Shearman & Sterling LLP | Financial Regulatory Developments Focus | EU Proposals for an Amended Prudential Regime for Investment Firms
Financial Regulatory Developments Focus
  • EU Proposals for an Amended Prudential Regime for Investment Firms
    The European Commission has published legislative proposals to amend the EU framework on the prudential supervision of investment firms. The proposals follow the European Banking Authority's Opinion on revising the regime published in September 2017. The aim of the proposals is to tailor the prudential requirements and supervisory arrangements to the risk profile and business models of investment firms.

    The Commission's proposals maintain the EBA's recommendation for three different categories of investment firm:

    (i) Class 1 firms: systemic "bank-like" firms which would remain within the scope of the EU Capital Requirements Directive and Regulation but would become subject to the same treatment as credit institutions under this legislation. Firms which will fall within this class will be those which deal on own account or which carry out underwriting or placing on a firm commitment basis or which have a total value of assets over EUR30 billion. Class 1 firms will be brought within the definition of a credit institution in the CRR and will need to obtain authorization as credit institutions. Most of these firms are currently located in the UK. The Commission is also proposing that the equivalence assessment for third countries which host large systemically important investment firms will need to be very detailed and granular.

    (ii) Class 2 firms: a middle category for a majority of firms that are not systemic but do pose risks which would be subject to a tailored prudential regime which includes governance arrangements and remuneration rules in addition to those provided for in the Markets in Financial Instruments Directive and Regulation. The remuneration rules will allow firms to choose between the types of instruments used to pay out part of the variable remuneration and the deferral and pay-out instrument requirements will not apply to firms with less than EUR100 million in total assets.

    (iii) Class 3 firms: small firms which are not interconnected and which only provide limited services would only be subject to a very simple regime. These firms will have a minimum capital requirement that matches the level of initial capital required for authorization or a quarter of their fixed costs for the previous year, whichever is higher. These firms will be subject to the remuneration and governance rules applicable to all investment firms under MiFID II but not to any additional requirements.

    The proposals will be considered by the European Parliament and the Council of the European Union as part of the EU legislative process. It is intended that the new regime would start to apply 18 months after the proposals are final and formally adopted. Feedback on the proposals is invited for submission by February 23, 2018.

    View the legislative proposals and related information.