Global Regulation, Local Solutions Emerging Themes 2020 - Page 23



SUPERVISION
EMERGING THEMES 2020
CONCLUSION
SCOPE
OVERVIEW
POTENTIAL IMPACT
EU investment firms are currently subject to
the prudential requirements under the Capital
Requirements Directive and the Capital
Requirements Regulation (“CRD IV”/”CRR”1).
The IFD/IFR will change that.
The IFD/IFR will apply in their entirety to class
2 firms. Class 3 firms will be subject to lighter
requirements within the new framework.
Class 1 firms will largely remain under the
CRD IV/CRR framework and are thus not
further discussed here.
The IFD/IFR essentially categorise investment
firms according to their systemic risk, whereas
CRD IV/CRR differentiate investment firms by
the particular type of MiFID II activities they
undertake. Consequently, it seems futile to
map the new classes to the current categories;
the European Banking Authority has identified
11 different types of investment firms under
the current framework. Subject to the local
implementation of the IFD/IFR, each firm will
have to assess which new class it would fall into.
The IFD/IFR categorise investment firms into
three classes:
X
X
X
Class 1 covers firms that conduct underwriting
business and proprietary trading and have
assets exceeding €15 billion. However, those
with assets exceeding €30 billion will be reclassified as “credit institutions” (i.e. no longer
“investment firms”)
Class 3 firms are those that meet specified
criteria (e.g. balance sheet below €100 million,
gross revenue below €30 million and assets
under management below €1.2 billion)
All other investment firms are class 2 firms.
NEW CATEGORISATION
€30bn
total
assets
REGULATORY CAPITAL
The IFD/IFR increase the current minimal capital
requirements by €20,000/€25,000. However,
since the ongoing capital that most investment
firms are required to maintain tends to exceed
such capital floors, the impact of such increases
may largely be inconsequential.
Broadly, class 2 firms need to calculate their
regulatory capital by reference to specified
“K-factors” which are designed to reflect the
risk profiles of investment firms. The regulatory
capital for class 3 firms is essentially 25% of their
annual fixed overheads, similar to the current
requirement for relevant firms.
During a five-year transition period, investment
firms can cap their capital under the new rules
to twice the amount calculated under the
current CRD IV/CRR rules.
RECATEGORISED
CREDIT
INSTITUTIONS
REMUNERATION REGIME
CLASS 1
CRD IV/CRR
FRAMEWORK
€15bn
total
assets
CLASS 2
€1.2bn*
IFD/IFR
FRAMEWORK
CLASS 3
While most of the new remuneration
requirements are similar to the current CRD IV/
CRR rules, they are generally less stringent. For
example, the IFD/IFR do not contain the 200%
bonus cap under CRD IV/CRR. The IFD/IFR
remuneration disclosures are also less extensive.
Class 3 firms only need to comply with the much
lighter MiFID II remuneration requirements.
In the UK, there are three broad groups of
investment firms: IFPRU firms, BIPRU firms and
IFPRU firms that are dual regulated by the
FCA and the PRA; there are sub-categories
under each.
FCA/PRA dual-regulated IFPRU firms may likely
fall within class 1 (some may be re-categorised
as credit institutions). Certain larger IFPRU firms
that are solo-regulated by the FCA (i.e. not
large enough to be dual-regulated) may also
fall within class 1. These firms should see minimal
changes as they would essentially remain within
the current CRD IV/CRR regime.
While the IFD/IFR aim to streamline
and harmonise the current rules
which are considered unduly
complex for investment firms, they
provide for various discretions to
EU member states. The impact will
depend on the local implementation
of not only the new IFD/IFR but also
the current CRD IV/CRR.
The implementation timeline may
be challenging, particularly given
that various technical standards
required by IFD/IFR may not be
finalised until the second half of
2020. It is therefore advisable that
investment firms start preparation
sooner rather than later, particularly
for those that will fall into classes
1 or 2.
BIPRU firms and some (smaller) IFPRU firms may
fall within either class 2 or class 3; most BIPRU
firms may fall within class 3. The impact may
vary, given the complexity of the current rules as
applicable to different sub-categories of BIPRU
firms; generally, the new requirements should be
less burdensome (which is one of the objectives
of the IFD/IFR).
The situation may well be different in other
member states.
The various technical standards
required by IFD/IFR may not be
finalised until the second half
of 2020
KAI ZHANG
Associate Director,
London
* Assets under management and other criteria.
1
CRD IV/CRR have been amended by CRD V/CRR II. The changes
(mainly for credit institutions) are not discussed here.
22/
/23

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