.9.1R have been exceeded Exceeding limit in MIFIDPRU 5.9.1R Notification without delay MIFIDPRU 5.11.2R Exemption from MIFIDPRU 5.2 to MIFIDPRU 5.10 for commodity and emission allowance dealers Decision to apply exemption where conditions in MIFIDPRU 5.11.1R are met Not applicable MIFIDPRU 7.1.9R Notification that firm has met necessary conditions to fall within either MIFIDPRU 7.1.4R(1)(a) or (b) for a continuous period of at least 6 months Meeting conditions in either MIFIDPRU 7.1.4R(1)(a) or (b) for a continuous period of at least 6 months Not applicable MIFIDPRU 7.1.12R Notification that firm no longer meets the conditions necessary to fall within MIFIDPRU 7.1.4R(1)(a) or (b) No longer meeting conditions in MIFIDPRU 7.1.4R(1)(a) or (b) when the firm previously did so Prompt notification MIFIDPRU 7.6.11R Notification where own funds fall below certain specified levels Own funds falling below levels specified in MIFIDPRU 7.6.11R Immediate notification MIFIDPRU 7.7.14R Notification where liquid assets fall below certain specified levels Liquid assets falling below levels specified in MIFIDPRU 7.7.14R Immediate notification MIFIDPRU 7.8.5R Firm’s choice of submission date(s) or change of submission date(s) for data item MIF007 (ICARA assessment questionnaire) Initial choice of submission date or change of submission date for data item MIF007 Not applicable

FCA 2021/XX Page 219 of 233 MIFIDPRU TP 1.8R Notification of firm’s intentions in relation to additional tier 1 instruments issued before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] Firm has outstanding additional tier 1 instruments on [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] By no later than [Editor’s note: insert date one month after MIFIDPRU sourcebook begins to apply] MIFIDPRU TP 7.4R Notification to treat capital instruments issued before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] as own funds under MIFIDPRU 3 Firm has issued capital instruments before [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] that it wishes to treat as own funds under MIFIDPRU 3 By no later than [Editor’s note: insert date that MIFIDPRU sourcebook begins to apply] 7 Editor’s note: The FCA will consult on proposed fees for certain applications for permissions under MIFIDPRU in a future consultation paper. Schedule 3 to MIFIDPRU may be updated at that time to reflect such proposals. Sch 3 Fees and other payment requirements Sch 3.1 G There are no requirements for fees or other payments in MIFIDPRU. 7 Sch 4 Rights of action for damages Sch 4.1 G (1) The table below sets out the rules in MIFIDPRU, contravention of which by an authorised person may be actionable under section 138D of the Act (Actions for damages) by a person who suffers loss a result of the contravention. (2) If “Yes” appears in the column headed “For private person”, the rule may be actionable by a private person under section 138D (or, in certain circumstances, that person’s fiduciary or representative: see regulation 6(2) and 6(3)(c) of the Financial Services and Markets Act 2000 (Rights of Action) Regulations 2001 (SI 2001/2256)). If “Yes” appears in the column headed “Removed”, this indicates that the FCA has removed the right of action under section 138D(3) of the Act.

FCA 2021/XX Page 220 of 233 Chapter/Appendix Rights of action under section 138D of the Act For private person Removed For other person All rules in MIFIDPRU No Yes – MIFIDPRU 1.3.1R No If so, a reference to the rule in which the right of action is removed is also given. (3) The column headed “For other person” indicates whether the rule may be actionable by a person other than a private person (or that person’s fiduciary or representative) under article 6(2) and (3) of those Regulations. If so, an indication of the type of person by whom the rule may be actionable is given. Sch 5 Rules that can be waived or modified Sch 5.1 G The rules in MIFIDPRU may be waived or modified by the FCA under section 138A of the Act (Modification or waiver of rules) where the relevant conditions in that section are met.

