MIFIDPRU TP 6 Application of criteria to be classified as an SNI MIFIDPRU investment firm: transitional

Application

16.1

R

MIFIDPRU TP 6 applies to the following:

(1)

a MIFIDPRU investment firm; and

(2)

a UK parent entity, in accordance with MIFIDPRU TP 6.9R.

Purpose

16.2

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(1)

MIFIDPRU TP 6 explains how a MIFIDPRU investment firm, or a UK parent entity which is applying MIFIDPRU 1.2 on a consolidated basis, should determine whether it meets the conditions to be classified as an SNI MIFIDPRU investment firm on the date on which MIFIDPRU begins to apply.

(2)

Under MIFIDPRU TP 6.4R, a MIFIDPRU investment firm or a UK parent entity may use either the reasonable estimates approach or the alternative calculation in MIFIDPRU TP 4.5R(2) to determine missing historical data points for the purposes of applying the average AUM or average COH conditions under MIFIDPRU 1.2.1R(1) and (2).

(3)

Under MIFIDPRU TP 6.7R, a MIFIDPRU investment firm or a UK parent entity must use its best efforts to estimate any missing historical data points for the purposes of applying the condition relating to total annual gross revenue from investment services and/or activities in MIFIDPRU 1.2.1R(7).

(4)

The transitional arrangements in MIFIDPRU TP 6 apply only to the extent that the firm has missing historical data points. If a firm has observed historical data covering any part of the relevant period, the firm should use those data points when applying the relevant calculations.

Duration

16.3

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The duration of the transitional arrangements in MIFIDPRU TP 6 depends on the relevant condition for classification as an SNI MIFIDPRU investment firm under MIFIDPRU 1.2. Under MIFIDPRU TP 6.4R(5) and MIFIDPRU TP 6.7R(3), the transitional arrangements cease to apply once a firm or UK parent entity has (or should have) collected sufficient historical information to apply the relevant condition in accordance with the applicable methodology in MIFIDPRU 1.2.

Missing historical data for application of SNI classification criteria: transitional for individual MIFIDPRU investment firms

16.4

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(1)

This rule applies to the extent that a MIFIDPRU investment firm does not have the necessary historical data to determine whether the following conditions are met:

(a)

the average AUM condition in MIFIDPRU 1.2.1R(1); or

(b)

the average COH condition in MIFIDPRU 1.2.1R(2).

(2)

If a firm decides to apply the alternative approach in MIFIDPRU 1.2.4R for the purposes of assessing whether a condition in (1) is met, this rule applies to the extent that the firm does not have the necessary historical data to apply that alternative approach to the relevant condition.

(3)

Where this rule applies, a firm may (subject to (4) and MIFIDPRU TP 6.5R) use either of the approaches set out in MIFIDPRU TP 4.5R(2) to assess whether the relevant condition in (1) is met.

(4)

A firm’s choice of approach under (3) must be consistent with any choice that the firm has made under MIFIDPRU TP 4.5R(2) in relation to the same K-factor average metric for the purposes of applying the transitional arrangements in MIFIDPRU TP 4.

(5)

This rule ceases to apply in relation to a condition in (1) on the earlier of the following:

(a)

the date on which the firm has collected sufficient historical information necessary to apply the condition in accordance with the applicable methodology under MIFIDPRU 1.2; or

(b)

the date that falls n months after the date on which MIFIDPRU began to apply, where n is the number of months’ worth of data points required to apply that condition in accordance with the applicable methodology under MIFIDPRU 1.2.

16.5

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(1)

This rule applies where a firm has chosen to apply both of the approaches below to determine whether the average AUM condition in MIFIDPRU 1.2.1R(1) or the average COH conditions in MIFIDPRU 1.2.1R(2) is met:

(a)

the alternative approach in MIFIDPRU 1.2.4R; and

(b)

the modified calculation under MIFIDPRU TP 4.5R(2)(b).

