New EU and UK prudential and remuneration regimes for investment firms
Key impacts of the new regimes
Classification to become more risk sensitive
Investment firms will fall into different prudential classes depending on the type of activities they are licensed to perform, and – this is new for many firms - the scale of their activity and size of their assets. Firms will need to make potentially complex assessments as to which class they fall into and will need processes for monitoring whether their classification changes over time, as moving between classes will have a potentially onerous impact on their prudential treatment.
Bank licence for Class 1 firms under EU regime
Investment firms that are licensed to deal on own account and/or provide underwriting/placing on a firm commitment basis, and that have assets above €30bn (individually or on a group basis) will be Class 1 firms under the EU regime. They will need to become licensed as credit institutions (i.e. banks) and will become subject to the liquidity coverage ratio (in some jurisdictions for the first time) as well as other CRR prudential rules such as the leverage ratio. Class 1 firms incorporated in the Euro area will also become subject to the prudential supervision of the European Central Bank which (amongst other things) will require these firms to establish working relationships with their new prudential supervisor. Under the UK IFPR, no investment firms will be required to become re-authorised as credit institutions because any investment firms which are dual-regulated by the FCA and PRA will already be subject to prudential supervision by the PRA.
Significant prudential and remuneration requirements for Class 1 minus/non-SNI firms
Under the EU regime, investment firms which have dealing on own account and/or underwriting/firm placing permissions but do not meet the €30bn asset threshold for Class 1 may still find themselves subject to the same rules as Class 1 firms if they meet certain lower asset thresholds. These ‘Class 1 minus’ firms will not become credit institutions but will, nevertheless, be subject to the more stringent prudential requirements in CRR/CRDIV (and soon CRR2/CRDV), including the leverage ratio, complex liquidity rules and capital buffers. The impact of this could be significant for some firms, particularly if Class 1 minus classification is at the instigation of their local regulator. Class 1 minus firms will also be subject to the stringent remuneration rules in CRDIV (as amended by CRDV), including bonus cap, malus and clawback provisions, deferral of variable pay and non-cash rules. Under the UK IFPR regime, all dual regulated investment firms will be subject to the stricter prudential and remuneration requirements application to UK credit institutions.
Some firms capable of being in Class 3/SNI may still find themselves in Class 2/non-SNI due to volume of activity
Because the new prudential classification does not simply categorise investment firms by reference to their scope of permissions, exempt-CAD or BIPRU firms in the UK (and those in equivalent categories in other EU jurisdictions) may find themselves in Class 2/non-SNI under the new regime. This will be the case for any investment firms exceeding, individually or on a group basis, any one or more of four thresholds set by reference to (i) assets under management (including ongoing non-discretionary advisory arrangements), (ii) client orders handled (or received and transmitted), (iii) annual gross turnover, or (iv) on- and off-balance sheet assets. We explain these thresholds in more detail in the materials below and indicate how in our report and indicate how these may impact portfolio managers and investment advisers. Under the UK IFPR, in addition, clearing firms and firms that act as depositories for investment funds will automatically be regarded as non-SNI firms (irrespective of whether they meet the thresholds).
More stringent requirements on capital for some Class 2/3 firms
IFR/IFD treats the same instruments as eligible capital as those that are eligible under CRR. The proportions of CET1, AT1 and T2 capital are also similar to those in CRR. Firms that are currently subject to less stringent rules on own funds will need to review their capital instruments. The IFR’s rules for deductions from CET1 are less sophisticated than those in CRR, which may adversely impact Class 2 and 3 firms.
Monitoring Class 2/non-SNI firm risks and impact on variable capital: Class 2/non-SNI
Class 2/non-SNI firms will need to put in place governance and processes to monitor how the risks they pose to their clients, the market and to themselves develop over time. This will involve these firms calculating their so-called K-Factors - the method introduced by the new prudential regimes for evaluating the risks posed by a firm – and translating these into variable capital requirements. Some Class 2/non-SNI firms will become subject to variable capital requirements for the first time.
More stringent remuneration requirements for Class 2/non-SNI firms
Class 2/non-SNI firms will be subject to concrete remuneration requirements including a requirement to issue at least 50% of variable pay in non-cash instruments, deferral of a proportion of variable pay for 3 to 5 years, malus and clawback. These firms will also need to publicly disclose certain aspects of their remuneration system and of the awards made. Some Class 2/non-SNI firms will need to establish a remuneration committee.
Investment firm groups and consolidation
The default rule is that investment firms must comply with the key prudential requirements of IFR/IFD on a solo basis. However, a consolidation framework also requires groups of EU investment firms to comply on a consolidated basis. Local regulators may allow small and non-complex groups of investment firms to apply a group capital test instead of consolidation. Similar rules will apply to groups containing UK investment firms under the UK IFPR regime.
Legislation & guidance under the EU regime
Level 1
Investment Firms Regulation (IFR) was published in the Official Journal on 5 December 2019.
- Corrigendum to IFR was published in the Official Journal on 24 January 2020 (Draft RTS/ITS relating to the amended MiFIR third-country equivalence regime are now due in September 2020, rather than 2021).
