Podcast transcript: Episode 3 Investment Firm Prudential Regime

Irina Velkova

Now, despite this impressive CVs you all heard about. If you thought we will be sticking only to the relatively drying world of regulatory requirements within investment management, fear not. I'm keen to explore some other extraordinary experiences our guests bring to us. Colm, for example, tells me that he has worked as a barman at a popular golf resort during college, which led him to serving pints of Guinness to many celebrities, including Matt Damon, Michael Jordan, as well as all the top names in golf.

Irina Velkova

Meanwhile, David has apparently just signed up for degree in military history, and during lockdown has been building enormous military ships which he likes to show as a background to his video calls. So, expect celebrity talk and military jokes. Well, I guess not a better place to start with, but we ask Colm what hobby did you sign up for during the lockdown Colm?

Colm Donnelly

Probably less of a hobby but, my wife and I have instead decided to double the size of our family by getting a dog as well as recently had a daughter four months ago, so the house went from quiet, just the two of us, to now being a little bit more chaotic, so probably not a hobby, but definitely keeping us busy.

Irina Velkova

More than a Lego building ships.

David Morrey

Just say it was the new Investment Firms Prudential Regime not enough complexity for you.

Colm Donnelly

No, I needed a hand, so.

Irina Velkova

And David, did you really sign up for this military history degree and why?

David Morrey

Well, you know it is a classic. I will regret it after lockdown when I'm having to do the homework. Yeah, masters in naval warfare. Yeah, well no, but I suppose that the correct answer, the official answer should be that you know military history, a tremendous focus of human and technological resources tends to lead to technical and societal developments. Makes it a fascinating area to study. I think the truth is I just like things that go bang, so that's why that's why I'm into it.

Irina Velkova

Yeah, planning a change of career then. The loss of the investment management industry?

David Morrey

That will be full time building Lego battleships. Yeah, so I'm thinking about it, thinking about it.

Irina Velkova

Okay, on that note, I think we better go back into the discussion and maybe via David starting with him to tell us a little bit more about the regime? Who is impacted by it? And what are the key timelines associated with it, David?

David Morrey

Yeah, I guess this is my attempt at a short sharp summary because I'm sure we'll get into some of the more detailed points as we go on, but the quick summary will be, you're right, it is called the Investment Firm's Prudential Regime. Colm and myself will abbreviate it to IFPR or MiFIDPRU through, which is the name of the regulatory handbook that’s going to contain these new rules, like the European Union's Investment Service directive and regulation, but not, and I think Brexit plays a role in identical to that regime, might pick out some of the differences as we go.

Basically, IFPR applies to any type of regulated firms that undertake MiFID activity and was it which is not a bank or an insurer. By MiFID activities, by MiFID, I mean investment activities covered by the Markets in Financial Instruments Directive. These investment managers, brokers, trading firms, investment advisers that aren't what we called MiFID exempt. Another way of looking at it and using some other jargon. If you currently follow BIPRU in calculating your capital, then going to be moving to IFPR, if you follow IFPRU then you will move to IFPR, if you’re an exempt CAD firm then you're going to move to IFPR.

As you said the outset Irina, we know it's essentially collapsing several legacy prudential regimes and replacing them with one. It's doing that on a time frame which which means that firms in the UK will have to comply from 1st of January 2022 for most of them. The first time you report and and there will be new style regulation returns to complete the first time you report your new capital numbers under IFPR will be the end of Q1 2022 - April 2022. That's different to the EU, where there was the version comes into force this month. At the end of this month. So, they are six months ahead.

In terms of what is changing? I mean the three headline grabbing things. I think that I’ll throw out there is:

One - firms are going to have to do K factor calculations and that's taking certain isn't there's a number of them volume metrics from your business and applying a percentage to generate a capital requirement, so gone are the legacy methods of looking your balance sheet and applying a percentage to come up with a capital requirement to some of the things on the balance sheet and others are being replaced by percentages, these K factors, that is the percentage being applied to the volume of your activity.