(2)

Where this rule applies, the modified calculation applies as if:

(a)

in MIFIDPRU TP 4.11R(1)(a), the words “excluding the most recent y months” were deleted; and

(b)

MIFIDPRU TP 4.11R(1)(c) and (d) were omitted.

16.6

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(1)

A firm must apply its chosen approach under MIFIDPRU TP 6.4R(2) consistently in relation to a specific condition in MIFIDPRU TP 6.4R(1).

(2)

A firm may apply different approaches under MIFIDPRU TP 6.4R(2) in relation to different conditions in MIFIDPRU TP 6.4R(1).

16.7

R

(1)

This rule applies to the extent that a MIFIDPRU investment firm does not have the necessary historical data to determine if the condition relating to the total annual gross revenue from investment services and/or activities in MIFIDPRU 1.2.1R(7) is met.

(2)

Where this rule applies, a firm must use its best efforts to estimate any missing historical data points for the calculation of the condition in (1).

(3)

This rule ceases to apply in relation to a condition in (1) on the earlier of the following:

(a)

the date on which the firm has collected sufficient historical information necessary to apply the condition in accordance with the standard methodology under MIFIDPRU 1.2; or

(b)

the date on which two complete financial years for the firm have elapsed after the date that MIFIDPRU began to apply.

16.8

R

If the FCA requests, a firm must provide a reasonable explanation of how the firm has determined any estimate under MIFIDPRU TP 6.4R(3) or MIFIDPRU TP 6.7R(2).

16.9

G

(1)

It is unnecessary to provide transitional arrangements for the following conditions:

(a)

the average ASA condition in MIFIDPRU 1.2.1R(3);

(b)

the average CMH condition in MIFIDPRU 1.2.1R(4);

(c)

whether the firm has permission to deal on own account in MIFIDPRU 1.2.1R(5);

(d)

the condition relating to the balance sheet total of the firm in MIFIDPRU 1.2.1R(6); 2

(e)

the average DTF condition in MIFIDPRU 1.2.1R(9); and2

2(f)

the condition relating to acting as a depositary in MIFIDPRU 1.2.1R(10).

(2)

The average ASA and average CMH conditions require that the firm has not held any MiFID client money, or any client assets in the course of MiFID business, during the preceding 9 months, excluding the most recent 3 months. A firm should already have information on whether it has held client money or client assets in the past. If the firm is unable to determine whether any amounts of client money or client assets were held in connection with MiFID business, it should apply MIFIDPRU 4.8.6R or MIFIDPRU 4.9.6R and treat the amounts as if they were held in connection with MiFID business for these purposes.

(3)

The conditions in (1)(c), (1)(d) and (1)(f)2 do not rely on historical information and therefore can be assessed by the firm at the point at which MIFIDPRU first begins to apply without any need for transitional arrangements.

(4)

The average DTF condition requires that the firm must not have entered into any transactions by dealing on own account or through the execution of orders on behalf of clients in the firm’s own name during the preceding 9 months, excluding the most recent 3 months. The FCA considers that a firm should already know whether it executed any transactions in that capacity during the relevant period.

16.10

G

(1)

MIFIDPRU TP 6.4R(5) and MIFIDPRU TP 6.7R(3) specify the date on which the transitional arrangements for applying certain conditions under MIFIDPRU 1.2.1R will cease to apply. From that date onwards, the firm will need to apply the standard methodology for determining whether it meets the relevant condition. This date may vary depending on the position of the individual firm and the relevant condition.

(2)

Under MIFIDPRU TP 6.4R(5)(a), if a firm has sufficient historical information to apply a condition in MIFIDPRU TP 6.4R(1), it is no longer permitted to rely on the transitional arrangements. The following are examples of how this requirement applies:

(a)

Example 1: On the date on which MIFIDPRU begins to apply, Firm A already has historical data on its AUM covering the previous 10 months. Assuming that the firm is applying the standard criteria under MIFIDPRU 1.2.1R (and not the alternative approach in MIFIDPRU 1.2.4R), the average AUM condition under MIFIDPRU 1.2.1R(1) requires 15 months of historical data. Since the firm must be collecting AUM data once MIFIDPRU begins to apply, Firm A will have sufficient data to apply the standard calculation for the average AUM condition 5 months later. At that point, the firm will no longer be able to rely on the transitional arrangements under MIFIDPRU TP 6, but instead must use the observed historical data to determine whether the condition in MIFIDPRU 1.2.1R(1) is met.

