EU investment firms' regulation & directive

Investment Firms are in theory subject to banking prudential regime (mainly governed by CRD IV and CRR) in relation to capital requirements, which was primarily designed for credit institutions. As investment firms do not have the same risk profiles and exposure as banks, the “one size fits all” approach does not fit many business models.

IFD/IFR aims to introduce a more proportionate and tailored regime for investment firms, without compromising financial stability.

In December 2017, the European Commission adopted a proposal for an Investment Firms Directive “IFD” (EU 2019/2034) and an Investment Firms Regulation “IFR” (EU 2019/2033) to amend the current EU prudential rules for investment firms.

These proposals amend the existing prudential framework as contained in CRD IV/CRR (which govern capital requirements to makesure firms have sufficient resources to face the risks they undertake) and in MiFID II/ MiFIR (which govern firms’ authorisationand conduct) and create specific requirements for so-called Class 2 investment firms.

The EBA has been tasked with establishing Regulatory Technical Standards, Guidelines and Reports to assist IFR/IFD. These have been grouped as per below and will be published in over four phases:

• thresholds and criteria for IF’s subject to the CRR (Phase 1)
• capital requirements and composition (Phase 1 & 2)
• Reporting and Disclosure (Phase 1 & 2)
• Remuneration and Governance (Phase 1, 2 & 3)
• Supervisory convergence and supervisory review and Pillar 2 (Phase 2 & 4)
• ESG Exposure (Phase 3 & 4)

A draft RTS on Own Funds and eligible liabilities was put out for consultation on 29 May 2020

IFD and IFR entered into force in December 2019 and IFR will be applicable from June 26, 2021with Member States having up until then to put in place measures to address the IFD.

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