Proposed New Regulatory Framework For Investment Firms

Author:Mr Andrew Bates and Donnacha O'Connor
Profession:Dillon Eustace
 
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On 7 January 2019, it was announced via a press release by the Council of the European Union (the "Council") that it's Permanent Representatives Committee ("COREPER") had endorsed its position on a package of measures, composed of the proposed Investment Firms Regulation ("IFR") and the proposed Investment Firms Directive ("IFD"), which will set out a new regulatory framework for investment firms designed to make "the rules applicable to investment firms more proportionate and more appropriate to the level of risk which they take".

The IFR and the IFD will, for most existing investment firms, replace the existing prudential requirements for investment firms set out in the Capital Requirements Regulation (575/2013) ("CRR") and the CRD IV Directive (2013/36/EU) ("CRD IV Directive") and will also amend the Markets in Financial Instruments Directive (2014/65/EU) ("MiFID II Directive") and the Markets in Financial Instruments Regulation (600/2014) ("MiFIR").

The Council has published notes setting out the Council Presidency's compromise proposals on the IFR and the IFD, which are set out below:

A note (5021/19) setting out the Presidency compromise proposal on the IFR.

A note (5022/19) setting out the Presidency compromise proposal on the IFD.

Bespoke Requirements for Investment Firms

Investment firms and credit institutions in the European Economic Area ("EEA") are currently subject to similar prudential rules set out in the CRD IV Directive and the CRR which include capital, liquidity and risk management requirements.

The European Commission, which has proposed the new framework, holds the view that the provisions contained in the CRD IV Directive and CRR do not take sufficient account of the business models and risks of investment firms. This point is reiterated by the Council which has indicated that the risks faced and posed by most investment firms are substantially different to the risks faced and posed by credit institutions and that such differences should be clearly reflected in the prudential framework.

Under the proposed new framework, many investment firms would no longer be subject to rules that were originally designed for credit institutions. However, the largest and most systemic investment firms would remain subject to the existing prudential framework under the CRD IV Directive and the CRR.

Three Classes of Investment Firm

Under the proposed new framework, investment firms will be divided into three classes.

Class 1 - covers...

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