Two - this is completely new. Mandatory liquid resource’s requirement for the first time, so it's not that difficult to calculate, it’s a third of your fixed overhead requirement, which is in turn 25% of the annual expenditure, so it's simple to calculate, but I think the big thing is, up to this point, firms have had to meet their capital requirement by having retained reserves, share capital on their balance sheet. Moving forward they will at least in part, must have some of that in cash, liquid cash, liquid resources, or cash, or near cash.

I think the third thing I would throw out, as a sort of headline change, is that in addition to these calculations around capital liquidity, you also going to need to do a self-assessment of whether you should, hold more capital or whether you should have more liquid resources, that’s the Pillar 2 for the BIPRU, IPRU firms will know and love, I think it's going to be analysed, introducing a slightly different way also the ICAAP, the document that used to be produced annually to present all this self-assessment, is going and is being replaced by something called the ICARA or the Internal Capital and Risk Assessment documents saying so that’s kind of the headline changes.

Those are the three things I pulled out, but believe me, there's a lot of lots of detail in those areas and more beyond that.

Irina Velkova

I don't doubt that. Sounds certainly like a lot of fundamental changes, so I guess, Colm turning to you. I can imagine this has been quite a hot topic amongst your colleagues under market and amongst peers. How do you think the industry received the proposed changes?

Colm Donnelly

Yeah, I think generally positive, so obviously it depends on your business model and what existing regime currently applies to you. But for a large number of firms, they’re previously subject to a regime that was largely kind of unashamedly built for banks, an therefore there were some kind of oddities, such as Piller 2 calculations, which were primarily designed for kind of, but on balance sheet activity and didn't really cater for agency type businesses such as asset managers where a lot of the activity would be will be happening elsewhere so it has been probably clear for a long time that a regime that was a bit of a better fit for investment firms was required, so in that respect, and it was pretty welcome that it was finally coming in, but said of course I I sit on the investment association's potential working group for the new regime is

coming in and obviously, as with any new body of regulation, there has been plenty of different challenges as well, so there's some opportunities like that come with new regulations coming in, so I'm sure we will be unpicking those.

Irina Velkova

Sounds like it is certainly a step in the right direction though in terms of or from a regulatory point of view, you said, you just mentioned that you are sitting on the Investment Association Group. Do you have views? For example, how prepared are the rest of the market players for the regime given the importing implementation deadlines as they would mention earlier 1st of January 2022?

Colm Donnelly

Yeah, I think it's mixed over. Also seeing some surveys recently that, which are pretty wide range in terms of readiness with some saying that they are at the final stages of the project and are close to being ready to go live versus others that have are just kind of really beginning and in many respects, let's say that is fairly expected, as I think the the landscape of investment firms is very broad, perhaps a versus what you can expect from new regimes were coming into place for, say banks or insurers. So you have firms that differ massively in size coming in which obviously gives a different product picture in terms of the resource is that can be thrown at, yet another magnitude rechange project and then you also have hugely varying starting points with some firms are transitioning from the old Basel regimes which have many of the same principles and frameworks as the new regime, versus some firms that were previously subject to not as much prudential regulation.

So, a lot of things I kind of knew under there for the first time, and lastly, probably the diversity of actual business models in in the investment firm space, is a lot more than you would perhaps see in the bank, in our insurance based, so you have everything from traditional asset manager to proprietary trading firms to even some smaller investment banks. So even when you get into the regime, there can almost be regimes within the regime because you have a different selection of K factors that will be most material to you and that that can bring a lot of differences and a lot of challenges as well.

Irina Velkova

Certainly, sounds like this. And David I know that we we have a lot of activity in that space, and we've been sought, if you like to help a number of firms without limitation of the regime, but you would, you whole markets view if you like. What do you think is the state of readiness across the across the board?

David Morrey

I guess I would say entities with European Union subsidiary, so they're being captured by the EU rules now, I think this month, tend to be ahead they've got to do more work, particularly on the K factors. That's a good thing for the UK implementation, although they're probably looking at a situation where they're going to systems for calculating K factors. Although because although they might be saying named the same thing, there are some differences in I got mentioned that volume activity, volume levels are getting included, the actual technical definitions of what goes into each K factor are quite complicated and do vary slightly between EU and UK, so in a number of cases said so, yes, but those are the years ahead, but there is not a simple drag and drop operation for them.

