CRD IV What it means for investment firms

Ben Blackett-OrdRichard CrossJackie Domanska

November 2013

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• CRD IV will be implemented on 1 January 2014 – many firms will be affected

• Even unaffected firms need to ensure they’re not inadvertently caught

• Some firms will be subject to significantly different capital requirements

• All impacted firms will be subject to new and complex reporting requirements

Make sure you understand what CRD IV means for you ASAP

Summary – CRD IV cannot be ignored

Evolving prudential categories

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IPRU INV 9

BIPRU / GEN PRU

IPRU INV 3

IPRU INV 5

IPRU INV 13

MiFID CRD III Exempt CAD Non-MiFID

SFA IMRO PIA1990s

EU Directives

2010s UPRU

UCITS

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• The Banking Consolidation Directive and the Capital Adequacy Directive (CAD) are collectively known as the Capital Requirements Directives (CRD)

• Investment firms subject to MiFID are subject to the prudential requirements of the CAD

• The CRD has been amended on a number of occasions, we are currently at CRD III

• CRD IV takes effect from 1st January 2014

The path to CRD IV

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• Strengthens capital requirements

• Introduces a capital buffer regime for significant firms

• Introduces an EU wide supervisory reporting framework for Financial Reporting (FINREP) and Common Reporting (COREP)

CRD IV: strengthening capital across the EU

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• The Capital Requirements Regulation- Directly applicable- Very little scope for consultation/amendment- Focuses on capital requirements, risk, liquidity and

disclosure

• The Directive- Member states to transpose into national law- Main focus of consultation- Focus is in supervision- Capital buffers, corporate governance and remuneration

CRD IV: structuring the new requirements

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• The Regulation – where most of the rules willnow be located

• Technical standards and guidance issued by theEuropean Banking Authority (EBA)

• FCA Handbook Rules and Guidance – IFPRU(with some changes to SYSC)

Finding the rules and guidance

CRD IV

Establishing how you’re affected

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Whether firms are in scope depends on MiFID permissions

In scope:• Anyone dealing on own account• Underwriting/placing financial instruments on firm commitment

basis• Placing without firm commitment basis• Operating MTF• Safekeeping, custodian, cash/collateral management (MiFID

ancillary service permission 1)• Anyone holding client money

All BIPRU 730k and 125k firms are in scope • Can catch some BIPRU 50k firms depending on permissions and

exempt CAD firms specifically if they have MiFID ancillary permission 1

It’s not easy to determine who is in scope

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FCA numbers reveal scale of regulation

Firm primary category Full scope

Limited activity

Limitedlicence

Total

Discretionary Inv. Manager 20 5 1440 1465Adviser and Arranger 21 3 229 253Stockbroker 62 11 85 158Corp Finance Firm 14 1 118 133Financial adviser 3 102 105Other 81 23 218 322Total 201 43 2192 2436

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• Existing BIPRU 50k firms that are only categorised as such because they have permission to :

- provide investment advice- receive and transmit orders- execute orders on behalf of clients (MiFID activity 2); or- undertake portfolio management (MiFID activity 4)

AND- do not hold client money and assets

… will fall outside CRD IV, remain subject to CRD III and will be known as BIPRU Firms.

Some existing BIPRU 50k firms escape

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• However, existing BIPRU 50k firms that do:

- place securities without a firm commitment basis (MiFIDactivity 7).

…will be caught by CRD IV and the associated reporting requirements.

If you are not placing you must return a VoP to FCA by 20th Novor you may be subject to CRD IV requirements.

If appropriate you should have been contacted by the FCA regarding this.

But some don’t…

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• Investment Firms Prudential Rules

• Categorisation dependent on activities (scope of permission)

• IFPRU Category (ie 50k, 125k and 730k)- This drives base capital requirement

• All have secondary categorisation (limited licence, limited activity or full scope)- This drives variable capital resources requirement

Welcome to IFPRU – new CRD IV categories

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CPMIs under AIFMD are potentially in scope

• Collective portfolio management firm (CPM)A firm that undertakes external collective portfolio management of AIFs, UCITS or both, but does not provide any MiFIDservices.

CPMs are not in scope

• Collective portfolio management investment firm (CPMI) A firm that undertakes external collective portfolio management of AIFs, UCITS or both and provides MiFID services (only managing investments permitted).

