Published: 20th January 2016

There has long been a recognition within the industry that the prudential requirements of investment firms arising out of the CRD IV framework were first and foremost designed for credit institutions, with investment firms – particularly those that do not hold client money or assets and neither deal on own account nor place/underwrite financial instruments – being subject to various carve-outs. The one that was of most benefit to UK investment firms was, of course, Article 95(2)(third paragraph) of the Capital Requirements Regulation (“CRR”) which allowed certain firms to remain under the (amended) BIPRU regime rather than becoming subject to IFPRU.

Various Articles under the CRR required the European Commission to report to the European Parliament and the Council, by 31 December 2015 the appropriateness of various elements of CRD IV to investment firms.

The EBA has published its report on Investment Firms and Prudential Requirements in response to the European Commission’s call for advice on the suitability of certain aspects of the prudential regime for investment firms. Although the report is badged EBA, it was prepared in full consultation with ESMA.

The first recommendation is for a new categorisation of investment firms which distinguishes between systemic and ‘bank-like’ investment firms (to which the full CRD IV framework will apply) and those which are non-systemic for which there would be a more limited set of prudential requirements. Within the latter there would recognition of small, non-interconnected firms for which a regime based largely on a fixed overheads requirement and simplified reporting should be adequate. The report identifies 11 categories of MiFID investment firms within the CRD IV framework e.g. a category 2 firm would be referred to in the FCA Handbook as an ‘exempt CAD’; a category 8 firm would equate to a ‘(IFPRU) limited activity firm’ etc. – see Table 2 (page 15).

The second recommendation is to develop such a prudential regime and the EBA advises that it “stands ready to complete” the necessary data collection in order to calibrate this new regime and produce a second, more in-depth report.

The report also includes a third recommendation, although this is directed at commodity trading firms that currently benefit from an exemption to the large exposure provisions (Article 493) and own funds provisions (Article 498). These exemptions apply until 31 December 2017; it is recommended that this be extended until 31 December 2020 to allow for the development of the proposed new prudential regime.

Section 2.4 explores both the differing interpretation of MiFID services across the EU and what is described as the inadequacy of risk sensitivity in the current framework. One well known example of this is the activity of placing without a firm commitment basis. Despite the limited prudential risk involved in this activity (the report refers to the activity as a ‘sales’ function), such a firm is still subject to the full €730k initial capital requirement – the view expressed in the paper is that there are only minor differences between this activity and that of transmitting orders which commands a much lower initial capital requirement.

The Annex to the report includes various data relating to the distribution of services throughout the EU. It’s probably not a surprise to learn that the majority of MiFID investment firms (51%) reside in the UK. The numbers include AIFMs/UCITS undertaking MiFID business, an area of activity where France leads the way.

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