Yeah, I think the maturity of the organisation under the existing regime makes a huge difference as well. It's fair to say we've picked up a few IFPR civil projects and it's become pretty apparent, quite early on, that the existing regulatory regimes not being complied with, to a particularly effective degree and so I think there is a very broad spectrum and that’s clearly one of the challenges that the FCA in supervising this sector for 3000 to 4000 firms and that with those concepts very different business models, very different levels of sophistication.

I can see why having a standardised set of credential rules, make sense in terms of making it somewhat easier to supervise those groups of firms, but they are still going to have to cope with a lot of variation within the sector.

Irina Velkova

Do you think the firms will be ready with the deadline coming in 1st of January 2022, for the most part, I guess?

David Morrey

Yeah, I mean I'm sure everyone will submit numbers in April 2022, whether those numbers are right or not is a different question. You know that inevitably, and we've been through this cycle before, new set of prudential rules, there's going to be a multi-year period of the FCA, probably finding faults and errors in how firms have done their calculations and what they've reported. So yeah, I'm not expecting widespread non-compliance in the sense of actually meeting deadlines, but I imagine were all going to be on a bit of a learning curve in terms of how some regulatory interpretations get applied and how some of our calculations might need to change overtime.

Irina Velkova

Are we going to see something like with the ICAAP where sometimes boards ask what is that and then probably going to ask what is the ICARA now?

David Morrey

Probably, I mean that's a good example, where you know that the state affairs have described as exist in quite a few investment firms. Ie the ICAAP is a maybe a bit of box ticking exercise, is not truly owned or challenged by the board as we all know it should be, but for many organisations more sophisticated organisations, you know it really is embedded in a much stronger way, so the fact that ICARA also needs to be subject to the same kind of challenge and scrutiny by the board and only by the board, is probably going to be easier step to take them to the mature organisations that already there, with and ICAAP.

Irina Velkova

I'm sure it would result in many interesting board discussions as well, that we will observe at a later point.

David Morrey

Well, yes if one of the questions is why we are calling it the ICARA and not the ICAAP then I don't have a good answer, it's just I think it's just trying to differentiate somewhere isn't it, so it’s a rebranding isn’t it.

Irina Velkova

But imagine the speculation at board level is still right, that’s the case, and they would probably think there is a logic behind it.

David Morrey

Yeah yes, good luck with that.

Irina Velkova

Okay, that's getting a bit too serious now in too much into detail, I reckon, so I'm just trying to break the conversation and ask Colm who is your favourite celebrity that is served while working at the golf resort and why? Is there a story there?

Colm Donnelly

I think it was probably so, during the Ryder Cup. So as did at the K Club up in Ireland. So, we had the Ryder Cup in 2006 and I got the lucky position of others in the European team lounge, which is where the after party broke out, because obviously we romped home so think, literally the one that stood out from the crowd was Michael Jordan. It was somewhere where you just looked out and hundreds of people and literally a foot above everybody else was him hovering around the room so that was a pretty cool one.

Irina Velkova

I would like to see how I look like next to Michael Jordan. I'm like 5.3 feet or something like that so.

Colm Donnelly

Yeah, it's one thing saying beside basketball player is normally on TV, then when you see him beside mere mortals, it’s ridiculous.

Irina Velkova

Oh yeah, that sounds like a really good fun. OK, I guess going back to the conversation and IFPR.

Colm, from your point of view and obviously where you sit in the regulatory part of your like, of your business? Which parts of the regime do you think firms and and your peers are perhaps finding the most challenging to deal with?

