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MIFIDPRU 1.1 Application and purpose

Application

MIFIDPRU 1.1.1 G

1There is no overall application provision for MIFIDPRU. Each chapter or section has its own application statement. However, MIFIDPRU broadly applies to the following:

  1. (1)

    MIFIDPRU investment firms;

  2. (2)

    UK parent entities; and

  3. (3)

    parent undertakings in an investment firm group that are incorporated in, or have their principal place of business in, the United Kingdom.

MIFIDPRU 1.1.2 G
  1. (1)

    1The 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 a provision of MIFIDPRU otherwise provides.

  2. (2)

    A collective portfolio management investment firm is also subject to the prudential requirements in IPRU-INV 11 (Collective Portfolio Management Firms and Collective Portfolio Management Investment Firms). These 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. (3)

    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. However, some requirements in MIFIDPRU apply to the firm as a whole.

Application to overseas firms

MIFIDPRU 1.1.3 G

1 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 some 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.

MIFIDPRU 1.1.4 G
  1. (1)

    1This 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. (2)

    The FCA will not normally 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 and the regulatory requirements are broadly equivalent to the requirements that would apply under MIFIDPRU.

  3. (3)

    When conducting the assessment in (2), the FCA will take into account the following non-exhaustive list of factors:

    1. (a)

      whether the requirements of the jurisdiction are likely to achieve similar prudential outcomes to MIFIDPRU;

    2. (b)

      how the overseas regulatory body supervises and enforces those requirements in practice;

    3. (c)

      the broader legal framework applicable to the applicant in the jurisdiction; and

    4. (d)

      whether there are adequate arrangements in place between the FCA and the overseas regulatory body to facilitate any necessary supervisory cooperation.

  4. (4)

    The FCA considers that the approach described in (2) and (3) is consistent with the following:

    1. (a)

      The requirements in the threshold conditions including, 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.

    2. (b)

      The need for the FCA to be able to apply effective supervision to a third country MIFIDPRU investment firm to ensure appropriate protection for consumers or potential consumers. This relies on cooperation between 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. (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. (6)

    Although a third country MIFIDPRU investment firm that is granted a Part 4A permission is not subject to MIFIDPRU, it 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

MIFIDPRU 1.1.5 G

1The purpose of MIFIDPRU is to set out the detailed prudential requirements that apply to a MIFIDPRU investment firm. MIFIDPRU does not apply to a designated investment firm, which is 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 as a whole.

MIFIDPRU 1.1.6 G

1The requirements in MIFIDPRU expand upon the basic requirements under the appropriate resources threshold condition referred to in COND 2.4 and the requirement in Principle 4 for a firm to maintain adequate financial resources.

Tied agents

MIFIDPRU 1.1.7 G
  1. (1)

    1Certain 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):

    1. (a)

      promotes investment services or ancillary services to clients or prospective clients;

    2. (b)

      receives and transmits instructions or orders from the client in respect of investment services or financial instruments;

    3. (c)

      places financial instruments; or

    4. (d)

      provides advice to clients or prospective clients in respect of investment services or financial instruments.

  2. (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

MIFIDPRU 1.1.8 R

1No provision in MIFIDPRU prevents a firm from:

  1. (1)

    holding own funds (or components of own funds) or liquid assets that exceed those required by MIFIDPRU; or

  2. (2)

    applying other measures that are stricter than those required by MIFIDPRU.

MIFIDPRU 1.1.9 G
  1. (1)

    1If a firm applies stricter measures than those required under MIFIDPRU in accordance with MIFIDPRU 1.1.8R, the firm must still ensure that it meets the basic requirements of MIFIDPRU. This is illustrated by the following two examples:

    1. (a)

      Example 1: A firm decides to hold own funds of 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 met the basic requirements of MIFIDPRU and therefore would be permitted under MIFIDPRU 1.1.8R.

