Capital

Key Insights

  • When assessing changes to capital requirements we found that Exempt-CAD firms would feel the biggest impact, with increases from a standard £42k (€50k) to figures ranging from £173k to £1.2m

  • With regards to capital resources, most firms will see no change. However, caution should be exercised when analysing the balance sheet and any deductions required by the rules. Deductions may include investments in financial and non-financial sector entities, intangible assets and deferred tax assets. Firms should carefully consider whether capital resources are sufficient to meet requirements.

Capital Requirements

The IFPR introduces new rules around capital requirements, which set a minimum threshold that firms should meet or exceed. Under the various current regimes that apply to UK investment firms, capital requirements vary drastically, from Exempt-CAD advisor/arranger type firms requiring just £42k (or €50k), to limited licence firms with a variable capital requirement, through to full scope firms calculating a complete set of operational, market and credit risk capital requirements.

The IFPR seeks to align these requirements, with minimum levels of capital applicable to all, and variable requirements based on the specific activities a firm undertakes. For the first time we see capital requirement calculations geared specifically toward the risks an investment firm faces and poses, known as the K-factor requirements (KFR).

Capital Resources

The capital resources rules are intended to standardise capital resources calculations and ensure consistency across eligibility criteria, appropriate deductions and weighting, according to the quality of capital itself.

Many investment firms have a simple capital structure, being funded entirely by equity. These firms will find it easier to apply the rules of capital resources than a firm that deploys, for example, convertible instruments or subordinated debt, into the composition of capital resources.

During the impact assessments, the Wheelhouse Advisors team calculated each firm’s capital requirements and resources, taking into account deductions and eligibility criteria for each tier of capital.

 Capital

The Findings

  • Almost a quarter of firms assessed will see an increase in capital requirements, whilst almost half will be required to maintain the same level of capital.

  • Those that will be subject to an increase are all Exempt-CAD firms.

  • Some of the increases we calculated for Exempt-CAD firms are staggering, ranging from a 311% increase, to a massive 2,800% increase.

  • The reason for the huge increase is mostly due to the fact that, from January 2022, the requirement to calculate the Fixed Overhead Requirement will apply to all firms.

  • 91% of the firms assessed will see no change to their capital resources.

Capital Impact

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