On December 20, 2017, the European Commission (EC) published draft legislative proposals for a revised prudential framework for EU investment firms.1 The proposals are the outcome of a review mandated by the current Capital Requirements Regulation (CRR) and the Fourth Capital Requirements Directive (CRD IV), which, in conjunction with MiFID II,2 constitute the current prudential framework for investment firms as well as credit institutions (banks).

Core Features of the Proposal

The EC proposals rely heavily on an Opinion published by the European Banking Authority (EBA)3 in September 2017, and take the form of a new Investment Firm Regulation (IFR) and accompanying Investment Firm Directive (IFD).

The IFR/IFD proposals aim to create a common prudential framework that is more sensitive to the particular risks faced by investment firms, and are intended to apply on a consolidated group basis. The proposed requirements are calibrated depending on the size and nature of the firm and, if adopted, will result in systemically important investment firms needing to be reauthorised as credit institutions under CFR/CRD IV, while other investment firms will be subject to tailored capital requirements, including some based on new “K-factors.”

In addition, the proposals seek to revise the existing remuneration framework for investment firms, which may result in more firms being captured, and to a greater extent, than under the existing remuneration rules.

Finally, the proposals introduce an amendment to MiFID II to ensure that third country “equivalence” decisions will have to take into account the new IFR/IFD prudential framework.