    2. (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 require the firm to calculate and apply the deductions. In addition, the failure to apply the correct deductions to 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. (2)

    If a firm wishes to apply a stricter measure but is unsure of whether that measure would meet the basic requirements of MIFIDPRU, it should discuss the proposal with the FCA before applying the measure.

MIFIDPRU 1.2 SNI MIFIDPRU investment firms

Basic conditions for classification as an SNI MIFIDPRU investment firm

MIFIDPRU 1.2.1 R

1A MIFIDPRU investment firm is an SNI MIFIDPRU investment firm if it satisfies the following conditions:

  1. (1)

    its average AUM, as calculated in accordance with MIFIDPRU 4.7.5R is less than £1.2 billion;

  2. (2)

    its average COH, as calculated in accordance with MIFIDPRU 4.10.19R is less than:

    1. (a)

      £100 million per day for cash trades; and

    2. (b)

      £1 billion per day for derivatives trades;

  3. (3)

    its average ASA, as calculated in accordance with MIFIDPRU 4.9.8R is zero;

  4. (4)

    its average CMH, as calculated in accordance with MIFIDPRU 4.8.13R is zero;

  5. (5)

    it does not have permission to deal on own account;

  6. (6)

    its on- and off-balance sheet total is less than £100 million;

  7. (7)

    its total annual gross revenue from investment services and/or activities 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;

  8. (8)

    it 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); and

  9. (9)

    its average DTF, as calculated in accordance with MIFIDPRU 4.15.4R, is zero.

MIFIDPRU 1.2.2 G

1The 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 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

MIFIDPRU 1.2.3 R

1Notwithstanding the calculation methodologies in MIFIDPRU 4, the firm must use the following for the purposes of the conditions in MIFIDPRU 1.2.1R:

  1. (1)

    end-of-day values to calculate:

    1. (a)

      its average AUM under MIFIDPRU 1.2.1R(1);

    2. (b)

      its average COH under MIFIDPRU 1.2.1R(2);

    3. (c)

      its average ASA under MIFIDPRU 1.2.1R(3);

  2. (2)

    intra-day values to assess its average CMH under MIFIDPRU 1.2.1R(4).

MIFIDPRU 1.2.4 R
  1. (1)

    1By way of derogation from MIFIDPRU 1.2.1R, a firm may use the alternative approach in (2) to measure:

    1. (a)

      its average AUM for the purposes of MIFIDPRU 1.2.1R(1); and/or

    2. (b)

      its average COH for the purposes of MIFIDPRU 1.2.1R(2).

  2. (2)

    The alternative approach is to apply the methodologies in MIFIDPRU 4 for measuring average AUM and average COH, but with the following modifications:

    1. (a)

      the measurement must be performed over the immediately preceding 12 months; and

    2. (b)

      the exclusion of the 3 most recently monthly values does not apply.

  3. (3)

    If a firm uses the derogation in (1), it must:

    1. (a)

      notify the FCA by submitting the form in MIFIDPRU 1 Annex 1R via the online notification and application system; and

    2. (b)

      apply the alternative approach for a continuous period of at least 12 months from the date specified in the firm’s notice in (a).

  4. (4)

    If a firm ceases to apply the derogation in (1), it must notify the FCA by submitting the form in MIFIDPRU 1 Annex 1R via the online notification and application system.

MIFIDPRU 1.2.5 G

1Where a firm relies on the derogation in MIFIDPRU 1.2.4R, the alternative approach applies only for the purpose of determining whether the firm meets the requirements to be classified as an SNI MIFIDPRU investment firm. It does not apply for the purpose of the firm’s calculation of its K-factor requirement under MIFIDPRU 4.

MIFIDPRU 1.2.6 R
  1. (1)

    1Subject to (2), a firm must use the values recorded at the end of the last financial year for which accounts have been finalised and approved by its management body to assess each of the following conditions:

    1. (a)

      its on- and off-balance sheet total under MIFIDPRU 1.2.1R(6); and

    2. (b)

      its total annual gross revenue under MIFIDPRU 1.2.1R(7).