Colm Donnelly

I think really, the big one is data, in particular on picking the K factors and determining exactly what inputs were needed, like even taking a simple one like assets under management, for example. You would think that's quite a simple metric for an asset manager, something we should be welcome to roll with but AUM can often be one of those if you ask four different people within the business, you'll get four different numbers, especially when it comes to defining well, especially when it comes to aggregating up to a legal entity view and which legal entity owns what products are actually in scope and kind of unpicking all of that, so it was a lot of breaking it down to the to the source systems and kind of unpicking exactly which products should be in which products should be aired, and we kind of had to move away from, we couldn't just take the AUM numbers. We already kind of, had our finance systems because our definition wasn't a match to the regulatory definition, so it was kind of unpairing that and kind of building it back up from scratch.

So that was a challenge as well as a similar journey for the for the other K factor is really trying to make sure we were understanding what was meant by the definition and then getting the data around it. And then I think probably another issue is one David has mentioned, so one that's kind of been emerging in the last 12 months or so and that's with the divergence between the European regime and the UK regime, so obviously we have we have presence in both the UK and Europe, so in some respects we have begun having to split the project in two with some sort of a kind of key differences and things, even AUM being an example, there is a difference in how Europe has defined it, they're going for kind of a gross assets under management, which has been an absolute data pain, whereas the FCA has gone for a little bit more of a simple definition and that's probably more akin to how we would normally define it, or them got more net assets net asset value, type definition so that's another thing that's just given a little bit more complexity to the project of running two regimes concurrently.

Irina Velkova

Yeah, sounds like more international you are like a business, they will be challenges you would encounter normally. So, I guess David from four client’s point of view and what we see on the market, are you finding that there any part of the regime that are more difficult for them to deal with? Or to understand and respectively to implement for another reason?

David Morrey

Well, is the number one is, is Colm’s already covered it and its the K factors. And I mean, as you say, come with things like AUM, these are measures that we've thrown around for years, often for PR purposes and suddenly has to be a robust enough number that you know, if you take that number and then report your capital based on it, and that's wrong, it’s a regulatory breach, you know, we know the FCA are very sensitive about it, it was in regulatory reporting, prudential reporting, so even beyond just defining, making sure you've got the right the right number, it is having a robust enough set of controllers around it to be able to know that its rights and sufficient for purpose ie not just the mark thing, but for for actually producing the capital number. So, that’s the number one challenge by mile.

I'm going to think there are challenges, there are big challenges, but for most firms have really got there yet, like it as the ICARA, I go back to that, I mean, it's superficially similar to use the FCA's own phrase, but there's a lot of detail and that is different, and my estimate did actually differ from the document, the type of analysis, actually some of that will have to flow back into risk frameworks, in order you can tag particular risks inserted, in the right ways that then flow through to your calculations correctly.

My best guess at the moment is doing the first ICARA will be 2/3 times the effort of just updating your ICAAP’s early in year one.

And understand, you know, I think that is going to end up being a significant burden extended from challenge we just haven't got there.

I think I just wanted, worth reflecting on there, I guess in terms of challenge, it affects some groups more than others, is the concept of prudential consolidation is not new concepts in terms of legacy regimes, but nevertheless particularly performing in Brexit and the sort of the idea UK group rather than EU group. There are there are challenges in the new regime that firms are struggling with and then some of it is quite straight forward and parent subsidiary you got a group one, you know that's not that complex, but there are, there’s allowance for connected undertakings, which are things that are not covered in the parent subsidiary relationship but very broadly subjectively almost being managed as if they were in the same group. Thus, there might need to be treated together in potential consolidation.

There's outside of the UK subsidiaries if they are similar to what would be a MiFID firm in the UK, they need to be included. I guess there's just areas where it's not necessarily black and white, there is the potential for debate about what should be included and what shouldn't and its only truth in the new regime imposes requirements not just on MiFID firms, but on the group in which they sit, including potentially some of the unregulated firms within that group. So, you need to get that group definition right.

Then there is something called group capital tests, which is a new mechanism that firms can in theory use to reduce the impact of potential consolidation, debate there probably about how beneficial it is, relative to not using it, but there’s a secondary mechanism that firms can use, but again, you know, it hinges on things like and if you group is in definition like if your group is sufficiently simple.