FCA 2021/XX Page 221 of 233 Annex D Amendments to the Supervision manual (SUP) In this Annex, underlining indicates new text and striking through indicates deleted text, unless otherwise stated. Description of data item Firms’ prudential category and applicable data items (note 1) MIFIDPRU investment firms Firms other than MIFIDPRU investment firms IPRU(INV) Chapter 3 IPRU(INV) Chapter 5 IPRU(INV) Chapter 9 IPRU(INV) Chapter 13 … … … … … … Capital adequacy MIF001 (notes 2 and 3) FSA033 (note 5) FSA034 or FSA035 or FIN071 (note 7) FSA031 Section D1 RMAR Supplementary capital data for collective portfolio management investment firms FIN067 (note 13) 16 Reporting requirements … … 16.12 Integrated Regulatory Reporting … Regulated Activity Group 3 … … 16.12.11 R The applicable data items referred to in SUP 16.12.4R are set out according to firm type in the table below:

FCA 2021/XX Page 222 of 233 ICARA assessment questionnaire MIF007 (note 3) Threshold conditions Section F RMAR … … … … … … Note 2 A UK parent entity of an investment firm group to which consolidation applies under MIFIDPRU 2.5 must also submit this report on the basis of the consolidated situation. Note 3 Data items MIF001 – MIF006 MIF007 must be reported in accordance with the rules in MIFIDPRU 9. … … Note 12 Only applicable to a parent undertaking to which the group capital test applies. Note 13 Only applicable to firms that are collective portfolio management investment firms. Data item Non-SNI MIFIDPRU investment firm SNI MIFIDPRU investment firm Investment firm group Firm other than a MIFIDPRU investment firm … … … … … FSA040 Quarterly FIN067 Quarterly Quarterly 16.12.12 R The applicable reporting frequencies for data items referred to in SUP 16.12.4R are set out in the table below according to firm type. Reporting frequencies are calculated from a firm’s accounting reference date, unless indicated otherwise.

FCA 2021/XX Page 223 of 233 (note 3) (note 3) FIN071 Quarterly … … … … … MIF006 Quarterly (note 3) Quarterly (note 3) MIF007 Annually (note 4) Annually (note 4) Section A RMAR Half yearly (note 1) Quarterly (note 2) … …. … … … Note 3 Reporting frequencies and reporting periods for this data item are calculated on a calendar year basis and not by reference to the firm’s accounting reference date. The relevant quarters end on the last business day of March, June, September and December. Note 4 The reporting period for MIF007 is determined by the date on which the firm reviews its ICARA process under MIFIDPRU 7.8.2R and the submission date that applies under MIFIDPRU 7.8.5R. Data item Quarterly Half yearly Annual … … FSA040 15 business days FIN067 20 business days 16.12.13 R The applicable due dates for submission referred to in SUP 16.12.4R are set out in the table below. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period set out in SUP 16.12.12R, unless indicated otherwise.

FCA 2021/XX Page 224 of 233 FIN071 20 business days … … MIF006 20 business days MIF007 The submission date that applies under MIFIDPRU 7.8.5R Section A RMAR 30 business days 30 business days … … Description of data item Firms’ prudential category and applicable data items (note 1) MIFID PRU investm ent firms Firms other than MIFIDPRU investment firms IPRU(I NV) Chapte r 3 IPRU(I NV) Chapte r 5 IPRU(I NV) Chapte r 9 IPRU(I NV) Chapte r 11 (collecti ve portfoli o manage ment firms only) IPRU(I NV) Chapte r 12 IPRU(I NV) Chapte r 13 … … Regulated Activity Group 4 … 16.12.15 R The applicable data items referred to in SUP 16.12.4R are set out according to firm type in the table below:

FCA 2021/XX Page 225 of 233 Capital adequacy MIF001 (note 3 and 4) FSA033 FSA034 or FSA035 or FIN071 (note 5) FSA031 FIN066 FIN069 Section D1 RMAR ICARA assessment questionnaire MIF007 (note 4) Supplementary capital data for collective portfolio management investment firms FIN067 (note 9) Threshold conditions Section F RMAR … … Note 4 Data items MIF001 – MIF006 MIF007 must be reported in accordance with the rules in MIFIDPRU 9. … … Note 8 Only applicable to a parent undertaking to which the group capital test applies. Note 9 Only applicable to firms that are collective portfolio management investment firms. Data item Non-SNI MIFIDPRU investment firm SNI MIFIDPRU investment firm Investment firm group Firm other than a MIFIDPRU 16.12.16 R The applicable reporting frequencies for data items referred to in SUP 16.12.15R are set out in the table below according to firm type. Reporting frequencies are calculated from a firm’s accounting reference date, unless indicated otherwise.