(b)

Example 2: Firm B has notified the FCA under MIFIDPRU 1.2.4R that it is using the alternative approach to applying the average AUM condition in MIFIDPRU 1.2.1R. Firm B has 13 months of historical data on its AUM. Under MIFIDPRU TP 6.4R(5)(a), Firm B may not rely on the transitional arrangements in MIFIDPRU TP 6. Although the standard calculation for the AUM condition in MIFIDPRU 1.2.1R(1) would require 15 months of historical data, the alternative approach under MIFIDPRU 1.2.4R(2) requires only 12 months of data. As Firm B has sufficient observed historical data to apply its chosen methodology, the transitional arrangements do not apply.

16.11

G

(1)

MIFIDPRU 6.4R(4) and 6.6R are designed to ensure consistency in a firm’s approach to applying the transitional arrangements in MIFIDPRU TP 4 and MIFIDPRU TP 6.

(2)

MIFIDPRU TP 6.4R(4) requires a firm to be consistent in its choice of approaches for the purposes of MIFIDPRU TP 4 and MIFIDPRU TP 6. For example, Firm A does not have sufficient information to calculate its average AUM for the purposes of the condition in MIFIDPRU 1.2.1R(1) and the K-AUM requirement under MIFIDPRU 4.7. If Firm A chooses to use the reasonable estimates approach under MIFIDPRU TP 4.5R(2) to calculate its K-AUM requirement, the firm must also use the reasonable estimates approach under MIFIDPRU TP 6.4R(3) to apply the average AUM condition in MIFIDPRU 1.2.1R(1). The estimates that Firm A uses for both purposes must be consistent.

(3)

MIFIDPRU TP 6.6R prevents a firm from alternating between approaches for the purposes of MIFIDPRU TP 6. For example, Firm B chooses under MIFIDPRU TP 6.4R(3) to apply the alternative calculation in MIFIDPRU TP 4.11R for the purposes of the determining whether the average COH condition in MIFIDPRU TP 6.4R(1) is met. Firm B may not later decide to switch to applying the reasonable estimates approach to determine whether that condition is met.

16.12

G

Under MIFIDPRU TP 5, a MIFIDPRU investment firm is required to collect at least 1 month of K-factor metrics that are relevant to any investment services and/or activities it carries on before MIFIDPRU begins to apply in full. When determining any estimate for the purposes of MIFIDPRU TP 6.4R(3) or MIFIDPRU 6.7R(2), a firm should consider any observed historical data that is available. Where the observed historical data covers a short period, a firm should take into account possible seasonal variations in figures or other factors which may be relevant to the accuracy of the estimate.

Missing historical data for application of SNI classification criteria: transitional for investment firm groups to which consolidation applies

16.13

R

(1)

A UK parent entity to which consolidation under MIFIDPRU 2.5 applies may apply the transitional arrangements in MIFIDPRU TP 6.4R to 6.12G to its consolidated situation in accordance with this rule.

(2)

Where a UK parent entity is applying MIFIDPRU TP 6.4R to 6.12G in accordance with (1), the following modifications apply:

(a)

a reference to a condition in MIFIDPRU 1.2.1R is a reference to that condition as it applies on a consolidated basis; and

(b)

a reference to a “MIFIDPRU investment firm” or a “firm” is a reference to the UK parent entity.

(3)

Any estimate produced by the UK parent entity of an investment firm group under MIFIDPRU TP 6.4R(3) or MIFIDPRU TP 6.7R(2) for the purposes of its consolidated situation must be consistent with any estimates produced on an individual basis by any MIFIDPRU investment firms forming part of that investment firm group.