Bank of England raises concerns over FCA plans to cut capital requirements for specialist trading firms, escalating a regulator-versus-regulator dispute over market stability
The Bank of England (BoE) has raised concerns about proposals by the Financial Conduct Authority (FCA) to reduce the capital requirements applicable to specialist trading firms — including named firms such as Citadel Securities, Jane Street, and Hudson River Trading — that operate as market makers and liquidity providers in UK financial markets. Capital requirements (the minimum amount of financial resources a firm must hold as a buffer against losses) for specialist trading firms are currently set under the Investment Firms Prudential Regime (IFPR), which came into force in the UK in January 2022 and was designed to calibrate prudential rules more precisely to the risks posed by non-bank investment firms, rather than applying bank-style regulation. The FCA's proposed changes would ease those requirements for firms in this category. The BoE's intervention reflects a fundamental tension in the UK's post-Brexit regulatory architecture: the FCA is pursuing a competitiveness agenda — bringing more liquidity and trading activity to UK markets — while the BoE's Prudential Regulation Authority (PRA) and Financial Policy Committee are focused on systemic stability. The concern appears to be that reducing capital cushions for firms that provide critical market liquidity could create vulnerability during periods of market stress. The FT, citing people familiar with the matter, first reported the BoE's position.
Why this matters
This dispute between the BoE and the FCA is commercially significant because it directly affects the regulatory cost of doing business for the specialist trading firms — known as principal trading firms or PTFs — that provide a large share of liquidity in UK equity, bond, and derivatives markets. If the FCA proceeds over BoE objections, it would signal a meaningful shift in the UK's post-Brexit regulatory posture toward competitiveness over systemic caution. For law firms advising these trading firms, the uncertainty creates an immediate demand for regulatory capital advice, compliance gap analysis, and potentially lobbying and consultation-response work. The episode also illustrates the structural tension in the UK's 'twin peaks' regulatory model, where the FCA and PRA can reach conflicting conclusions on the same regulated population.
On the Ground
A trainee in the financial regulation team would assist by drafting or proofreading compliance gap analysis memos comparing the current IFPR capital requirements against the FCA's proposed revised thresholds, and preparing regulatory notification drafts for affected trading firm clients. They might also assist in coordinating responses to the FCA's consultation on the proposed changes.
Interview prep
Soundbite
When two UK regulators publicly disagree on capital rules, trading firms face compliance uncertainty — and law firms see a spike in regulatory advisory mandates.
Question you might get
“How does the UK's 'twin peaks' regulatory model — with the FCA and PRA having separate but overlapping mandates — create tension when the two regulators disagree on prudential rules for investment firms?”
Full answer
The Bank of England has publicly flagged concerns about FCA proposals to cut capital requirements for specialist trading firms like Citadel Securities and Jane Street, in what amounts to a rare regulator-versus-regulator dispute. This matters because capital requirements are the fundamental cost of operating as a market maker — reducing them lowers barriers to entry and increases competitiveness, but the BoE's concern is that thinner capital buffers could amplify market stress during a liquidity crunch. The wider picture is the UK's post-Brexit tension between a competitiveness mandate (embedded in the FCA's secondary statutory objective) and systemic stability goals pursued by the BoE. Law firms advising trading firms should expect heightened demand for regulatory capital and compliance advisory work as this debate plays out through consultation and potential rule revision.
My notes
saved