FCA 2021/XX Page 226 of 233 investment firm … … FSA039 Half yearly Half yearly Half yearly FIN067 Quarterly (note 3) Quarterly (note 3) FIN071 Quarterly … … MIF006 Quarterly (note 3) Quarterly (note 3) MIF007 Annually (note 4) Annually (note 4) Section A RMAR Half yearly (note 1) Quarterly (note 2) … … Note 3 Reporting frequencies and reporting periods for this data item are calculated on a calendar year basis and not by reference to the firm’s accounting reference date. The relevant quarters end on the last business day of March, June, September and December. Note 4 The reporting period for MIF007 is determined by the date on which the firm reviews its ICARA process under MIFIDPRU 7.8.2R and the submission date that applies under MIFIDPRU 7.8.5R. 16.12.17 R The applicable due dates for submission referred to in SUP 16.12.4R are set out in the table below. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period set out in SUP 16.12.16R, unless indicated otherwise.

FCA 2021/XX Page 227 of 233 Data item Quarterly Half yearly Annual … … FSA039 30 business days FIN067 20 business days FIN071 20 business days … … MIF006 20 business days MIF007 The submission date that applies under MIFIDPRU 7.8.5R Section A RMAR 30 business days 30 business days … … Description of data item Firms’ prudential category and applicable data item (note 1) MIFIDPRU investment firms Firms subject to IPRU(INV) Chapter 13 Firms that are also in one or more of RAGs 2 to 6 and not subject to IPRU(INV) Chapter 13 … … Group capital test MIF006 … Regulated Activity Group 7 … 16.12.22A R The applicable data items referred to in SUP 16.12.4R are set out according to type of firm in the table below:

FCA 2021/XX Page 228 of 233 (notes 6 and 8) ICARA assessment questionnaire MIF007 (note 6) Supplementary capital data for collective portfolio management investment firms FIN067 (note 10) … … Note 4 Does not apply to an SNI MIFIDPRU investment firm which has been granted an exemption from the liquidity requirements in MIFIDPRU 6. Note 5 Only applicable to a non-SNI MIFIDPRU investment firm. Note 6 Data items MIF001 – MIF006 MIF007 must be reported in accordance with the rules in MIFIDPRU 9. … … Note 9 Where a firm submits data items for both RAG 7 and RAG 9, the firm must complete Section D1. Note 10 Only applicable to firms that are collective portfolio management investment firms. Data item Frequency Non-SNI MIFIDPRU investment firm SNI MIFIDPRU investment firm Investment firm group Annual regulated business revenue up to and Annual regulated business revenue over £5 million … 16.12.23A R The applicable reporting frequencies for data items referred to in SUP 16.12.22AR are set out in the table below. Reporting frequencies are calculated from a firm’s accounting reference date, unless indicated otherwise.

FCA 2021/XX Page 229 of 233 including £5 million … … FSA030 Quarterly FIN067 Quarterly Quarterly MIF001 Quarterly (note 1) Quarterly (note 1) Quarterly (note 1) … … MIF006 Quarterly (note 1) Quarterly (note 1) MIF007 Annually (note 2) Annually (note 2) Section A RMAR Half yearly Quarterly … … Note 1 Reporting frequencies and reporting periods for this data item are calculated on a calendar year basis and not by reference to the firm’s accounting reference date. The relevant quarters end on the last business day of March, June, September and December. Note 2 The reporting period for MIF007 is determined by the date on which the firm reviews its ICARA process under MIFIDPRU 7.8.2R and the submission date that applies under MIFIDPRU 7.8.5R. Data item Quarterly Half yearly Annual 16.12.24A R The applicable due dates for submission referred to in SUP 16.12.4R are set out in the table below. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period set out in SUP 16.12.23AR, unless indicated otherwise.

