The Investment Firms Prudential Regime (MIFIDPRU) Explained

The Investment Firms Prudential Regime is the FCA’s prudential rulebook for MiFID investment firms, and it asks a different question from the bank-style rules it displaced. Instead of measuring a firm against credit and market risk models designed for balance-sheet lenders, MIFIDPRU asks what harm the firm could do — to clients, to markets, and to itself — and how much capital and liquidity it needs to absorb that harm or to shut down in an orderly way. For most investment firms the practical consequence is that prudential compliance became a documented reasoning exercise rather than a calculation.

Who is in scope

MIFIDPRU applies to MIFIDPRU investment firms, UK parent entities and parent undertakings in an investment firm group incorporated in or principally based in the UK (MIFIDPRU 1.1.1G). Collective portfolio management investment firms must comply unless a provision says otherwise, and remain subject to IPRU-INV 11 (MIFIDPRU 1.1.2R). Designated investment firms sit outside it entirely, because they are prudentially regulated by the PRA (MIFIDPRU 1.1.5G). The rules do not apply directly to undertakings outside the UK, though they impose obligations on UK parent entities in respect of third-country group members.

The SNI test is the single most consequential classification

Everything downstream depends on whether a firm is small and non-interconnected. MIFIDPRU 1.2.1R sets ten conditions, and a firm must satisfy all of them:

• average assets under management below £1.2 billion
• average client orders handled below £100 million per day for cash trades and £1 billion per day for derivatives
• average assets safeguarded and administered of zero
• average client money held of zero
• no permission for dealing on own account, or for underwriting or firm-commitment placing
• on- and off-balance sheet total below £100 million
• total annual gross revenue from investment services below £30 million, averaged over the preceding two financial years
• not classified as non-SNI under MIFIDPRU 10.2 on clearing grounds
• average daily trading flow of zero
• not appointed as a depositary under FUND 3.11.10R(2) or COLL 6.6A.8R(3)(b)(i)

Assets under management, client orders handled, balance sheet and revenue are assessed on a combined group basis (MIFIDPRU 1.2.10R); the rest individually (MIFIDPRU 1.2.9R). A firm that stops meeting any condition generally ceases to be SNI immediately (MIFIDPRU 1.2.14R), with one concession: a three-month grace period where the breach is of the assets under management, orders handled, balance sheet or revenue thresholds and the other conditions are still met (MIFIDPRU 1.2.15R). The zero-value conditions have no grace period, so a firm that holds a single pound of client money loses SNI status that day.

The own funds requirement

A firm must at all times maintain own funds at least equal to its own funds requirement (MIFIDPRU 4.3.1R). For a non-SNI firm that is the highest of the permanent minimum capital requirement, the fixed overheads requirement and the K-factor requirement (MIFIDPRU 4.3.2R). For an SNI firm it is the higher of the first two (MIFIDPRU 4.3.3R) — K-factors do not apply.

The permanent minimum capital requirement is the highest applicable figure in the MIFIDPRU 4.4.1R table:

The FCA’s own worked example is instructive: a firm with portfolio management and investment advice permissions that also holds client money has a requirement of £150,000, not £75,000 (MIFIDPRU 4.4.7G). Permissions aggregate upwards to the highest applicable figure.

The fixed overheads requirement is one quarter of the previous year’s relevant expenditure (MIFIDPRU 4.5.1R), taken from the most recent audited financial statements and annualised where the period is not twelve months (MIFIDPRU 4.5.2R). Relevant expenditure starts from total expenditure before profit distribution, with permitted deductions including fully discretionary staff bonuses, tax on annual profits and own-account trading losses (MIFIDPRU 4.5.3R), and additions for certain fixed expenses incurred on the firm’s behalf including by tied agents (MIFIDPRU 4.5.6R). Two triggers catch firms out: immediate recalculation is required if projected relevant expenditure rises by 30% or more, or if the requirement would rise by £2 million or more (MIFIDPRU 4.5.7R) — while a reduction needs prior FCA permission before the lower figure may be used (MIFIDPRU 4.5.9R). The asymmetry is deliberate.

