Investment firm classification

Under the IFPR the classification system for investment firms is based on their activities, systemic importance, size, and interconnectedness, as well as K-factors.

K-factors are quantitative indicators that are intended to identify risks that an investment firm may pose to clients, market access or liquidity, and to itself.

Investment firms will be subject to different prudential requirements dependent on the class they fall within.

Under the IFPR, investment firms fall into four classes as follows:

Systemically important investment firms (or Class 1A firms) – those investment firms considered to be sufficiently important to the orderly functioning of the financial markets in which they operate that they should be classified as credit institutions and subject to the prudential requirements in the current Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR).
Large investment firms (or Class 1B firms) – large (but not systemically important) investment firms that deal on own account and/or carry out underwriting/placing on a firm commitment basis. These firms will remain subject to the prudential requirements under the current CRD/CRR.
Non-S-NII (Non-small and non-interconnected investment) firms (or Class 2 firms) – non-systemic investment firms that exceed specific quantitative thresholds. These firms are subject to the full scope of the IFPR.
S-NII (Small and non-interconnected investment) firms (or Class 3 firms) – small investment firms with simpler business models and a reduced scope of activities. These firms are subject to requirements under the IFPR which are proportionate to the risks that they pose to the public and the financial markets in which they operate.

The following table sets out the framework for classifying firms:

Class	Covered Firms
1A Systemically important investment firms	Authorised investment firms that are own account dealer/underwriter firms* if: · their consolidated assets are equal to or exceed £15bn† (excluding assets of non-Gibraltar subsidiary own account dealer/ underwriter firms); · they are part of a group where the total consolidated assets of all own account dealer/underwriter firms that have consolidated assets of less than £15bn are equal to or exceed £15bn† (excluding assets of non-Gibraltar subsidiary own account dealer/underwriter firms); or · their consolidated assets are equal to or exceed £5bn (excluding assets of non-Gibraltar subsidiary own account dealer/ underwriter firms)† and the GFSC designates them as Class 1a based on systemic risk, clearing member status or economic importance, cross border significance or interconnectedness.
1B Large investment firms	Authorised investment firms that are own account dealer/underwriter firms if: · they elect to be subject to CRR; · they are a subsidiary and included in the consolidated supervision of a credit institution, financial holding company or mixed financial holding company under CRR; and · the GFSC is satisfied that the election is prudentially sound, does not reduce own funds requirements and is not for purposes of regulatory arbitrage.
2 Non-S-NIIfirms	AUM (assets under management, discretionary and ongoing nondiscretionary advisory)	≥ £1.2bn
	Daily COH (client orders handled)	≥ £100m (cash trades) or £1bn (derivatives)
	ASA (assets safeguarded and administered)	> zero
	CMH (client money held)	> zero
	DTF (daily trading flow)	> zero
	NPR (net position risk) or CMG (clearing margin given)	> zero
	TCD (trading counterparty default)	> zero
	On-and-off-balance sheet total	≥ £100m
	Total revenues from investment services and activities (average of last 2 years)	≥ £30m
3 Small and non-interconnected investment (S-NII) firms	All other authorised investment firms.

‘Own account dealer/underwriter firms’ are firms whose business it is to carry out (Class 1 firms) or that carry out (other firms) dealing on own account, underwriting or placing on a firm commitment basis.

*Excluding commodity and emission allowance dealers, collective investment undertakings and insurance undertakings.

*Calculated on the basis of a 12-month average.

*Calculated on a combined basis for all investment firms that are part of a group.

Transition between S-NII (Class 3) and non-S-NII (Class 2)

An S-NII firm will become a non-S-NII firm (either immediately or after 3 months, depending on the circumstances) if it no longer satisfies the categorisation thresholds set out above. Similarly, a non-S-NII firm will become an S-NII firm if it satisfies all of the categorisation thresholds for a period of 6 months without any breaches. Firms will therefore be required to monitor these thresholds.

Alternative Investment Fund Managers (AIFMs) and UCITS Management Companies

All AIFMs will be affected by the IFPR to the extent that they have to comply with the own funds requirements which is set out under Regulation 16 of the IFPR Regulations. In addition, the full regime will be applicable to AIFMs and UCITS management companies that have MiFID ‘top-up’ permissions as from the 1st of July 2022.