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    EBA Issues Consultations on Regulatory Framework for Investment Firms

    June 04, 2020

    EBA outlined its roadmap for implementation of the new regulatory framework for investment firms and launched a consultation on the first set of regulatory deliverables on prudential, reporting, disclosures, and remuneration requirements under the Investment Firm Directive and Regulation (IFD and IFR). The comment period for this set of proposals ends on September 04, 2020, as mentioned in the consultation documents. The proposals contain various regulatory and implementing technical standards that factor in the proportionality principle to take into account the specificities of the different classes of investment firms. To assess the impact of the provisions proposed in the regulatory deliverables, EBA also launched a voluntary data collection exercise.

    Consultation on prudential requirements. The Investment Firms Prudential Package consists of IFD and IFR and represents a new prudential framework for investment firms authorized under the Markets in Financial Instruments Directive or MiFID. This consultation paper includes three draft regulatory technical standards on the reclassification of certain investment firms to credit institutions, five draft regulatory technical standards on capital requirements for investment firms at solo level, and one draft regulatory technical standards on the scope and methods of prudential consolidation for investment firms at group level. Currently, the prudential treatment of investment firms is set out in the Capital Requirements Directive and Regulation (CRD and CRR). However, some investment firms are exempt from the full CRD and CRR requirements, depending on which services they provide and their combination or size. This consultation paper explains the policy choices of regulatory requirements for draft regulatory technical standards and outlines their legislative basis. The draft regulatory technical standards will be submitted to EC for endorsement, following which they will be subject to scrutiny by the European Parliament and the Council, before being published in the Official Journal of the European Union. The technical standards will apply from June 2021.

    Consultation on reporting requirements and disclosures. This consultation paper proposes implementing technical standards on supervisory reporting and disclosures ,which will cover all supervisory reporting and disclosures requirements for investment firms under IFR. The draft implementing technical standards cover the levels of capital, concentration risk, liquidity, the level of activities, and disclosure of own funds. The consultation paper also includes draft regulatory technical standards specifying the information that investment firms have to provide to enable the monitoring of the thresholds that determine whether an investment firm has to apply for authorization as credit institution. A set of templates have been developed to assist competent authorities in the verification on the mentioned information. After a consultation period of three months, EBA will deliver the final draft regulatory and implementing technical standards to EC, to be aligned with the application of the IFR requirements. The EBA submission of the final updated standards to EC is expected to take place in December 2020. EBA will also develop the data-point model (DPM), XBRL taxonomy, and validation rules based on the final draft implementing and regulatory technical standards.

    Consultation papers on remuneration requirements. One consultation paper presents the draft regulatory technical standards on the criteria to identify all categories of staff whose professional activities have a material impact on the risk profile of a firm or the assets it manages (risk takers). The identification criteria are a combination of qualitative and appropriate quantitative criteria that aim to ensure that a sufficient level of scrutiny by investment firms and competent authorities is applied when identifying staff whose professional activities have a material impact on the risk profile of an investment firm or the assets it manages. EBA is consulting the draft standards for a period of three months and will subsequently finalize the draft standards and submit them to EC. The second paper is on the draft regulatory technical standards specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable remuneration of risk takers. The link to credit quality as a going concern is established by introducing uniform minimum trigger events for write-down and conversion of Additional Tier 1, Tier 2, and Other Instruments. To ensure that different classes of instruments are appropriate for the purposes of variable remuneration, these instruments should provide appropriate incentives for staff to be prudent and long-term oriented in their risk-taking. EBA aims to submit the draft standards to EC in November 2020 and it is assumed that institutions will have to comply with the standards with regard to the remuneration awarded for the performance year 2021.

    Roadmap for IFD and IFR. The roadmap outlines the work plan of EBA for each of the mandates laid down in the IFR and IFD and clarifies the sequencing and rationale behind their prioritization. EBA mandates cover a broad range of areas related to the prudential treatment of investment firms. These include 18 regulatory technical standards, 3 implementing technical standards, 6 sets of guidelines, 2 reports, the requirement for EBA to maintain a list of capital instruments and a database of administrative sanctions, and requirements for a number of notifications in various areas. During the development, ESMA will also be actively involved in the development of these regulatory products, as most of the EBA mandates are "in consultation" or working in "close collaboration" with ESMA, with only a few mandates to be developed jointly. The roadmap provides an overview of the timeline for its mandates. Overall, the mandates are divided into four phases, mostly in accordance with the legal deadlines. EBA is expecting to deliver by December 2020 the mandates for phase 1, by June 2021 the mandates for phase 2, by December 2021 the mandates for phase 3, and between December 2021 and June 2025 the mandates for phase 4. With this in mind, the EBA mandates have consequently been grouped into the following thematic areas:

    • Thresholds and criteria for investment firms to be subject to the CRR
    • Capital requirements and composition
    • Reporting and disclosures
    • Remuneration and governance
    • Supervisory convergence and the supervisory review process
    • Mandates concerning environmental, social, and governance (ESG) aspects


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    Comment Due Date: September 04, 2020

    Keywords: Europe, EU, Banking, Securities, IFD, IFR, MIFID, Capital Requirements, Reporting, Disclosures, Remuneration, Roadmap, CRR, Investment Firms, Proportionality, ESG, EBA

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