FCA consults on capital rules for UK investment firms

What does this mean?

The rules on own funds for UK investment firms are currently fragmented across different regulatory texts - MIFIDPRU 3, UK CRR and various technical standards - making it challenging for firms to navigate. Furthermore, the cross-referenced UK CRR rules - which are based on the version of the rules that existed on 1 January 2022 - were designed to address the complex capital structures and sophisticated capital instruments often used by banks, making them largely irrelevant for investment firms which typically have simpler capital structures.

Proposed changes

The FCA proposes a number of structural changes to MIFIDPRU 3 to streamline the legal text and improve accessibility. The FCA states that the proposed changes will reduce the volume of legal text by 70%.

The FCA also proposes some policy changes to simplify requirements and ease compliance. These changes will be most relevant to new entrants and firms considering future modifications to their capital structure, as the FCA does not expect existing firms to change their capital arrangements as a result of the proposed amendments. The key proposed changes include:

Structural changes

• Removal of irrelevant materials: The FCA proposes to remove materials which are not relevant to investment firms’ business models or that duplicate other materials.

• Consolidation and restructuring of provisions governing the eligibility of own funds: The Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 capital eligibility requirements, which are currently fragmented across MIFIDPRU 3, UK CRR and technical specifications, would be consolidated into a single, coherent framework within MIFIDPRU 3. The requirements would be organised thematically around core characteristics (e.g. loss absorption, perpetuity, subordination) with a consistent deduction approach applied across all capital tiers.  

Policy changes

• Move to a notification-based system for inclusion of interim profits in CET1: Firms are currently required to obtain the FCA’s prior permission to include interim profits in CET1. This permission is subject to the firm meeting certain conditions, including independent verification of profits by the firm’s auditors. The FCA proposes to remove the prior permission requirement and move to a notification-based system. Firms will still be required to meet the other existing requirements under the proposed rules.

• Deductions for significant and non-significant holdings of capital instruments of financial sector entities (FSEs) to be combined: Under the current rules, firms are allowed not to deduct non-significant holdings of capital instruments of FSEs when those investments are held in the trading book. One implication of the FCA's proposal to combine the deductions for significant and non-significant holdings of capital instruments of FSEs is that significant investments in FSEs held in the trading book can also benefit from this exception.
• Revised approach for identifying and quantifying indirect and synthetic holdings for deduction purposes: The FCA proposes to clarify what constitutes indirect and synthetic holdings, and replace prescriptive calculation methodologies with clearer principles-based guidance that focuses on economic substance. As part of these changes, the FCA proposes to clarify that firms are generally not required to “look through” a fund’s investments to identify potential indirect holdings of capital instruments.

• Introduction of an objective test for cross holdings: Under the current rules, firms are required to deduct reciprocal cross holdings of CET1 instruments that the FCA considers have been designed to artificially inflate own funds. The FCA proposes that the deduction for cross holdings would no longer rely on FCA opinion, but will be based on an objective test that considers a range of indicators, such as cross holdings that do not serve a genuine business purpose and coordination between entities in capital management decisions.

• Reduction of own funds for market making purposes: The FCA intends to remove the requirement for a permission or notification for firms that repurchase their own capital instrument for market making purposes.

Link to the FCA's broader regulatory objective

In PS21/6: Implementation of Investment Firms Prudential Regime (IFPR), the FCA expressed a long-term goal to break the link with the UK CRR altogether, ensuring that prudential rules are tailored to investment firms. This CP supports this objective by proposing a more proportionate and standalone prudential framework for FCA investment firms. In another step toward this objective, the FCA has announced it will be undertaking a Market Risk Review, which will examine whether capital requirements for trading firms remain appropriate. A further publication on this is expected in early 2026.

By simplifying the own funds rules and incorporating them into the FCA Handbook, the FCA is laying the foundation for a more consistent framework, which the FCA believes could be extended to other sectors.

What do firms need to do?

While the FCA does not anticipate that the proposals will require firms to alter their existing capital arrangements, the CP contains a number of policy proposals that have the potential to reduce the operational burden and compliance costs of firms. Firms should review the proposed changes and consider the extent to which they can benefit from the overall simplification of the rules.

FCA investment firms should stay informed about policy directions and actively engage in shaping the future of the sector. As the FCA continues to work toward its broader objective of a more proportionate prudential framework for investment firms - and EU authorities make progress on their own review of prudential rules - regulatory change with far-reaching impact could be on the horizon.

Next steps

The consultation closes on 12 June 2025. The FCA intends to publish final rules in a policy statement in the second half of 2025, with the new framework expected to come into force on 1 January 2026.