CPMIs may be in scope

The new regime – CRD IV and AIFMs

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No AIFM Full Scope AIFM Sub-threshold AIFM

No MiFID Activity IPRU (INV) 3, 5 or 13 IPRU (INV) 11CPM

IPRU (INV) 5

RTO and Investment Advice

IPRU (INV) 9 IPRU (INV) 11 and 9 IPRU (INV) 5and 9

Portfolio Management (PM)

New BIPRU IPRU (INV) 11 and new BIPRUCPMI

IPRU (INV) 5and new BIPRU

Execution of Orders New BIPRU X IPRU (INV) 5and new BIPRU

Placing IFPRU 50k X IPRU (INV) 5and IFPRU 50k

Holding money / assets

IFPRU 125k IPRU (INV) 11 and IFPRU 125k / CPMI (if holding in relation to PM)

IPRU (INV) 5 and IFPRU 125k

Dealing on own account

IFPRU 730k X ?

Underwriting IFPRU 730k X ?

Operate an MTF IFPRU 730k X ?

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Wealth manager• Discretionary portfolio management • Does not hold client money or assets

Currently – BIPRU 50k Limited Licence firm

From 1st Jan – BIPRU Firm

Example: Dolphin Securities

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Corporate finance boutique• Gives M&A advice• Places securities in relation to IPOs• Deals as agent• Does not hold client money or assets.

Currently – BIPRU 50k Limited Licence

From 1st Jan – IFPRU 50k Limited Licence

Example: Williams Corporate Finance

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Hedge fund manager (full-scope AIFM)• Discretionary managed accounts (ie MiFID

business)• Holds client money/assets in respect of its

MiFID business. • Currently BIPRU 125k

CPMI = subject to IPRU (INV) Chapter 11 in relation to its AIFM business and IFPRU/CRR in relation to its MiFID investment business.

Example: Gold Star Asset Management

Preparing for CRD IV• Understanding capital requirement• Getting ready for new reporting

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CRD IV

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The are two categories for capital requirements: ‘significant’ firm or SME (small and medium enterprise).

‘Significant’ firms:• meet one or more of certain financial indicators such as:

- Total assets £530mm- Annual fees £120mm- Client money £425mm

• have to to hold various ‘capital buffers’ including:- Conservation capital buffer = 2.5% risk weighted assets. (Firms

have to hold but can use buffer with FCA permission)- Counter cyclical buffer = up to 2.5%- Systemic risk buffer = up to 5%

Significant firms can be asked to hold capital up to 18%

Capital – ‘Significant’ firms

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SMEs (small and medium enterprises) are not subject tocapital buffers

• Tier 3 no longer allowed as part of the calculation

• Simplified credit risk calculation no longer available forIFPRU firms. FCA may publish a help-sheet on this

• No changes to Pillar 2

• No changes to FOR calculation

• EU looking to overhaul prudential regime for all investmentfirms in 2015

Capital – Other firms

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• In scope IFPRU firms have to comply with COREP reporting from 1 Jan 2014 (first quarter affected ends 31 March 2014)

• New reports submitted in XBRL language to EBA via GABRIEL reporting. Can no longer input everything direct to GABRIEL

• Report templates found at EBA website

• 25 templates replace FSA003 to FSA008 (risk reporting) –granularity of detail needed and data input needs to be validated

• If outside of scope, status quo. New BIPRU firm reports under old FCA reports in GABRIEL

• FINREP replaces FSA001 and FSA002 for very limited number of firms from 1July 2014

Reporting – COREP/FINREP

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Reporting: which new templates do I use?

IFPRU 50k firm capital adequacy templates only

IFPRU 125k firmcapital adequacy templates + credit risk part 3.2 + market risk templatesCR+MR > FOR

capital adequacy templates only

CR+MR< FOR

IFPRU 730k firm full suite of reports

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Example: Dolphin Securities

‘new’ BIPRU firm

greater of:• base capital• credit risk +market risk • FOR

GABRIEL reporting FSA 003

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Example: Williams Corporate Finance

IFPRU 50k firm

greater of:• base capital• credit risk +market risk • FOR

IFPRU 3

COREP capital adequacy templates

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Example: Gold Star Asset Management

IFPRU 125k firm greater of:• base capital• credit risk +market risk • FOR

IFPRU 3

IPRU-INV CH 11greater of• base capital +• 2BP on AUM >250MM

or • FOR

Take the greater of the two calculations

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• Review your underlying data to see if it is sufficientlydetailed and in appropriate format for COREP submission

• Review credit risk calculation as simplified risk calculationno longer available.

• Trial run of new templates

• Ensure you can convert Excel to XBRL

• Consider purchasing XBRL and validation software

Bovill can help

Getting ready for the new reporting regime

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• Review your permissions and work out your new prudential category

• Decide whether you need to apply for a variation

• If so apply ASAP

• Review capital adequacy if you’re a ‘Significant Firm’

• Establish what you need to do to meet new reporting

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