The K-factor requirement is the sum of nine components (MIFIDPRU 4.6.1R): K-AUM, K-CMH, K-ASA, K-COH, K-NPR, K-CMG, K-TCD, K-DTF and K-CON. K-AUM is 0.02% of average assets under management, measured on the last business day of each of the previous fifteen months excluding the three most recent (MIFIDPRU 4.7.1R and 4.7.5R). K-CMH is 0.4% of average client money in segregated accounts plus 0.5% of that in non-segregated accounts (MIFIDPRU 4.8.1R) — a direct capital penalty for not segregating, which is worth reading alongside the CASS client money rules.

ICARA and the overall financial adequacy rule

The internal capital adequacy and risk assessment process is where the regime’s harm-based logic actually bites. Under the overall financial adequacy rule (MIFIDPRU 7.6.4R) a firm must hold the higher of the own funds needed to fund ongoing operations through periods of financial stress across the economic cycle, and the own funds needed for an orderly wind-down.

As part of the process a firm must produce a reasonable estimate of the own funds needed for identified potential material harms it has not yet mitigated, and for residual harms remaining after mitigation (MIFIDPRU 7.6.2R to 7.6.3R). It may not set a figure below what MIFIDPRU 4 or 5 require, nor use components of the own funds requirement to cover harms that cannot reasonably be attributed to them (MIFIDPRU 7.6.3R(2)). A non-SNI firm must assess harms falling outside the K-factor framework separately — corporate finance business is the FCA’s own example (MIFIDPRU 7.6.8G).

The resulting own funds threshold requirement cannot be lower than the K-factor requirement or the fixed overheads requirement, and at least 75% must be met with CET1 and AT1 combined and at least 56% with CET1 (MIFIDPRU 7.6.5R). Firms must notify the FCA immediately if own funds fall below the early warning indicator, the threshold requirement or the wind-down trigger, or if they reasonably expect that in the foreseeable future (MIFIDPRU 7.6.11R). The early warning indicator is generally set at 110% of the threshold requirement (MIFIDPRU 7.6.12G).

Why this is a competence problem

IFPR moved prudential compliance out of the realm of formula application. The SNI test requires judgement about group aggregation; the fixed overheads requirement requires judgement about which expenditure is genuinely discretionary; the ICARA requires a firm to identify its own potential harms and defend a number attached to each. None of that can be delegated to a spreadsheet, and in smaller firms the person doing it is often a finance director without prudential training. Our CPD course library covers the risk, capital and governance foundations the process assumes, and the EMIR obligations that frequently sit alongside it for the same firms.

Frequently asked questions

Does holding any client money end SNI status?

Yes. MIFIDPRU 1.2.1R(4) requires average client money held to be zero, and the three-month grace period in MIFIDPRU 1.2.15R covers only the assets under management, orders handled, balance sheet and revenue thresholds. A firm breaching a zero condition ceases to be SNI immediately.

Can the fixed overheads requirement be reduced after a cost-cutting year?

Not unilaterally. MIFIDPRU 4.5.9R requires prior FCA permission before a firm may apply a reduced figure, whereas an increase of 30% or more in projected expenditure, or of £2 million or more in the requirement, triggers immediate recalculation without any application.

Do SNI firms have to calculate K-factors?

No. Under MIFIDPRU 4.3.3R an SNI firm’s own funds requirement is the higher of the permanent minimum capital requirement and the fixed overheads requirement only. SNI firms do still have an ICARA process.

What happens if the own funds wind-down trigger is breached?

The FCA’s expectation is that breaching it should normally lead to an immediate wind-down, unless recovery is imminent and credible (MIFIDPRU 7.6.15). It is a trigger rather than a warning level, which is what distinguishes it from the early warning indicator.