  2. (2)

    The firm must use provisional accounts where its accounts have not been finalised and approved after 6 months from the end of the last financial year.

MIFIDPRU 1.2.7 R
  1. (1)

    1A firm may use the end-of-day value for average CMH instead of the intra-day value under MIFIDPRU 1.2.3R(2) if:

    1. (a)

      there is an error in record-keeping or in the reconciliation of accounts that incorrectly indicates that the firm has breached the zero threshold in MIFIDPRU 1.2.1R(4); and

    2. (b)

      the error is resolved before the end of the business day to which it relates.

  2. (2)

    If a firm uses an end-of-day value under (1), it must notify the FCA immediately of:

    1. (a)

      the error;

    2. (b)

      the reasons that the error occurred; and

    3. (c)

      how the error has been corrected.

  3. (3)

    The notification in (2) must be submitted via the online notification and application system using the form in MIFIDPRU 1 Annex 2R.

MIFIDPRU 1.2.8 G
  1. (1)

    1MIFIDPRU 1.2.7R applies where a firm has incorrectly recorded an amount of client money as CMH and identifies the mistake before the end of the same business day. This could occur, for example, where there has been an error in data entry, or where a firm incorrectly records client money as meeting the CMH definition.

  2. (2)

    MIFIDPRU 1.2.7R does not apply where a firm mistakenly accepts an amount that satisfies the CMH definition and subsequently returns that amount to the relevant client. In that case, the firm will have breached the zero threshold in MIFIDPRU 1.2.1R(4) and the situation has not arisen due to an error in record-keeping or reconciliation. A firm that wishes to be classified as an SNI investment firm should therefore operate effective systems and controls that prevent it from mistakenly accepting money or assets that constitute CMH or ASA.

MIFIDPRU 1.2.9 R

1A MIFIDPRU investment firm must assess the following conditions on the basis of the firm’s individual situation:

  1. (1)

    average ASA under MIFIDPRU 1.2.1R(3);

  2. (2)

    average CMH under MIFIDPRU 1.2.1R(4);

  3. (3)

    average DTF under MIFIDPRU 1.2.1R(9);

  4. (4)

    whether the firm has permission to deal on own account; and

  5. (5)

    whether the firm is a clearing member or an indirect clearing firm.

MIFIDPRU 1.2.10 R
  1. (1)

    1A 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 the firm:;

    1. (a)

      MIFIDPRU investment firms;

    2. (b)

      designated investment firms;

    3. (c)

      collective portfolio management investment firms; and

    4. (d)

      third country investment firms that carry on investment services and/or activities in the UK.

  2. (2)

    The relevant conditions are:

    1. (a)

      average AUM under MIFIDPRU 1.2.1R(1);

    2. (b)

      average COH under MIFIDPRU 1.2.1R(2);

    3. (c)

      the on- and off-balance sheet total under MIFIDPRU 1.2.1R(6); and

    4. (d)

      total annual gross revenue under MIFIDPRU 1.2.1R(7).

  3. (3)

    When measuring the combined total annual gross revenue under (2)(d), the firm may exclude any double counting that arises in respect of gross revenues generated within the group.

  4. (4)

    When calculating the contribution of the following to the combined position of the group, the firm must:

    1. (a)

      for a collective portfolio management investment firm, include only amounts that are attributable to the investment services and/or activities that fall within COLL 6.9.9R (4) to COLL 6.9.9R (6) or FUND 1.4.3R (3) to FUND 1.4.3R (6); and

    2. (b)

      for a third country investment firm:

      1. (i)

        include only amounts that are attributable to the investment services and/or activities that are carried on by the third country investment firm in the UK; and

      2. (ii)

        apply the definitions of AUM and COH as if the references to “MiFID business” in those definitions included the investment services and/or activities in (i).

