Investment Firms Update: New prudential regime applies to MiFID investment firms across the EU
From 26 June 2021, a new prudential regime applies to Markets in Financial Instruments Directive (MiFID) investment firms across the EU. These changes have been introduced by the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR).
Keeping you informed
Our January 2021 briefing (Investment Firms: New prudential rules will apply from 26 June 2021) summarised the new classification regime for MiFID investment firms, and outlined the key requirements of IFD/IFR regarding capital, remuneration, disclosures and reporting.
We also hosted a webinar (‘IFD/IFR – 2 months to go….’) on 29 April 2021 – you can access the recording here.
Our May 2021 briefing (Investment Firms Update: Variable Remuneration under IFD/IFR for ‘Class 2’ firms) examined how the Department of Finance addressed the discretions set out in the IFD regarding variable remuneration.
This briefing summarises recent transposition-specific developments, in particular:
- the Central Bank’s Feedback Statement on its recent consultation; and
- the Central Bank’s clarification that alternative investment fund managers (AIFMs) and UCITS management companies with MiFID top-up permissions should, for the time being, continue to comply with the current prudential regime set out in their authorisation conditions, and are not currently subject to any of the requirements of the IFD/IFR regime.
The IFD deals with supervisory matters, and the IFR deals with prudential requirements. The IFR is a directly-effective regulation and has applied in Ireland from 26 June 2021. Regulations are needed to transpose the IFD into Irish law and, while these regulations have not yet been published, the Minister for Finance is expected to sign them into law shortly. The Department of Finance confirmed in its recent Feedback Statement that, as part of those Regulations, it will be designating the Central Bank as competent authority for IFD/IFR purposes in Ireland.
As ‘Class 1’ firms now need to apply for a banking licence from the ECB (see further below) and as some technical standards are yet to be finalised by the European Commission and the European Banking Authority, the Commission has encouraged competent authorities to exercise a degree of flexibility, while completing any new authorisation processes “without delay”.
Classification and Remuneration Reminder
By way of reminder, the IFD/IFR classification regime is as follows:
|‘Class 1’||Systemically important firms that are authorised to deal on own account and/or underwrite or place financial instruments on a firm commitment basis and whose total assets exceed €30 billion (individually or on a group basis) are ‘Class 1’ firms. These ‘Class 1’ firms are subject to ECB supervision, and the ECB confirmed that those firms must now apply for a banking licence. Those firms will remain subject to the CRR2/CRDV regime as it applied to them on 25 June 2021 until such time as they are issued with a banking licence. From then on, the revised version of that regime for ‘Class 1’ firms will apply.
‘Class 1’ firms are subject to the CRR2/CRDV remuneration regime.
|‘Class 1 minus’||‘Class 1 minus’ firms are firms that are authorised to deal on own account and/or underwrite or place financial instruments on a firm commitment basis and whose total value of consolidated assets exceeds €15 billion but does not meet the €30 billion ‘Class 1’ threshold.
‘Class 1 minus’ firms are subject to the CRR2/CRDV remuneration regime.
|‘Class 2’||Firms that are not systemically important but that hold a particular level of own funds are classified as ‘Class 2’.
‘Class 2’ firms are subject to the new IFR/IFD remuneration regime. These new remuneration rules apply to all staff whose professional activities have a material impact on the firm’s risk profile: senior management, risk takers, control functions, and employees receiving overall remuneration equal to at least the lowest remuneration of any risk taker or member of senior management.
|‘Class 3’||Small and non-interconnected investment firms that do not meet certain thresholds and do not hold client assets are classified as ‘Class 3’.
‘Class 3’ firms are not subject to the new IFR/IFD remuneration regime and are instead subject to the high-level MiFID requirements
AIFMs and UCITS Management Companies with MiFID top-up permissions
The Central Bank has confirmed that AIFMs and UCITS management companies with MiFID top-up permissions should, for the time being at least, continue to comply with the current prudential regime set out in their authorisation conditions, and not with any of the new IFD/IFR requirements. It remains to be seen if this position will change in due course.
Central Bank Discretions
The Central Bank consulted on competent authority discretions in January 2021, in anticipation of being designated as the Irish competent authority. It has now confirmed that it will exercise those discretions in the manner set out in its consultation paper, including:
- maintaining the discretion to, on a case-by-case basis, designate certain investment firms as ‘Class 1 minus’ where the relevant firm carries out ‘bank-like’ activities on such a scale that its failure or distress could lead to systemic risk, or where the firm is a clearing member that offers its clearing services to other financial sector entities which are not clearing members themselves, or where the Central Bank considers that classification to be justified in light of the size, nature, scale and complexity of the activities of the investment firm concerned;
- preventing investment firms from having a qualifying holding which exceeds 15% of own funds or total qualifying holdings which exceed 60% of own funds, in each case in undertakings that are not financial sector entities;
- allowing ‘Class 2’ firms (which would otherwise be subject to the IFR/IFD) that are supervised on a consolidated basis with a credit institution to continue to apply the CRR prudential requirements;
- only exempting ‘Class 3’ firms on an exceptional basis from the requirement to hold one-third of their fixed overhead requirement in liquid form; and
- requiring all ‘Class 3’ firms to perform an assessment of internal capital and liquid assets.
- the Central Bank will shortly publish a notice setting out how it will exercise the powers referred to in the Department of Finance’s recent Feedback Statement (covered in our briefing: Investment Firms Update: Variable Remuneration under IFD/IFR for ‘Class 2’ firms);
- the Central Bank will amend its Investment Firms Regulations in the manner proposed in its consultation to ensure that reporting requirements are aligned – while those amended Regulations have not yet been published, the Central Bank expects investment firms to start applying the revised reporting requirements appended to its Feedback Statement from 26 June 2021 onwards; and
- the Central Bank plans to consult on some of the changes arising from the CRR2/CRDV regime later in 2021 – this will impact both ‘Class 1’and ‘Class 1 minus’ firms.
We will keep you updated on key developments, in particular the expected publication of the Irish transposing Regulations, and further regulatory notices from the Central Bank.
If you require advice or assistance in relation to the application or impact of IFD/IFR on your business, please contact our Financial Regulation Group.