On 3 June 2020, the European Banking Authority (EBA) issued a roadmap outlining its work plan in relation to its appointed mandates for the implementation of the new regulatory framework resulting from the EU Investment Firms Directive (IFD) and Regulation (IFR).
The IFD and IFR entered into force on 26 December 2019, but will be applicable 18 months from that date.
In this article, Elina Mantrali, associate at global offshore law firm Harneys, outlines what the roadmap will mean for investment firms.
The IFD and IFR represent a new prudential framework for investment firms authorised under the MiFID regimes.
It recognises the nuances and particular needs and risks to which investment firms are subject.
Up until this new package of legislation, all investment firms have been subject to the same capital, liquidity and risk management rules as banks.
In particular, European capital requirements regulation (the EU Capital Requirements Regulation (CRR) and the EU Capital Requirements Directive IV (CRD IV) are based on international standards intended for banks.
This did not fully take into account the specificities of investment firms.
Under the IFD and IFR, investment firms will be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, however the set of requirements they would need to apply would be differentiated according to their size, nature and complexity.
Larger firms would be subject to the full banking prudential regime and would be supervised as credit institutions.
Larger firms would include investment firms which:
- provide “bank-like” services, such as dealing on own account or underwriting financial instruments, and whose consolidated assets exceed €15bn would automatically be subject to CRR / CRD IV;
- engage in “bank-like” activities with consolidated assets between €5bn and €15bn could be requested to apply CRR / CRD IV by their supervisory authority, in particular if the firm’s size or activities would involve risks to financial stability.
Smaller firms which are not considered systemic will be able to rely on a bespoke regime with dedicated prudential requirements.
In respect of certain capital requirements, the IFR will become applicable within an extended period of five years, to allow for a smooth transition.
What does the Roadmap cover?
A significant number of mandates in relation to the implementation of the IFD and IFR have been given to the EBA, often in consultation with the European Securities and Markets Authority (ESMA).
Following the adoption of the IFD and IFR into law, the EBA now moves into the implementation phase for these pieces of legislation.
To this end, the EBA released a roadmap to outline its intentions, upcoming workplan and prioritisation strategy in relation to its appointed mandates.
Principles underpinning implementation
The EBA has been heavily involved in the design of the new regime for investment firms as set out in the IFD and IFR, which recognises the need for a separate regime addressing the particularities in the business of investment firms.
On this basis, the EBA sets out four key principles in the Roadmap based on which it has developed the framework for discharging its mandates and which will inform its implementation programme, as follows:
- Ensuring proportionality with regard to the regulatory requirements aimed at investment firms of different size and complexity is a key aspect of the new regime, mostly in accordance with the legal deadlines.
- It is recognised that investment firms face specific risks compared with credit institutions within the scope of the CRR and CRD IV, but it is also important to stress that the regimes applicable to credit institutions and investment firms are interlinked.
- The IFR/IFD recognises the specific risk structure and drivers of investment firms and investment firm groups. The EBA will be particularly mindful of ensuring that the main risks of investment firms are well covered. For many, especially those with no trading activities, the operational risk that can be harmful to clients will be important to manage.
- The development of the new investment firm regime should be accompanied by a further strengthening of a harmonised regulatory environment, in order to adopt a European level across the types and categories of investment firms.
The EBA’s mandates
In particular, the EBA’s mandates cover a broad range of areas relating to the prudential treatment of investment firms, thematically categorised as follows:
- Thresholds and criteria for investment firms to be subject to the CRR;
- Capital requirements and composition;
- Reporting and disclosure;
- Remuneration and governance;
- Supervisory convergence and the supervisory review process; and
- Mandates concerning environmental, social and governance (ESG) factors and risks.
Through these mandates, the EBA will contribute to the implementation of a regulatory framework that is adjusted to the size and nature of investment firms.
The Roadmap on investment firms can be found here.
This article was written for Expert Investor by Elina Mantrali, associate at global offshore law firm Harneys.