Investment firms: European Council agrees position on new regulatory and supervision framework

The European Council is making the rules applicable to investment firms more proportionate and more appropriate to the level of risk which they take.

EU ambassadors endorsed January 8 the Council’s position on a package of measures, composed of a regulation and a directive, setting out a new regulatory framework for investment firms. The texts define prudential requirements and supervisory arrangements that are adapted to investment firms’ risk profile and business model while ensuring financial stability.

Investment purposes

Investment companies are financial institutions whose main activity is to hold and manage securities and derivatives for investment purposes on behalf of their clients. They offer a variety of funds and investment services, such as advice, portfolio management or trading on financial markets. Unlike banks, they do not accept deposits and do not provide loans on a significant scale.

There are about 6000 investment firms in the European Economic Area. Most of them are rather small, but a limited number of investment firms hold a significant proportion of all assets and provide a very broad range of services.

Until now, all investment firms have been subject to the same capital, liquidity and risk management rules as banks. The capital requirements regulation and directive (CRR/CRD4) are based on international standards intended for banks. They do not therefore fully take into account the specificities of investment firms.

On the basis of the text agreed today, investment firms would be subject to the same key measures, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they would need to apply would be differentiated according to their size, nature and complexity.

Largest firms (class 1)

The largest firms (“class 1”) would be subject to the full banking prudential regime and would be supervised as credit institutions:

Investment firms that provides “bank-like” services, such as dealing on own account or underwriting financial instruments, and whose consolidated assets exceed EUR 15 billion would automatically be subject to CRR/CRD4;

Investment firms engaged in “bank-like” activities with consolidated assets between EUR 5 and 15 billion could be requested to apply CRR/CRD4 by their supervisory authority, in particular if the firm’s size or activities would involve risks to financial stability.

Smaller firms that are not considered systemic would enjoy a new bespoke regime with dedicated prudential requirements. These would, in general, be different from those applicable to banks, but competent authorities could allow to continue applying banking requirements to certain firms, on a case by case basis, to avoid disrupting their business models. The text also provides for a 5-year transitional period to give companies enough time to adapt to the new regime.

The Council text further strengthens the equivalence regime, as set out in MIFID2/MIFIR, that would apply to third country investment firms. It sets out in greater detail some of the requirements for giving them access to the single market and grants additional powers to the Commission.

In particular, in case the activities performed by third country firms are likely to be of systemic importance, it allows the Commission to apply some specific operational conditions to an equivalence decision to ensure that ESMA and national competent authorities have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.

Next steps

The Parliament voted on its position on this file 24 September 2018. Negotiations between the Council and the Parliament are therefore ready to start.