On 20 December 2017, the European Commission proposed a review of the prudential rules for investment firms by amending the Regulation on capital requirements (“CRR”) and the Directive on the prudential supervision of investment firms (“CRD”). Apart from CRD/ CRR, the review concerns also certain provisions of the Markets in Financial Instruments Directive and Regulation (“MiFID2/MiFIR”).
The aim of the revision is to ensure a more proportionate application of prudential requirements for investment firms. It is considered that the existing prudential framework has not fully catered for the business models of investment firms, which do not engage in lending activities and are therefore less exposed to credit and liquidity risks. Under the Commission’s proposals, the majority of EU investment firms, except for the largest, systemic ones, would no longer be subject to these rules.
Based on the recommendations of the European Banking Authority (“EBA”), the Commission proposes prudential requirements differentiated by three classes according to firms’ size, nature and complexity. Only the largest firms, with assets over EUR 30 billion (Class 1) would remain under the prudential regime of the current CRR/CRD and would be treated and supervised as significant credit institutions. This implies that their operations in Member States participating in the Banking Union would be directly supervised by the European Central Bank’s Single Supervisory Mechanism (“SSM”).
For larger firms (Class 2), further defined by specific thresholds, the rules introduce a new way of measuring their risks and provide for lighter governance and remuneration arrangements. The capital requirements for the least risky investment firms (Class 3) will be set in a simpler way, yet flexible enough to cater for various business models. These firms would not be subject to any additional requirements on corporate governance or remuneration. Any firm that is deemed to hold clients’ funds however would not fall under this category.
The regulation entails transition provisions allowing firms to build up the new required amounts of initial capital in a period of 5 years. As regards non-EU firms, the proposal adjusts the equivalence test of the prudential treatment and supervisory convergence of the jurisdiction where they are established. These would be subject to a more detailed and granular assessment by the European Commission.