FSRA’s Consultation Paper no. 2 of 2025: Review of prudential framework for lower-risk firms

The Financial Services Regulatory Authority (FSRA) of Abu Dhabi Global Market (ADGM) has issued on 9 April 2025 the ADGM FSRA Consultation Paper on Prudential Framework 2025 as part of its ongoing review of the prudential framework for lower-risk Firms. The proposals primarily concern Firms within Categories 3B, 3C, and 4, which typically do not hold client assets or insurance money and are therefore considered to present limited risk.

The aim is to recalibrate the prudential requirements to ensure they are proportionate to Firms’ actual risk profiles, reduce unnecessary regulatory burdens, and bring ADGM’s standards in line with international best practices—particularly those introduced in the UK and EU under equivalent investment Firm regime reviews. These updates fall within the broader initiative of ADGM’s prudential framework updates for investment Firms.
The deadline to submit feedback is on 21 May 2025. Send your comments to fsra.consultation@adgm.com, and please include “FSRA Consultation Paper No. 2 of 2025” in the subject line.

What is the FSRA proposing?

1.    Removal of the EBCM for certain Category 4 Firms
The Expenditure-Based Capital Minimum (EBCM) will be removed for Category 4 Firms that do not hold client assets or insurance money, reflecting their low systemic risk and limited potential for market disruption. This proposal is a central feature of the revised capital requirements for Category 4 Firms in ADGM.

2.    Increase in Base Capital Requirement (BCR)
The BCR for most Category 4 Firms will increase from USD 10,000 to USD 50,000, establishing a straightforward and effective capital floor. This reflects the FSRA’s direction outlined in ADGM’s FSRA Consultation Paper on Prudential Framework 2025.

3.    Introduction of a liquid asset threshold
Firms must maintain liquid assets exceeding the revised BCR, ensuring continued operational liquidity despite the removal of the EBCM. This threshold is consistent with ADGM’s prudential framework updates for investment Firms.

4.    Lower BCR for custody of Non-Public Funds
The BCR for providing custody of funds—other than Public Funds—will be reduced from USD 4 million to USD 250,000. The higher requirement will remain for custody involving Public Funds, another significant change under the revised capital requirements for Category 4 Firms in ADGM.

5.    Removal of IRAP for Category 3B and 3C Firms
The requirement to submit an Internal Risk Assessment Process (IRAP) report will be dropped for these Firms, recognising their low prudential risk.

6.    Removal of PII requirement for branches
Branches of Category 3B, 3C, and 4 Firms will no longer need to maintain professional indemnity insurance (PII), as they are financially supported by their head offices.

7.    Minimum standards for PII
For Firms still subject to PII, new minimum standards for coverage and insurer creditworthiness will apply. Instead of submitting the policy itself, Firms will submit an annual board-approved attestation.

8.    Miscellaneous amendments
These include clarification that Chapter 10 (SREP and ICAAP) applies only to Domestic Firms, further guidance on fund manager BCRs, and the correction of typographical errors in the PRU Rulebook.

9.    Forthcoming review of Categories 2 and 3A
A future phase will assess more nuanced differentiation within higher-risk Categories 2 and 3A, such as for matched principal trading and agency models. This will build on the foundation set by ADGM’s prudential framework updates for investment Firms.

Our assessment of FSRA’s consultation paper questions

Q1: Do you support the removal of the EBCM and the increase in the BCR to USD 50,000 for in-scope Category 4 Firms?

Yes. Removing the EBCM is consistent with international developments and recognises the minimal prudential impact of Firms that do not hold client assets or insurance money. Raising the BCR to USD 50,000 provides a clearer, more practical capital floor, avoiding the complexities of EBCM calculations outlined in FSRA’s Consultation Paper on Prudential Framework 2025.

Q2: Comments on requiring liquid assets in excess of the BCR for these Firms?

We support this change. Linking liquidity requirements to the BCR rather than the EBCM ensures Firms retain sufficient operational liquidity, particularly in wind-down scenarios, while simplifying compliance under ADGM’s updated Prudential Framework for Investment Firms.

Q3: Do you agree with the proposed USD 250,000 BCR for custody of non-public funds?

Yes. This adjustment better reflects the lower risk associated with non-public fund custody—especially where retail investors are not involved. It also aligns with international standards and the revised capital requirements for Category 4 Firms in ADGM.

Q4: Support for removing the IRAP requirement for Category 3B and 3C Firms?

We agree. These Firms typically have stable, low-risk operations. The removal of the IRAP requirement reduces regulatory burden while preserving the FSRA’s discretion to request risk assessments when appropriate.

Q5: Do you support the removal of the PII requirement for branches of Category 3B, 3C, and 4 Firms?

Yes. As branches rely on their parent Firms for financial support and are not standalone entities, the current requirement is disproportionate. This change aligns with a risk-based approach promoted in ADGM’s FSRA Consultation Paper on Prudential Framework 2025.

Q6: Comments on the proposed PII standards and revised reporting requirement?

We are in favour. Prescribing minimum standards ensures effective coverage, while the switch to an annual board-approved attestation reduces paperwork and maintains governance accountability.

Q7: Comments on the miscellaneous amendments?

We recommend that the FSRA include a clearly defined effective date in the final rules. This would provide certainty for Firms currently authorised under the existing PRU regime and enable smoother implementation planning.

Q8: Are there additional changes the FSRA should consider for Category 3B, 3C, or 4 Firms?

We suggest introducing a risk-based frequency for standard prudential reporting, especially for smaller Category 4 Firms with simple business models. This would align well with the goals of the revised capital requirements for Category 4 Firms in ADGM.

Q9: What should inform FSRA’s approach to matched principal trading?

Matched principal trading presents significantly lower risk as positions are held temporarily and without speculation. A distinct prudential treatment is justified, separating it from unmatched principal trading which carries higher credit and market risk.

Q10: What are the key risks for Firms dealing as agents, and should Basel-style requirements apply?

Agent-model Firms do not carry risk on their own balance sheets. Therefore, applying Basel-derived capital requirements could be disproportionate. A tailored regime focusing on operational and conduct risks would be more appropriate and in line with ADGM’s prudential framework updates for investments Firms. 

If you have any questions about this consultation paper or require any assistance with governance, risk and compliance matters. contact our team today.

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