FCA eyes split fee-blocks for principal firms

The move follows its review of the Investment Firms Prudential Regime (IFPR) – the prudential regime applying to UK firms authorised under MiFID – which came into force in January 2022.

In its consultation paper on regulatory fees and levies for 2024/25 published today (21 November), the FCA explained most MiFID and non-MiFID firms fall under the A.10 block for fees and levies, which relates to firms dealing as principals.

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As part of its proposals, the regulator plans to split the A.10 block in two: A.10A for dual-regulated firms (companies falling under the regulatory remit of both the FCA and Prudential Regulation Authority) and A.10B for solo-regulated firms.

This could lead to reduced or increased fees, as a result, depending on the business.

Previously, in order to determine business sizes, the FCA’s predecessor (the Financial Services Authority) proposed to base its metric for calculating fees on the headcount of traders.

But now, the regulator said trader headcount may not be “in all cases a reflection of the business size activity”.

The FCA added: “At this stage, the tariff base for A.10A would remain unchanged and we are taking this opportunity to consider feedback more broadly on potential alternatives to trader headcount as a measure of business size.  

“Within the planned A.10B fee-block, initial analysis suggests several firms will see a reduction in fees while some firms may see significant upwards adjustments. To address concerns on fee increases, we are also considering transitional provisions.”

The changes would will also include data selection and weighting and modelling.

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On the data side, the FCA will focus on the Form MIF001, which companies are required to report to the regulator on a quarterly basis, and which includes “minimum variable own funds requirements based upon business activity, known as ‘K-factors’,” the FCA explained.

The regulator will analyse four K-factors: K-net position risk; K-clear margin given; K-daily trading flow; K-trading counterparty default.

“In developing this approach, we have observed instances of misreporting leading to extreme K-Factor values. Specifically, the misplacing of decimal points which, in some cases, leads to incorrect changes in K-Factors of more than 1,000% across quarters,” the FCA explained.

“We intend to remind firms through a further IFPR Newsletter and expect the frequency of misreporting to fall as their understanding of these reporting requirements improves.”

However, the FCA noted the K-Factors differ in methods of calculations designed to capture risk, and said it will also introduce data weighting for K-Factors to “ensure that firm’s fees are proportionate to the scale of their trading and market footprint”.

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When it comes to fees and levies applicable for financial services companies, there were some “exceptional projects” which require additional funding outside of the normal budget, it said.

For the current 2023/24 financial year, the cost for exceptional projects amounted to £26.5m, the regulator noted.

The FCA said it will reveal such upcoming projects when it consults on fee-rates in April 2024 once their budgets have been set, but has also given notice of two such “major” projects.

These include the expansion of open banking, as well as the potential application of these systems to open savings, and incoming cryptoasset regulations.

Most of the costs will be levied from the firms to which such operations are applicable, the regulator explained, meaning the former will mostly be levied from payment firms, retail banks and building societies, while the latter from firms directly engaged in the cryptoasset market.

The FCA said: “It remains our intention to maintain a model of cost recovery which focuses the direct costs of cryptoasset regulation on firms directly engaged in the cryptoasset market when we become responsible for their regulation, recovering the costs once they are authorised.

“However, our urgent work must continue on tackling financial crime and money laundering and mitigating the potential risks to consumers presented by cryptoassets.”

It said: “Since this potentially affects the whole market, we expect to recover some of these costs from the full population of feepayers. We will set out our approach in future consultations.”

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