MIFIDPRU 1.2.11 G
  1. (1)

    1MIFIDPRU 1.2.10R applies to each individual MIFIDPRU investment firm by reference to the relevant entities that form part of that firm’s group. The purpose of the rule is to prevent a MIFIDPRU investment firm from dividing its business between separate group entities that may each carry-on investment services and/or activities in the UK in order to avoid being classified as a non-SNI MIFIDPRU investment firm. Where two or more MIFIDPRU investment firms exceed one or more of the relevant thresholds in MIFIDPRU 1.2.10R on a combined basis, each of those firms will be treated as a non-SNI MIFIDPRU investment firm.

  2. (2)

    Where a MIFIDPRU investment firm forms part of an investment firm group to which consolidation applies under MIFIDPRU 2.5, MIFIDPRU 2.5.21R explains how MIFIDPRU 1.2 applies to the consolidated situation of the relevant UK parent entity.

Summary of conditions for classification as an SNI MIFIDPRU investment firm and associated calculation requirements

MIFIDPRU 1.2.12 G

1The following table summarises the effect of MIFIDPRU 1.2.1R to 1.2.10R.

Measure

Measurement of relevant values

Threshold to be classified as an SNI MIFIDPRU investment firm

Application of threshold on an individual basis or combined basis of investment firms within a group (see MIFIDPRU 1.2.9R and 1.2.10R)

Average AUM

End-of-day

Less than £1.2 billion

Combined

See Note 1

Average COH (cash trades)

End-of-day

Less than £100 million per day

Combined

See Note 1

Average COH (derivatives)

End-of-day

Less than £1 billion per day

Combined

See Note 1

Average ASA

End-of-day

Zero

Individual

Average CMH

Intra-day

Zero

Individual

See Note 2

Average DTF

End-of-day

Zero

Individual

NPR

Firm must not have permission to deal on own account, so these measures must always be zero

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 services and/or activities

End of last financial year for which accounts finalised by management body

Less than £30 million, based on an average of annual figures for the two-year period immediately preceding the given financial year

Combined

See Notes 3 and 4

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:

Under MIFIDPRU 1.2.4R, the firm can choose to calculate the relevant values for these measures by applying the applicable methodologies in MIFIDPRU 4 to the most recent 12 months without excluding the three most recent monthly values.

Note 2:

Under MIFIDPRU 1.2.7R, the firm may use the end-of-day value if there has been an error in record keeping or in reconciliation of accounts that incorrectly indicates the firm has breached the zero threshold for average CMH, provided that the error is corrected before the end of the business day to which it relates.

Note 3:

Under MIFIDPRU 1.2.6R, the firm must use provisional accounts where the relevant accounts have not been finalised and approved after 6 months from the end of the last financial year.

Note 4:

Under MIFIDPRU 1.2.10R, the firm may exclude any double counting that arises in respect of gross revenues generated within the group.

Non-SNI MIFIDPRU investment firms that subsequently satisfy the conditions to be an SNI MIFIDPRU investment firm

MIFIDPRU 1.2.13 R
  1. (1)

    1This rule applies to a non-SNI MIFIDPRU investment firm that subsequently satisfies all the conditions in MIFIDPRU 1.2.1R.

  2. (2)

    The firm in (1) shall be reclassified as an SNI MIFIDPRU investment firm only if:

    1. (a)

      the firm satisfies the relevant conditions for a continuous period of at least 6 months (or any longer period that has elapsed before the firm submits the notification in (b)); and

    2. (b)

      the firm notifies the FCA that it satisfies the conditions in (a).

  3. (3)

    The notification in (2)(b) must be submitted via the online notification and application system using the form in MIFIDPRU 1 Annex 3R.

Ceasing to meet the conditions to be an SNI MIFIDPRU investment firm

MIFIDPRU 1.2.14 R

1Where a MIFIDPRU investment firm no longer satisfies all the conditions set out in MIFIDPRU 1.2.1R, it ceases to be an SNI MIFIDPRU investment firm with immediate effect, except where MIFIDPRU 1.2.15R applies.