FCA 2021/XX Page 230 of 233 … … FSA030 20 business days (note 1) 30 business days (note 2) FIN067 20 business days MIF001 20 business days (note 1) 30 business days (note 2) … … MIF006 20 business days MIF007 The submission date that applies under MIFIDPRU 7.8.5R Section A RMAR 30 business days 30 business days … … Description of data item Firms’ prudential category and applicable data items (note 1) MIFIDPRU investment firms Firms other than MIFIDPRU investment firms IPRU(INV) Chapter 3 IPRU(INV) Chapter 5 IPRU(INV) Chapter 9 IPRU(INV) Chapter 13 … … Regulated Activity Group 8 … 16.12.25A R The applicable data items referred to in SUP 16.12.4R are set out according to type of firm in the table below:

FCA 2021/XX Page 231 of 233 Group capital test MIF006 (notes 5 and 6) ICARA assessment questionnaire MIF007 (note 5) Threshold conditions Section F RMAR (note 17) … … Note 5 Data items MIF001 – MIF006 MIF007 must be reported in accordance with the rules in MIFIDPRU 9. … … Data item Non-SNI MIFIDPRU investment firm SNI MIFIDPRU investment firm Investment firm group Firm other than a MIFIDPRU investment firm … … MIF006 Quarterly Quarterly MIF007 Annually (note 4) Annually (note 4) Section A RMAR Half yearly (note 1) Quarterly (note 2) … 16.12.26 R The applicable reporting frequencies for data items referred to in SUP 16.12.25AR are set out according to the type of firm in the table below. Reporting frequencies are calculated from a firm’s accounting reference date, unless indicated otherwise.

FCA 2021/XX Page 232 of 233 … … Note 3 Reporting frequencies and reporting periods for this data item are calculated on a calendar year basis and not by reference to the firm’s accounting reference date. The relevant quarters end on the last business day of March, June, September and December. Note 4 The reporting period for MIF007 is determined by the date on which the firm reviews its ICARA process under MIFIDPRU 7.8.2R and the submission date that applies under MIFIDPRU 7.8.5R. Data item Quarterly Half yearly Annual … … MIF006 20 business days MIF007 The submission date that applies under MIFIDPRU 7.8.5R … … SUP 16.17 (Remuneration reporting) is deleted in its entirety. The deleted text is not shown but the section is marked [deleted] as shown below. 16.17 Remuneration reporting [deleted] Insert the following new section after SUP 16.26 (Reporting of information about Directory persons). The text is not underlined. 16.27 MIFIDPRU Remuneration Report Application 16.27.1 R This section applies to a MIFIDPRU investment firm. 16.12.27 R The applicable due dates for submission referred to in SUP 16.12.4R are set out in the table below. The due dates are the last day of the periods given in the table below following the relevant reporting frequency period set out in SUP 16.12.26R, unless indicated otherwise. …

FCA 2021/XX Page 233 of 233 Purpose 16.27.2 G The purpose of this section is to ensure that the FCA receives regular information in a standard format to assist it in assessing the effectiveness of MIFIDPRU investment firms’ remuneration and incentive arrangements. Reporting requirement 16.27.3 R A firm to which this section applies must submit the MIFIDPRU Remuneration Report: (1) in the format set out in SUP 16 Annex [XX]R; (2) in accordance with the instructions in SUP 16 Annex [XX]G; and (3) online through the appropriate systems accessible from the FCA’s website. 16.27.4 R The information in the MIFIDPRU Remuneration Report must be denominated in pound sterling. 16.27.5 R Where a MIFIDPRU investment firm does not form part of an investment firm group to which consolidation applies under MIFIDPRU 2.5, it must complete the report on a solo basis in respect of remuneration awarded in the last completed financial year to all relevant staff of the firm who mainly undertook their professional activities within the UK. 16.27.6 R Where a MIFIDPRU investment firm forms part of an investment firm group to which consolidation applies under MIFIDPRU 2.5, it must not complete the report on a solo basis. The MIFIDPRU investment firm must complete the report on a consolidated basis in respect of remuneration awarded in the last completed financial year to all relevant staff of the firm who mainly undertook their professional activities within the UK. 16.27.7 G Firms’ attention is drawn to SUP 16.3.25G which permits a single report to be submitted to satisfy the reporting requirements of all firms in a group. Frequency and timing of report 16.27.8 R (1) A firm to which this section applies must submit a MIFIDPRU Remuneration Report to the FCA annually. (2) The firm must submit that report to the FCA within 4 months of the end of the firm’s accounting reference date.

