New prudential regime for investment firms


At the end of December 2017, the European Commission published proposals for a Regulation on the prudential requirements of investment firms and for a Directive on the prudential supervision of investment firms. The Capital Requirements Regulation (CRR), which foresees different Commission's reports on prudential rules, was at the origin of this workstream. The texts have been adopted and published in the Official Journal in December 2019. Implementation by Member States and level 2 work are ongoing. The texts will apply as of 26 June 2021.

BIPAR and its working party have been following this dossier from the start, responding to Commission and EBA consultations, taking part in stakeholder meetings and liaising with the different policymakers. In this respect, BIPAR supported proportionate rules and regretted that the texts remove the possibility for certain (small) firms to substitute capital requirements by PI cover (or having lower capital requirements in case a firm has PI cover).

The Investment Firm Directive (IFD) and Investment Firm Regulation (IFR) were published in the Official Journal of the EU on 5 December 2019 and entered into force 20 days later.

The new rules introduced by this “Investment Firms Prudential Package” aim to create a more tailored prudential regime for investment firms, by reducing the number of categories of investment firms with regard to the prudential regime applicable from 11 to 3 and by moving away from the current system where all investment firms are subject to the same capital, liquidity and risk management rules as the banks: the CRD/CRR regime.

The new categories concern:

  • large firms (“class 1”): they remain under the scope of the existing CRD/CRR prudential rules, and the most systemic ones will be brought under the same supervisory regime as significant credit institutions;
  • other firms (large but "non-systemic") (“class 2”) have to comply with a more limited set of prudential requirements than class 1 firms. They fall in class 2 when they exceed certain thresholds (for e.g. balance sheet, client orders handled, assets under managements, etc);
  • small firms with "non-interconnected" services (“class 3”) that do not exceed the thresholds, will have simpler and more streamlined requirements.

The texts contain rules on the initial capital of investment firms, the supervisory powers and tools for the prudential supervision of investment firms by competent authorities and the publication requirements for competent authorities in the field of prudential supervision of investment firms.

They also deal with remuneration policy and practices and with how providers based in non-EU countries can offer their services to EU companies and clients.

The texts strengthen the equivalence regime that would apply to third country investment firms, setting out in greater detail some of the requirements for giving them access to the single market and granting additional powers to the Commission.

Early June 2020, the European Banking Authority EBA outlined its roadmap for the implementation of the rules and launched 4 public consultations on level 2 prudential, reporting, disclosure and remuneration requirements.

The roadmap outlines the EBA’s work plan for each of the mandates laid down in the IFR/IFD and clarifies the sequencing and rationale behind their prioritisation. EBA will deliver on its IFR/IFD mandates following a four-phased approach running from 2020 to 2025.

BIPAR notes that for the guidelines to specify the criteria when exempting small firms (“Article 12(1) firms”) from the liquidity requirements, there is no legal deadline, but EBA schedules this in its roadmap for phase 4 (between December 2021 and June 2025), and more in particular for June 2022.

In its press release, EBA stresses that it will ensure a: “proportionate implementation of this new framework to take account of the different classes of investments firms”. ESMA will also be actively involved in the development of the level 2 measures.

Finally, to assess the impact of the provisions proposed in the regulatory deliverables, the EBA also launched a data collection exercise on a voluntary basis.

Next steps

The EBA consultations run until 4 September 2020 and BIPAR will look into these, together with its working party on MiFID.

The Regulation will apply from 26 June 2021. By that same day, Member States shall adopt and publish the measures necessary to comply with the Directive and they shall apply those measures from then.

- Published on June 2020 -

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