MIFIDPRU: capital and risk management for UK investment firms
The UK Investment Firms Prudential Regime (MIFIDPRU), which replaced the previous IFPRU and BIPRU frameworks for most FCA-regulated investment firms from 1 January 2022, represents a fundamental change in how non-systemic investment firms calculate and manage their regulatory capital. The regime, modelled broadly on the EU Investment Firms Regulation (IFR) but with UK-specific modifications, introduced the K-factor approach to capital calculation — replacing asset-based capital requirements with a set of risk-based metrics designed to reflect the specific harm that investment firms' business models can cause to clients, markets, or themselves.
The K-factor capital calculation is the central operational challenge of MIFIDPRU. K-factors are grouped into three categories: harm to clients (AUM, CMH, ASA, COH — covering assets under management, client money held, assets safeguarded, client orders handled); harm to markets (NPR, CMG — covering net position risk and clearing margin given); and harm to the firm (TCD, DTF, GHC — covering trading counterparty default, daily trading flow, and net revenue). For most non-systemic investment firms that do not deal on own account and do not hold client assets, the relevant K-factors are limited, and the regime imposes a more proportionate capital burden than IFPRU. However, firms that hold client money, manage assets, or conduct transactions as principal face material capital requirements that must be calculated correctly and maintained on an ongoing basis.
The Internal Capital Adequacy and Risk Assessment (ICARA) process is the qualitative heart of the MIFIDPRU regime. The ICARA requires firms to identify the harms they could cause to clients, markets, or themselves in a wide range of scenarios — not merely those captured by the K-factor calculation — and to assess whether additional own funds are required to address risks not adequately covered by the regulatory minimum. The ICARA is also the mechanism through which firms assess their liquidity requirements and set their wind-down capital buffer. The FCA has been clear that the ICARA is not a compliance document to be filed and forgotten, but a genuine risk management tool that must be updated when business model, risk profile, or market conditions change materially.
Remuneration requirements under MIFIDPRU apply to all in-scope investment firms and require a documented remuneration policy that identifies Material Risk Takers (MRTs), sets out how variable remuneration is structured and adjusted for risk, and ensures that risk adjustment mechanisms are genuinely applied rather than theoretical. The FCA's supervisory guidance has highlighted that many smaller investment firms have not adequately identified their MRTs and have not implemented risk-adjustment processes that would withstand scrutiny. Remuneration policies should be reviewed and approved by the board (or remuneration committee) at least annually.
Regulatory reporting obligations
MIFIDPRU firms must submit quarterly (and for smaller firms, annually) capital adequacy returns (MIF001–MIF007) to the FCA via RegData. The quality of these returns has been identified as a supervisory concern — many firms are submitting returns that do not accurately reflect their capital position or that contain calculation errors. Firms should ensure that their regulatory reporting process is adequately documented and subject to appropriate review before submission. Any material error identified after submission should be corrected promptly by notifying the FCA under SUP 15.