The Financial Conduct Authority (FCA) has recently closed consultation on a landmark proposal to simplify the definition of regulatory capital for FCA-regulated investment firms. This initiative, outlined in Consultation Paper CP25/10, marks a significant step in tailoring prudential regulation to better suit the business models of investment firms—moving away from the legacy frameworks originally designed for banks.
What’s changing?
The FCA is proposing to:
- Remove references to the UK Capital Requirements Regulation (UK CRR) from the definition of regulatory capital (also known as "own funds") under MIFIDPRU 3.
- Reduce the volume of legal text by approximately 70%, streamlining the rulebook and eliminating provisions irrelevant to investment firms.
- Clarify eligibility criteria across all three tiers of capital—Common Equity Tier 1 (CET1), Additional Tier 1 (AT1), and Tier 2—without changing the amount of capital firms are required to hold.
Why it matters
For mid-sized investment firms, navigating the current capital rules can be disproportionate to their size and complexity. Many of the existing provisions were inherited from banking regulations and are ill-suited to the operational realities of non-bank financial institutions. The FCA’s proposals aim to:
- Improve clarity and accessibility, reducing the risk of misinterpretation.
- Lower compliance costs, especially for firms without large in-house regulatory teams.
- Support market entry and innovation, by making prudential rules easier to understand and apply.
Implications for firms
While the proposals do not alter capital adequacy requirements, they do represent a meaningful shift in how firms will demonstrate compliance. Firms should prepare to:
- Review their capital instruments against the revised eligibility criteria.
- Update internal documentation and compliance frameworks to reflect the simplified rules.
- Engage with the FCA’s forthcoming Policy Statement, which will provide finalised guidance based on consultation feedback.
Our view
We see this as a very positive move towards a more proportionate investment firm-focused regulatory framework. For our clients, this should present an opportunity to reassess capital structures and ensure alignment with a more streamlined rulebook.
The next step
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