But poses, doesn't pose a significant risk you know, these are inherently qualitative concepts, which I think it's going to take awhile for the industry to probably through, feedback loops from the FCA guy, that you could just see what some of these some of these subjective tests mean in practise. I don’t know whether Colm, whether you would echo any of that from a prudential consolidation point of view.

Colm Donnelly

Yeah, I think I would, I think prudential consolidation one was probably thought early on in the regime, that I mean it was drifting towards following quite similar to the old one, but I think it was something from the most recent FCA paper, as specifically on the ICARA, there seems to be a move towards more doing it all my on a MiFID level rather than consolidation group, which in some ways it probably does make sense because we'd seen more and more attention in the in the last few years, with heightened expectations going from, say the SMCR regime came around, at which was takes of a legal entity view on what the what the responsibilities of directors and so forth is, and that could sometimes even conflict a little bit with than those that were sitting on the consolidated group, so it probably simplifies it a lot more in that, those regimes, will be having the main focus on the same legal entity view it seems, and in the Pillar 2 space, unless you want to do they've left in the option to do it on a consolidated group as well, which will be helpful in some circumstances.

David Morrey

Yeah I’ll be interested to see, although it, you know in some respects making options like that available because most groups subject to prudential currently will be doing ICAAP’s at consolidated level have to do it at that level, will have got their risk frameworks and then they’re ICAAP process is aligned to do that, you're right, the latest consultation paper implies that firms, will certainly have the option to, produce their ICARA at the solo entity level rather than the consolidation group level. Does that mean the regulator doesn't have a preference? I mean, I don't know, I was, you know, do you put a mechanism in place to produce all these solo entity level and then potentially 2-3 years down the track you're getting a stiff and the regulator that you should be doing it consolidation group level. I think it's I think it's just that there is a, there still remains some uncertainty about how things will play out, I think.

Irina Velkova

Yeah, I think we'll go to the FCA consultation paper or the latest one in a second. But just before we get into that David, can you just elaborate a little bit more on how the group capital test is applied? Just for firms from practical point of view, so it would be really helpful to them.

David Morrey

Well, I mean basically the prudential consolidation rules will mean that capital adequacy will need to be calculated under the regulatory capital rules we've been talking about, at the level of consolidation groups, the holding company, and any company or companies that form part consolidation group. So, you would be doing an essentially a full accounting consolidation to work out how much capital assisting in that business, would then be doing the regulatory capital calculations, we won’t go into detail about all the consolidating situation, but you have to do all the capital calculations, that at a group level building up from the solo level to work out whether the group as a whole is, is and has enough capital to make its capital requirement.

So, in other words, you could have that scenario exists where you could have individual MiFIDPRU firms in your group, all of which have sufficient capital. But when you consolidate them up, particularly as you knock out intangibles and things like that, suddenly the group as a whole is insolvent in terms of regulatory capital purposes, so it's an important test. The GCT basically gets you off the hook for doing that full consolidation. There's still some book value tests around having enough capital in the whole code, but you not you not calculating your capital requirement or not fully consolidated basis so. I mean, at the very least you should reduce the capital you need to hold the whole go level, but at the very least it simplifies the process immensely because you're not having to do the crank numbers in the same one.

Irina Velkova

So, are you expecting that firms are going to make use of that test, certainly?

David Morrey

Quite a few firms would be very interested in it. I'm going to think I don't put it after the most recent consultation paper their enthusiasm may be falling away. It has to be approved by the FCA so there's a process for applying for it although you would be allowed to use the GCT you know whilst your, until the FCA makes a determination on your your application but said since the application is based on concepts of simplicity and risk that are quite hard to define, it's hard to tell how the FCA will just make judgements on those. So, I've got some quite larger sophisticated clients to be quite honest who are going to apply to the FCA to use the GCT just to find out whether they can actually. Just to see what the limits of those subjective parameters.