CP21/7 Appendix 2 Financial Conduct Authority A new UK prudential regime for MiFID investment firms Appendix 2 General Guidance on the application of ex-post risk adjustment to variable remuneration

Finalised Guidance Financial Conduct Authority Page 1 of 9 1 Introduction 1.1 This statement is general guidance under section 139A(1) of the Financial Services and Markets Act 2000 (FSMA). It was initially issued on 1 July 2015 and applied to all firms in scope of the FCA’s Dual-regulated firms Remuneration Code in SYSC 19D. In 2021, we revoked the guidance and reissued it with an extended scope. It now also applies to FCA investment firms in scope of the MIFIDPRU Remuneration Code in SYSC 19G This guidance statement It has effect from [1 January 2022]July 2015. 1.2 This guidance is aimed at all firms to whom the Financial Conduct Authority’s Dual￾regulated firms Remuneration Code in SYSC 19D1 applies. ItsThe main purpose of this guidance is to set out the FCA’s expectations of the way in which firms comply with the requirements on ex-post risk adjustment (also referred to as performance adjustment). Where firms consider an alternative approach to be justified in meeting the requirements on ex-post risk adjustment in the Dual-regulated firms Remuneration Code or the MIFIDPRU Remuneration Code, this should be consistent with the general requirement to promote sound and effective risk management set out in SYSC 19D.2.1R and SYSC 19G.2.8R. 1.3 The Prudential Regulation Authority (PRA) has also issued a Supervisory Statement (SS2/13) entitled ‘PRA expectations regarding the application of malus to variable remuneration’. This has been superseded by a Supervisory Statement on Remuneration (SS2/17), which was revised in December 2020 published in October 20132 . 1 The creation of SYSC 19D has been consulted on in CP14/14. 2 PRA Supervisory Statement on Remuneration (December 2020) expectations regarding the application of malus to variable remuneration (October 2013) is available at: https://www.bankofengland.co.uk/prudential￾FG21/[X]: General guidance on the application of ex-post risk adjustment to variable remuneration 1 July 2015[date] [month] [year]

Financial Conduct Authority Page 2 of 9 1.4 The primary purpose of the Dual-regulated firms Remuneration Code and the MIFIDPRU Remuneration Code is to ensure greater alignment between risk and individual reward, to discourage excessive risk taking and short-termism, and encourage more effective risk management, and in turn to support positive behaviours and a strong and appropriate conduct culture within firms. This advances our objectives of securing an appropriate degree of protection for consumers and protecting and enhancing the integrity of the UK financial system. 1.5 The effective, meaningful and timely use of ex-post risk adjustment including malus, is essential to these aims. 1.6 Ex-post risk adjustment refers to the adjustment of variable remuneration to take account of a specific crystallised risk or adverse performance outcome including those relating to misconduct (a ‘relevant event’). Ex-post risk adjustments include reducing current year awards, the application of malus (reducing or cancelling deferred incentive awards that have not yet vested), and clawback (recouping already vested awards). 1.7 The FCA expects firms to consider the application of ex-post risk adjustment for relevant events where there has been a materially adverse impact on any of the relevant criteria set out in 3.8. Ex-post risk adjustment should be applied as a minimum in the event of circumstances that fall within the meaning of SYSC 19D.3.62R - SYSC 19D.3.64R or SYSC 19G.6.28R – SYSC 19G.6.32G including for material cases of misconduct. 1.8 The importance of ex-post risk adjustment has been underscored both in Directive 2013/36/EU (the Capital Requirements Directive or CRD), which requires up to 100% of the total variable remuneration to be subject to malus or clawback arrangements, and the Parliamentary Commission on Banking Standards' final report. 1.91.8 Firms should comply with the Dual-regulated firms Remuneration Code’s and MIFIDPRU Remuneration Code’s provisions on risk and performance adjustment in their spirit as well as to the letter. 1.101.9 Where a firm has a Remuneration Committee, the FCA expects the Chair to ensure that the decisions taken by this committee on ex-post risk adjustment support the purpose and objectives of the Dual-regulated firms Remuneration Code and MIFIDPRU Remuneration Code to promote positive behaviours and culture within the firm. regulation/publication/2017/remuneration-ss http://www.bankofengland.co.uk/pra/Documents/publications/policy/2013/appofmalusss2-13.pdf.

