FCA PS25/14: Defining Regulatory Capital for FCA Investment Firms

On 15 October 2025, the Financial Conduct Authority (FCA) published Policy Statement PS25/14 - Definition of Capital for FCA Investment Firms, following its April 2025 consultation paper CP25/10. The Policy Statement finalises the FCA’s plans to simplify and consolidate how regulatory capital (or own funds) is defined for FCA-regulated investment firms under MIFIDPRU 3.

The reforms are structural rather than substantive. They do not increase capital requirements or force firms to change their capital instruments. Instead, they introduce a standalone, investment-firm-specific definition of capital, removing reliance on the UK Capital Requirements Regulation (UK CRR) and addressing several long-standing technical uncertainties.

The new rules will come into force on 1 April 2026.

Why the FCA Has Changed the Definition of Capital

Under the current Investment Firms Prudential Regime (IFPR), firms are required to navigate a complex web of cross-references between MIFIDPRU, the UK CRR, and related technical standards originally designed for banks.

In PS25/14, the FCA confirms that this fragmentation increased compliance costs and the risk of misinterpretation without improving prudential outcomes. The regulator has therefore:

• Removed all cross-references to the UK CRR from MIFIDPRU 3

• Deleted and replaced MIFIDPRU 3 in its entirety

• Created a single, comprehensive chapter setting out what qualifies as regulatory capital for investment firms

The FCA is clear that this is about clarity, accessibility and proportionality, not deregulation.

Who Is Affected by PS25/14?

The new definition of capital applies to all entities subject to MIFIDPRU, including:

• MIFIDPRU investment firms

• UK parent entities required to comply with MIFIDPRU 3 on a consolidated basis

• Parent undertakings subject to the Group Capital Test (GCT)

For mixed groups containing FCA-regulated investment firms and PRA-regulated entities, the new rules apply only to the FCA investment firm on a solo basis. The existing group-level approach remains unchanged.

What Is Changing - and What Is Not

What is not changing

• Overall regulatory capital levels

• The fundamental quality and loss-absorbing characteristics of eligible capital

• The existing three-tier capital structure: (1) Common Equity Tier 1 (CET1), (2) Additional Tier 1 (AT1), (3) Tier 2 capital

• The continued eligibility of existing capital instruments

What is changing

The FCA has confirmed the following key improvements:

• A new standalone capital chapter within MIFIDPRU 3

• Clearer presentation of CET1, AT1 and Tier 2 capital

• Simplified language tailored specifically to investment firms

• Removal of banking-specific provisions with no relevance to investment firm business models

• A shift from a permission-based to a notification-based approach for interim profits

• Enhanced disclosure requirements for firms with non-standard capital structures

Key Areas of Clarification in FCA Policy Statement PS25/14

FCA Policy Statement PS25/14 introduces a number of important clarifications on the definition of regulatory capital (own funds) for FCA-regulated investment firms. While the changes do not increase capital requirements, they address areas that have historically created uncertainty under MIFIDPRU and the IFPR. These clarifications are particularly relevant for firms with partnership structures, group participations or non-standard capital arrangements.

1. Consolidation of Own Funds Into MIFIDPRU 3

The FCA has consolidated the definition and composition of own funds directly into MIFIDPRU 3, creating a single, standalone regulatory capital framework tailored specifically to investment firms. This removes the need to cross-reference the UK Capital Requirements Regulation (CRR) or banking-focused technical standards.

Key points for firms:

• Capital requirements themselves are unchanged

• The three-tier structure of CET1, AT1 and Tier 2 capital is retained

• The consolidation improves clarity, consistency and accessibility

• The risk of misinterpretation or miscalculation of regulatory capital is reduced

2. Enhanced Disclosure for Non-Standard Capital Structures

Under PS25/14, the FCA expects enhanced disclosure where firms operate non-standard capital structures, particularly where instruments other than CET1 rank equally with CET1 in insolvency or stress scenarios. The purpose is to ensure that supervisors and stakeholders can clearly understand how loss absorption works in practice.

Firms may need to provide enhanced disclosure where capital structures include:

• Non-voting ordinary shares

• Shares with mandatory dividend features

• Redeemable shares ranking equally with CET1

• Shares with capped or restricted distributions

In these cases, firms should clearly explain which instruments rank equally with CET1 and describe the mechanics of loss absorption.

3. Interim Profits and CET1 Capital

From 1 April 2026, firms will be able to include verified interim profits in Common Equity Tier 1 (CET1) capital on a notification basis, rather than requiring prior FCA permission. This reduces administrative burden while preserving prudential safeguards.

Key considerations when including interim profits:

• Profits must be independently verified

• Foreseeable dividends and charges must be deducted prudently

• Firms should consider dividend policies, past distribution ratios and management decisions

• The approach must remain conservative and well-documented

4. Treatment of Partnership and LLP Profits as Regulatory Capital

PS25/14 provides critical clarification on how partnership and LLP profits are treated for regulatory capital purposes. The FCA confirms that tax treatment is not determinative; instead, the focus is on whether profits are permanent and genuinely loss-absorbing.

Partnership profits may only qualify as CET1 where:

• The partnership has an unconditional and indefinite right to refuse distributions

• Partners have no enforceable right to demand payment

• The partnership agreement does not create automatic or mandatory distributions

The FCA applies a substance-over-form approach. Even if profits are described as discretionary, established practice may indicate that profits are effectively available to partners on demand. In such cases, the profits are treated as liabilities and cannot qualify as CET1 capital.

Implementation Date and Next Steps

The new rules take effect on 1 April 2026. For most firms, implementation will involve:

• Updating internal capital policies and ICARA documentation

• Revising rule references and prudential disclosures

• Reviewing partnership agreements and equity structures

• Ensuring MIF returns submitted from Q1 2026 onwards align with the new framework

Firms with non-standard capital structures or partnership models should prioritise early review.

Compliance Angle Can Help

At Compliance Angle, we support FCA-regulated investment firms with:

• MIFIDPRU and IFPR gap analyses

• ICARA reviews and capital composition assessments

• Partnership and LLP capital structuring reviews

• Group Capital Test and consolidation advice

• Policy updates aligned to FCA Policy Statements

Contact Compliance Angle at info@complianceangle.co.uk or call +44 7427 792594 to schedule a free consultation to discuss how we can support your firm in preparing for the implementation of PS25/14.