Irina Velkova

Yeah, it will be interesting space to certainly watch. You both mentioned the latest FCA consultation paper is certainly more from what the previous one was. Did you encounter any surprises in how the FCA thinking has evolved since the first one? And in general, you are you finding the logic and rationale behind the direction of travel now with the second consultation paper? Colm, I guess maybe just starting with you.

Colm Donnelly

Yeah, I think one of the main things was probably given the timeline of it, so the FCA have pushed back their implementation by six months or what in reality that meant is, Europe put out what they were going to do first, and then it was kind of left to the FCA, are they going to follow the same route or where they were they going to differ? They seem to be not afraid of taking the latter route and different on some key points.

I mentioned the AUM they also helpfully in the liquidity space, Europe kind of pushed you down if you're holding money, some of your cash in money market funds, you’ll effectively have to do the LC calculation for banks, which is reasonably complex if you haven't done it before, whereas the FCA have more gone for the route of where you can include it, but then you just need to think about it in the Pillar 2 space rather than using banking type rules, you need to challenge yourself under there too. And kind of say well could be fully access it in times of stress, which I think is quite a sensible manner, so that's that's something that was welcome.

I think in another interesting one versus probably already discussion paper was the original had indicated that it would just be that kind of formulaically bring it over existing ICG scalers from the old regime and just lift that across into the new regime, but it seems in the in the latest consultation paper, they kind of done away with that and instead invited everyone with existing ICG’s to come and approach them.

So, in one sense, that's that's good to be able to go have an open discussion with them, but you would think that's going to be quite a resource challenge for them, given its, where now six months out of hundreds of firms are going to be approaching them at once, so you would have that slight worry in the back of your mind as well. Is the only way to deal with that volume of requests is to kind of revert to having a formula and one now that it is isn’t being published and could have just been a slide away from transparency and it'll still almost via default way. We were hoping it'll be kind of the former and it will be an open discussion on it and some back and forth as to what makes more sense and taking that forward into the new regime.

Irina Velkova

Would you agree with that David?

David Morrey

Yeah, first thing, Colm’s absolutely right there, that surprised me, just because I thought that you know I'm having the original discussion paper scrolling back 18 months to say on this, covered in quite some detail, a transitional mechanism to convert your existing regulator-imposed capital guidance into a new number. Yeah, so you could maintain that guidance under the new regime and very formulaic and very certain. And now we have this uncertainty about these individual conversations, I mean I've got quite a few clients and you can understand this, you know, they got their capital guidance 2016, you know, whatever full five years ago and they think right great opportunity, we going to have these conversations, they are going to get the FCA to fundamentally rebase, our hopefully fundamentally re-base, the view of how much capital we need to hold under these guide individual guidance.

The FCA governance pointed out, I'm thinking materially changing firm’s capital guidance, without substantial internal process. So yeah, I find it fascinating. I love to see how it plays out. I strongly suspect Colm’s right, that the formula we've already seen or something very close to it will end up being the mechanism that FCA uses, even if it's not formally acknowledged as such, we shall see.

I think, I’m going to throw in, I mean just it's a small I think it is in the FCA and this is probably a post-Brexit thing as much as anything has has shown a decent degree of willingness to approach things in a different way. And in fact, if you if you go back and read the original discussion paper, which is pretty substantial document talking about how they were going to implement the investment firm's directive and regulation EU rules, there’s quite a few big chunks of it that you can now throw out essentially given the consultation paper, so it's been quite interesting to see how much the FCA is thinking is moving in a few years and yet, just as an example, actually, the discussion paper makes it pretty clear or seems to me, that the remuneration code, you know we've got exactly is still not high priority area existing remuneration codes, but by pru firms and improvements will remain in force until some unspecified future period when will consult on a new remuneration code.

Fine, except the consultation paper lands on, it’s a massive consultation on the set of open remuneration codes, so it’s not a night and day different one for the existing one. But yeah, it's just interesting for me that somewhere along the way the decision's been made that they will. They will do the rumination working now rather than later.

Irina Velkova

Entertain us David with your military history hat. How would you describe the FCA’s approach with a second consultation paper in military tactics terms?

