New prudential regime for investment firms

On 20 December 2017, the European Commission published a proposal for a Regulation on the prudential requirements of investment firms and a proposal for a Directive on the prudential supervision of investment firms. The Capital Requirements Regulation (CRR), which foresees different Commission's reports on prudential rules, is at the origin of this workstream.

Over the past two years, the Commission and the European Banking Authority (EBA), in cooperation with the European Securities and Markets Authority (ESMA), have been looking at such a review of the prudential regime for investment firms.BIPAR has been following this work and, amongst others, provided a response to EBA discussion paper in February 2017, to the Commission’s inception impact assessment in April 2017 and attended various stakeholder meetings organised by the Commission and by EBA. BIPAR also responded to the “Better Regulation” consultation that immediately followed the publication of the Commission's proposals.

BIPAR views

The Commission explains that under the new legislative proposals, the vast majority of investment firms in the EU would no longer be subject to rules that were originally designed for banks.With the new proposals, the Commission reduces the number of categories of investment firms with regard to the prudential regime applicable from 11 to 3:

  • systemic and "bank-like" firms (“class 1”): full CRD/CRR requirements should be applied,
  • other firms (large but "non-systemic") (“class 2”) with a more limited set of prudential requirements,
  • small firms with "non-interconnected" services (“class 3”).

BIPAR is in favour of proportionate rules. Some of BIPAR’s key issues with the Commission's proposals are:

  • For many of the micro to small firms which will now fall under the scope of the new rules, these new rules will mean a tripling of capital requirements.
  • For many of the micro to small firms that only provide “know-how services” and do not hold client money, capital requirements are not proportionate as the real risk that they represent is very limited.
  • The proposals remove the possibility for certain (small) firms of substituting capital requirements by PI cover (or having lower capital requirements in case a firm has PI cover). This alternative option of insurance instead of (part of the) capital requirements should be introduced in the proposal for “category 3 firms” under certain conditions.
  • In order to avoid abrupt - non-realistic - transitions between the different categories (“cliff-edge scenarios”), it is necessary to build in “smoothing” margins of flexibility, both in terms of timing and of thresholds.
  • The description of the threshold “holding client money” should not include a reference to “controlling client money” in order to avoid that small firms carrying out portfolio management would be considered as “holding” client money.

The proposals are currently under discussion for amendment and adoption by the European Parliament and the Council of the EU. BIPAR and its dedicated working party have had various contacts with the Council Presidency, the Parliament and with the officials of the European Commission.


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