MIFIDPRU 1.2.15 R
  1. (1)

    1Where a MIFIDPRU investment firm exceeds one or more of the thresholds in (2), but continues to satisfy all other conditions in MIFIDPRU 1.2.1R, it ceases to be an SNI MIFIDPRU investment firm 3 months after the date on which it first exceeded the relevant threshold.

  2. (2)

    The relevant thresholds are:

    1. (a)

      the average AUM threshold in MIFIDPRU 1.2.1R(1);

    2. (b)

      either or both of the average COH thresholds in MIFIDPRU 1.2.1R(2);

    3. (c)

      the on- and off-balance sheet total threshold in MIFIDPRU 1.2.1R(6); and

    4. (d)

      the total annual gross revenue threshold in MIFIDPRU 1.2.1R(7).

MIFIDPRU 1.2.16 R
  1. (1)

    1If a MIFIDPRU investment firm ceases to satisfy one of the conditions in MIFIDPRU 1.2.1R, it must promptly notify the FCA.

  2. (2)

    The notification in (1) must be submitted via the online notification and application system using the form in MIFIDPRU 1 Annex 4R.

MIFIDPRU 1.2.17 G

1Where a firm ceases to satisfy one of the conditions in MIFIDPRU 1.2.15R, but subsequently satisfies that condition within the three-month period referred to in that rule, the firm will still be reclassified as a non-SNI MIFIDPRU investment firm 3 months after the date on which it first ceased to satisfy that condition. The firm will only be reclassified as an SNI MIFIDPRU investment firm if it satisfies the conditions in, and requirements of, MIFIDPRU 1.2.13R.

Application of senior management, remuneration and systems and controls requirements to SNI MIFIDPRU investment firms

MIFIDPRU 1.2.18 R
  1. (1)

    1Subject to (2) and (3), the following provisions do not apply to an SNI MIFIDPRU investment firm:

    1. (a)

      MIFIDPRU 7.3 (Risk, remuneration and nomination committees);

    2. (b)

      the provisions in SYSC 19G (MIFIDPRU Remuneration Code) which are not listed in SYSC 19G.1.6R(2).

  2. (2)

    Subject to (4) and (5), if a non-SNI MIFIDPRU investment firm satisfies the conditions in MIFIDPRU 1.2.1R to be classified as an SNI MIFIDPRU investment firm, the provisions in (1) will cease to apply only:

    1. (a)

      6 months after the date on which the firm first satisfied those conditions (or after any longer period that has elapsed before the firm submits the notification in (b)(ii)); and

    2. (b)

      provided that the firm:

      1. (i)

        continued to satisfy the conditions throughout the period in (a); and

      2. (ii)

        has notified the FCA under MIFIDPRU 1.2.13R(2)(b).

  3. (3)

    Subject to (4) and (5), if an SNI MIFIDPRU investment firm no longer satisfies the conditions in MIFIDPRU 1.2.1R to be classified as an SNI MIFIDPRU investment firm, it must:

    1. (a)

      notify the FCA immediately in accordance with MIFIDPRU 1.2.16R of the date on which it ceased to satisfy the conditions; and

    2. (b)

      comply with the provisions in (1) within 12 months from the date on which the firm ceased to satisfy the conditions.

  4. (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. (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 SYSC 19G.1.1R(2).

MIFIDPRU 1.2.19 G

1Under the Capital Requirements (Country-by-Country Reporting) Regulations 2013 (SI 2013/3118) as amended, non-SNI MIFIDPRU investment firms may be required to disclose information relating to their branches or subsidiaries outside the UK. The Regulations also set out how the country-by-country reporting obligations apply when a MIFIDPRU investment firm is reclassified as an SNI MIFIDPRU investment firm or a non-SNI MIFIDPRU investment firm.

MIFIDPRU 1.3 Actions for damages

MIFIDPRU 1.3.1 R

1A contravention of any rule in MIFIDPRU does not give rise to a right of action by a private person under section 138D of the Act (and each of those rules is specified under section 138D(3) of the Act as a provision giving rise to no such right of action).