David Morrey

Well, no, but this this whole thing is that the time honoured, an ancient process of standardisation. And, well, you know, so yeah. It is no different from Greek hoplite warfare or you know the early mediaeval firearms drills of the armies of the Netherlands. Yeah, you standardise, and you create resilience to threats and risks by standardising. Technical sounding way describing it, isn't it? I mean it because everyone does the same thing, reacts the same way to particular set of external threats. I mean you’re going to have to understand for the FCA supervise many many thousands of organisations where that would be appealing as well.

I mean the I think the classic challenge of historical challenge to standardisation is, at some point a completely unforeseen development occurs and that the old model you had falls over entirely you know, the whole system collapses potentially. I think the FCA is trying to address that though, by giving themselves more flexibility than they've ever had before to impose or direct the holding of capital and liquidity buffers and requirements and other like, so they got more flexibility to be agile I guess it's the word I've used in changing firm’s capital requirements.

Irina Velkova

Thank you for that and I guess last question is. Then I know marketing are going to be after me. Clearly, the regime introduces some fundamental changes, so I guess the question to both of you, in years to come, will the market think this was a change to get regime in your view Colm?

Colm Donnelly

I hope so. I think for some of the things like, it no longer being kind of banking calculations we need to do to an asset manager.

That should make it a lot simpler, but I think the real the real proof will come from when we start to see FCA's doing their first kind of tests under the new world and that's, that'll be the real asset test of, will they just continue to kind of have large multiples on what your base calculation is, and then ultimately not much will have changed because you end up with the same capital number, just a slightly different path in getting there, and so I think those and the early findings from the industries and those experiences will really be the key sign of of the changes.

Irina Velkova

David?

David Morrey

Yeah, I agree with that. Yeah, it will be a few years before we go, a real sense of what this means. I mean, I think my overriding thought at this point is it feels like a big change because we've been doing something different for years but probably in five years’ time will think it's pretty sensible actually. Yeah, if we’ve been doing this from the outset, you know 2007 onwards then it would just seem sensible.

I think it does take out some of the gaming the system that's possible now, you know your firms with different with relatively similar business models but different, being captured by different parts of the regulatory regime for exempt CAD firms etcetera and an ending up with quite different, where you get different capital positions as a result, so I think it's that’s taking that gaming aspect out is probably a sensible one. I think level playing field. Yeah, I clearly there are some firms and I think we exempt CAD firms at the headlines here, where that level playing field may well be at a height which they are significantly underneath and that could be your business model fatal in some cases so. But yes, time will tell.

Irina Velkova

Interesting, well thank you very much, both for fascinating discussion. It certainly has been very interesting to me. Hopefully for our listeners as well. I just make a very quick recap, so the new IFPR regime is coming into force and 1st of January 2022 for MiFID firms. Some key changes that David mentioned at the very beginning of those we found the K factors are calculated which required to generate the capital requirements. There are new mandatory liquidity requirements, and they will be also need for firms to do self-assessment for capital and liquidity resources.

There won’t be any more ICAAP, but now will be the ICARA. The market has been generally positive with the proposed changes we heard from Colm and of course firms, are at a different stage of readiness depending on their size and sophistication, and that's how the main challenges refer to firms getting to grips with the defining the K factors and interpreting those certainly some of the firms will try and benefit from the group capital test we heard and we all think that is going to be certainly a good change in, hopefully in years to come. Is that a fair summary?

David Morrey

It is, thank you, Irina.

Irina Velkova

That's okay, thank you very much. Again, and it’s been an absolute pleasure to have you today and I guess thank you to our listeners today to leave you with some more regulatory food for thought. We have recently published our Financial Services Regulatory Handbook 2021. Your one stop shop for all key regulatory developments in the year ahead. You can also sign up to the Financial Services Regulatory newsletter to receive weekly updates and invites into your inbox. And of course, don't forget to subscribe to the podcast.

Thank you all for tuning in. Will be back with our next episode next month to talk about other exciting topics of the risk and regulatory world.

Thank you again and goodbye.