On 5th December 2019 the Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms (hereinafter referred to as the “IFD”) and the Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms (hereinafter referred to as the “IFR”) have been published in the Official Journal of the European Union.
IFD and IFR (hereinafter collectively referred as the “IFD/IFR regime”) have already entered into force on 25th December 2019. Most of the provisions will have to be transposed into Cyprus law by the 26th June 2021.
Background
In 2015, the European Banking Authority (hereinafter referred to as the “EBA”) outlined several weaknesses in the existing supervisory framework. The major weakness according to the EBA was the classification of investment firms. Classification was characterised as extremely complex, without to adequately reflect the nature, scope and complexity of investment firms activities. As a result, the European Commission bases on the EBA proposals presented a new supervisory framework.
Key matters for consideration on the new prudential framework for investment firms
Investment firms with a consolidated balance sheet total of EUR 15 billion or more (calculated as an average over the previous 12 months) remain within the scope of the Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms (hereinafter referred to as the “CRD”) and the Regulation (EU) 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (hereinafter referred to as the “CRR”). Investment firms with a consolidated balance sheet total of EUR 30 billion or more are subject to ECB supervision. All other investment firms by 26th June, will be subject to the IFD/IFR regime.
New risk parameters are used in the classification of investment firms and the new calculation methodology for capital requirements. K-factors are quantitative indicators to identify risks that an investment firm may pose to clients, market access or liquidity, and to the investment firm itself.
Investment firms will be subject to a new remuneration and governance framework set out in the IFD.
Investment firms will be divided into three categories:
Class 1
Systemic investment firms are ‘bank-like’ investment firms which are (re) classified as “credit institutions” and as a result are subject to the prudential requirements of CRD/CRR. These are investment firms with total assets equal to or exceeding EUR 30 billion. Systemically relevant investment firms will be supervised by the ECB.
Article 8a(3) CRD IV provides that large investment firms authorised under MiFID II that met the conditions for treatment as a Class A investment firm shall, on 24 December 2019, submit an application for re-authorisation as a credit institution under the relevant implementing provisions of national law by 27 December 2020.
Class 1 (minus)
Class 1 minus investment firms have a consolidated balance sheet total of EUR 15 billion or more. Such investment firms are not systemically relevant and therefore not subject to ECB supervision, but will nevertheless remain subject to the CRD/CRR.
Class 2
Class 2 investment firms are non-systemic investment firms. They do not qualify as small and non-interconnected investment firms. The IFD/IFR regime applies to them.
Class 3
Class 3 investment firms are small and non-interconnected investment firms. The IFD/IFR regime applies to them.
Articles 9 – 11 of the IFD introduces the provisions in regards with the initial capital requirements for investment firms.
“The initial capital of an investment firm authorised to provide the investment services or perform the investment activity listed in point (9) of Section A of Annex I to Directive 2014/65/EU, where that investment firm engages in dealing on own account or is permitted to do so, shall be EUR 750 000.”
“The initial capital of an investment firm required pursuant to Article 15 of Directive 2014/65/EU for the authorisation to provide any of the investment services or perform any of the investment activities listed in points (1), (2), (4), (5) and (7) of Section A of Annex I to Directive 2014/65/EU and which is not permitted to hold client money or securities belonging to its clients shall be EUR 75 000.”
“The initial capital of an investment firm required pursuant to Article 15 of Directive 2014/65/EU for investment firms other than those referred to in paragraphs 1, 2 and 4 of this Article shall be EUR 150 000.”
Article 55 of IFD provides that, if the parent company of an investment firm is located outside the EU, the EU Member State in which the firm is domiciled has to verify whether the investment firm is subject to supervision by the authorities of the non-EU country comparable to that of the IFD/IFR on a group level.
The competent authority, as a group supervisor in case in which the parent company were established in the EU, may request the establishment of a European investment holding company or a mixed financial holding company in the EU.
The IFD based on existing CRD IV contains provisions on Pillar 2 requirements (ICAAP, Article 24 IFD; SREP, Articles 36 and 37 IFD; supervisory powers of competent authorities, Article 38 to 45 IFD).
In Articles 25 to 35 IFD (Articles 30, 32 to 34 IFD) remuneration and governance requirements are introduced.
Conclusion
In essence, IFD/IFR primarily introduces a new regime for small and medium-sized investment firms by exempting them from the CRD/CRR regime. This is intended to relieve these types of investment firms of the prudential burden.