Financial Conduct Authority Page 3 of 9 2 Scope 2.1 All unvested variable remuneration should, in principle, be capable of forfeiture or recovery through ex-post risk adjustment. Deferred remuneration for the purposes of adjustment includes Long-Term Incentive Plans (LTIPs). 2.2 The use of ex-post risk adjustment should not be limited to employees who engaged directly in misconduct. In all cases, the FCA expects firms to consider applying ex￾post risk adjustment to those employees whose roles and responsibilities include areas where failures or poor performance contributed to, or failed to prevent, the crystallisation of risk including cases of misconduct. Ex-post risk adjustment should be applied, including for individuals who: a. could have been reasonably expected to be aware of the failure, misconduct or weakness in approach that contributed to, or failed to prevent, the crystallisation of risk at the time but failed to take adequate steps to promptly identify, assess, report, escalate or address it; or b. by virtue of their role or seniority are indirectly responsible or accountable for the relevant event, including senior staff who drive the firm's culture and set its strategy. 2.3 Section 2.2 above includes individuals within control functions (e.g. compliance, risk, internal audit etc.) for the weaknesses and failings identified within these functions. The FCA expects firms to place primary responsibility on the business for meeting standards expected of them and expects the amount and nature of adjustments made to control functions to reflect that allocation of responsibility. 2.4 The FCA expects all firms subject to ex-post risk adjustment to have a firm-wide policy on the application of ex-post risk adjustment (and group-wide policy, where appropriate) for staff subject to the relevant provisions of the Dual-regulated firms Remuneration Code and MIFIDPRU Remuneration Codefor whom the latter can be partially dis-applied due to their level of earnings under the proportionality rule.

Financial Conduct Authority Page 4 of 9 3 Expectations in relation to the application of ex-post risk adjustment 3.1 Firms’ remuneration policies and employment contracts should make it clear that variable remuneration awards are conditional, discretionary and contingent upon a sustainable and risk-adjusted performance. They are therefore capable of forfeiture or reduction at the employer’s discretion. 3.2 Ex-post risk adjustment can be applied collectively at bonus pool level, to groups of employees and to individuals. Firms should apply an appropriate balance of ex-post risk adjustments across these levels. 3.3 The primary focus in applying ex-post risk adjustments should be on individuals. Collective ex-post risk adjustments are likely to be appropriate where there are widespread failings or to meet all or a significant part of the cost of regulatory action and fines, redress and other associated costs from bonus pools. Where a relevant event has a material impact on any of the relevant criteria in paragraph 3.8, the FCA expects to see a similarly material adjustment as a proportion of a firm’s bonus pool. 3.4 Where the misconduct, failings or poor performance which led to a relevant event occurred primarily in particular business units or divisions, collective adjustments should be weighted towards those areas. 3.5 Firms should ensure that individuals do not profit from a relevant event. Firms should consider the extent to which past bonuses were earned as a result of identified failings and also give appropriate consideration to the cost of consequent redress and other financial impacts. Firms should apply further ex-post risk adjustment to reflect this and should do so robustly and fairly. 3.6 In considering how much further ex-post risk adjustment to apply to individuals, the FCA expects firms to consider the degree of culpability, involvement or responsibility of an individual and the relevant criteria listed in paragraph 3.8. 3.7 For cases with a high degree of personal responsibility and a high impact in relation to any of the relevant criteria in paragraph 3.8, up to 100% ex-post risk adjustment should be the starting point. For lower degrees of responsibility and impact, proportionately less ex-post risk adjustment may be applied. In all cases, firms should ensure that the size of ex-post reductions reflect the severity of the relevant event, are material in size and are sufficient to drive positive individual behaviours and culture within the firm. 3.8 When deciding the amounts to be adjusted, the FCA expects firms to take into account all relevant criteria, including: a. The impact on the firm’s customers, counterparties and the wider market; b. The impact of the failure on the firm’s relationships with its other stakeholders including shareholders, employees, creditors, the taxpayer and regulators; c. The cost of fines and other regulatory actions (e.g. Section 166 of FSMA reviews); d. Direct and indirect financial losses attributable to the relevant failure; and

Financial Conduct Authority Page 5 of 9 e. Reputational damage.

