Investment Firms' Regulatory Capital: FCA Confirms Rules Simplifying MIFIDPRU Definition Of Capital (PS25/14)

The FCA has published a policy statement, Definition of capital for FCA investment firms(PS25/14) setting out its final rules to simplify and consolidate the definition of regulatory capital (own funds) for FCA investment firms under MIFIDPRU 3.

New framework

As proposed in its April 2025 consultation paper (CP25/10) (see our blog for an analysis), the FCA is removing all cross-references to the UK CRR (assimilated law) from MIFIDPRU 3 and establishing a standalone framework for regulatory capital tailored specifically to investment firms. The amendments mean that firms will be able to rely on a single, comprehensive chapter, no longer needing to cross-refer to the UK CRR and associated technical standards. (The FCA notes in PS25/14 that many respondents to CP25/10 commented that the navigation that is currently required creates unnecessary complexity and compliance costs.)

Key changes to the current rule architecture and content include:

• Structural improvements: all capital definitions in one place within MIFIDPRU; simplified language tailored to investment firms; removal of provisions designed for banks with no relevance to investment firms; and clearer structure distinguishing between Common Equity Tier 1 (CET1), Additional Tier 1 (AT1) and Tier 2 capital.
• Process improvements: move from permission-based to notification-based approach for interim profits; and enhanced disclosure requirements for non-standard capital structures.

The rules are set out in the Definition of Capital for Investment Firms Instrument 2025 (FCA 2025/42). The FCA is implementing the rules largely as consulted, with targeted amendments to address specific technical issues that emerged, including in relation to the requirement to deduct qualifying holdings in non-financial sector entities that exceed certain thresholds. It has also provided new guidance and/or worked examples on areas where respondents sought clarity, for example in relation to minority interests and consolidation treatment, and indirect funding of capital instruments.

Timing

The implementation date for the new framework is 1 April 2026. In CP25/10, the FCA had proposed 1 January 2026, but it has changed this to balance respondents' requests for adequate preparation time with its aim of delivering simplification benefits promptly.

Impact

The purpose of the new rules is to simplify and clarify: they do not change the overall levels of regulatory capital firms must hold or require firms to alter their capital structures. Summarising the impact on firms, the FCA highlights the following in PS25/14:

"For most firms, implementation will primarily involve updating internal documentation and references. [...]. But we recognise that firms need adequate time to update documentation, systems and processes. Existing capital instruments that meet current requirements will continue to qualify under the new framework without amendment. The consolidation exercise does not change the substantive eligibility criteria for own funds. Firms should not need to restructure their capital or renegotiate capital instruments because of these changes."

Wider context and next steps

The policy set out in PS25/14 is part of a wider FCA programme to simplify and modernise its prudential framework for investment firms. It meets commitments made in PS21/6, Implementation of the Investment Firms Prudential Regime (IFPR) to keep the IFPR under review and identify simplification opportunities.

Specifically, by creating a self-contained own funds definition within MIFIDPRU, the FCA is moving away from assimilated law (i.e. the UK CRR) and closer to a standalone, tailored prudential regime that is fully embedded in the Handbook.

The FCA believes its consolidated approach could serve as a template for its longer-term vision of an integrated prudential sourcebook (COREPRU). This would contain the core prudential standards applicable to all FCA solo-regulated firms, while specific requirements for different firm types would continue to be set out in dedicated prudential sourcebooks. In CP25/15, A prudential regime for cryptoasset firms the FCA consulted on how the own funds framework could form part of COREPRU.

Next, through its Market Risk Review (announced in CP25/10), the FCA will examine whether the amounts of capital that certain specialised trading firms must hold against market risk remain appropriate and proportionate. As the FCA noted in CP25/10, this "involves a more complex policy assessment of capital adequacy".

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