Financial Conduct Authority Page 6 of 9 4 Timing in the consideration of ex-post risk adjustment 4.1 Firms should start to consider ex-post risk adjustment once relevant events have been identified and impose reductions as soon as reasonably possible. 4.2 Where ex-post risk adjustments are made to current or prior year awards before the full impact of the relevant event is known, subsequent consideration and, where appropriate, subsequent adjustments should be made to ensure the final value of the adjustment fully reflects the impact of the incident. 4.3 Firms should update the FCA on any relevant pending investigations and ahead of any payment of outstanding awards to individuals under investigation for misconduct. 4.4 Risk management failures and misconduct can take years to come to light. This should not prevent firms from applying ex-post risk adjustment to the extent that the relevant individuals have variable remuneration capable of reduction, even where this does not relate to performance in the year in which the relevant event occurred or came to light. 4.5 Firms should freeze the vesting of all variable remuneration potentially due to individuals undergoing internal or external investigation that could result in material ex-post risk adjustment until such an investigation has concluded and the firm has made a decision and communicated it to the relevant employee(s). This does not preclude the vesting of some or all variable remuneration in relation to particular individuals once the firm has established with certainty that ex-post risk adjustment of these amounts is not required.

Financial Conduct Authority Page 7 of 9 5 Procedure for considering ex-post risk adjustment 5.1 The FCA expects firms to develop and maintain an adequate procedure for deciding cases that could result in the use of ex-post risk adjustment as part of or alongside regular internal performance management and disciplinary proceedings. This procedure should: a. Identify which roles, departments, functions and committees are responsible for identifying, escalating and deciding cases that may trigger the use of ex￾post risk adjustment. b. Ensure that control functions including Internal Audit, Compliance, Finance, Human Resources, Legal, Reward and Risk provide relevant information and contribute to discussions as required. c. Set out clear criteria on the kind of cases that may trigger the use of ex-post risk adjustment. These criteria should be indicative and non-exhaustive. Remuneration Committees should retain full discretion to introduce additional criteria where appropriate. d. Set out a clear process for determining the degree of culpability, responsibility or accountability, including allowing individuals under investigation to make representations. e. Promote consistency, fairness and robustness in the application of ex-post risk adjustment. f. Firms should ensure that the initial process for determining bonus pools is sufficiently transparent to enable them to quantify and articulate clearly the impact of any ex-post risk adjustments they might make prior to them being approved. g. Clearly record the value of awards and the rationale for why they are that size prior to and following ex-post risk adjustments being applied. h. Clearly record the value of the adjustments made at individual, business unit and firm levels so that it is possible to determine the value of each adjustment per incident and at the individual employee level. Firms should make consistent judgments and be able to explain how adjustments have been made and why any differences exist between incidents or the individuals concerned. i. Ex-post risk adjustments should be applied separately after all other factors relevant to setting awards (including those set out in Principle 8 - Profit-based measurement and risk adjustment- and Principle 12b –Remuneration structures – assessment of performance) have been considered to ensure that subsequent adjustments are not made that would reduce or undermine the effect of ex-post risk adjustment at bonus pool or individual level. j. Firms should ensure that the value of ex-post risk adjustments made to an individual’s variable remuneration and the reasons for the adjustments are clearly communicated to the affected individuals in writing and that the value and reasons for collective adjustments are clearly communicated to staff as a group.

Financial Conduct Authority Page 8 of 9 5.2 The operation of an effective procedure for considering ex-post risk adjustment is not a substitute for taking account of known increases in risk as they arise, including those relating to conduct. The FCA would expect firms to take these risks into account including for example, where weaknesses in systems and controls have been identified or where there is an increased level of customer complaints, when determining the appropriate size and value of new awards.

Financial Conduct Authority Page 9 of 9 6 Co-operation with the FCA 6.1 Firms are expected to provide the FCA with information on their application of ex￾post risk adjustment as requested. This information should be sufficient for the FCA to assess the firm’s ex-post risk adjustment decisions. 6.2 Where a firm’s policies and practices on variable remuneration are under review by the FCA, these firms should comply with anythe timetable set by the regulators, providing sufficient time for the FCA to form a view before the date by which they intend to communicate and distribute their awards. Firms in scope of the Dual￾regulated firms Remuneration Code should Please refer to the FCA and PRA websites for the most up-to-date data collection templates and review timetable. 6.3 Where a firm does not meet athe timetable set by the regulators, there is likely to be a commensurate impact in the provision of the FCA’s view to the firm which may delay the firm’s own timetable for communicating and distributing awards.

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