Investment Firms Directive (IFD) was published in the Official Journal on 5 December 2019.
Level 2
RTS: Thresholds and criteria for firms subject to CRR
| RTS/ITS | Official Journal version | Commission adopted version | EBA consultation process |
| RTS on the criteria for subjecting certain investment firms to the CRR (Article 5(6) of the IFD) (EUR 5bn threshold) | Delegated Regulation (C(2021) 5780) (6 August 2021) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
|
| RTS on information related to thresholds for credit institutions reporting requirements under Article 55(5) IFR (EUR 5 bn) | EBA/CP/2020/07 (4 June 2020) Final draft RTS: EBA/RTS/2021/18 (December 2021) - Expected to apply from June 2022 |
||
| Second RTS on information for effective monitoring of credit institution thresholds under Article 55(5) IFR (EUR 30 bn) | Final draft RTS: EBA/RTS/2021/18 (20 December 2021) | ||
| RTS on the information to be provided for the authorisation of investment firms as credit institutions (Article 8a(6) point (a) of CRD) | Delegated Regulation (C(2022) 3342 (10 June 2022) |
EAA/CP 2020/06 (June 2020)
Final draft RTS: EBA/RTS/2020/11(16 December) |
|
| RTS on the calculation of the (Class 1 – EUR 30bn) threshold referred to in Article 4(1)(1b) CRR (Article 8a(6) point b) of the CRD) | First CP: EBA/CP 2020/06 (June 2020) Second CP: EBA/CP/2021/23 (June 2021) Final draft RTS: EBA/CP/2021/17 (December 2021) - Expected to apply from June 2022 |
RTS: Capital requirements and composition
| RTS/ITS | Official Journal version | Commission adopted version | EBA consultation process |
| RTS to specify the calculation of the fixed overheads requirement and to specify the notion of a material change (Article 13(4) of the IFR) | Commission Delegated Regulation (EU) 2022/1455 (5 September 2022) | Delegated Regulation (C(2002) 2162) (25 April 2022) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
| RTS to specify the methods for measuring the K-factors (Article 15(5) point (a) of the IFR) | Commission Delegated Regulation (EU) 2022/25 (11 January 2022) | Delegated Regulation (C(2021) 6739) (22 September 2021) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
| RTS to specify the notion of segregated accounts (Article 15(5)point (b) of the IFR) | Commission Delegated Regulation (EU) 2022/26 (11 January 2022) | Delegated Regulation (C(2021) 6807) (24 September 2021) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
| RTS to specify adjustments to the K-DTF coefficients (Article 15(5) point (c) of the IFR) | Commission Delegated Regulation (EU 2022/76 (20 January 2022) | Delegated Regulation (C(2021) 6731) (22 September 2021) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
| RTS to specify the calculation of the amount of the total margin for the calculation of K-CMG (Article 23(3) of the IFR) | Commission Delegated Regulation (EU) 2022/244 (22 February 2022) | Delegated Regulation (C(2021) 6776) (24 September 2021) | EBA/CP 2020/06 (June 2020) Final draft RTS: EBA/RTS/2020/11 (16 December 2020) |
| RTS on prudential consolidation of investment firms groups (Article 7(5) of the IFR) | EBA/CP 2020/06 (June 2020) [Final draft outstanding, was due in December 2020] |
ITS: Supervisory reporting and disclosures
| RTS/ITS | Official Journal version | Commission adopted version | EBA consultation |
| ITS on reporting requirements under Article 54(3) and disclosures requirements under Article 49(2) IFR – new reporting framework in relation to the calculation of own funds, levels of minimum capital, concentration risk, liquidity requirements and the level of activity in respect of small and non-interconnected investment firms |
EBA/CP/2020/07 (4 June 2020) Final draft ITS: EBA/ITS/2021/02 (5 March 2021) The Annexes on this page contain the relevant reporting and disclosure templates for Class 2 and 3 firms. |
||
| RTS on disclosure of investment policy under Article 52 IFR | Delegated Regulation (C(2022) 1413 (11 March2022) |
EBA/CP/2021/15 (31 March 2021), together with Annex I (disclosure templates - opens in Excel) and Annex II (instructions)
Final draft RTS: |
RTS: Remuneration and governance
| RTS/ITS | Official Journal version | Commission adopted version | EBA consultation |
| RTS on classes of instruments suitable for variable remuneration in accordance with Article 32(8) IFD | Delegated Regulation (C(2021)5948 (13 August 2021) | EBA/CP/2020/08 (4 June 2020) Final draft RTS: EBA/RTS/2021/01 (21 January 2021) |
|
| RTS on criteria to identify material risk takers in accordance with Article 30(4) IFD | Delegated Regulation (C(2021) 5949 (13 August 2021) | EBA/CP/2020/09 (4 June 2020) Final draft RTS: EBA/RTS/2021/02 (21 January 2021) |
RTS/ITS: Supervisory convergence and SREP
| RTS/ITS | Official Journal version | Commission adopted version | EBA consultation |
| ITS on the supervisory disclosure by competent authorities in accordance with Article 57(4) IFD | Commission Implementing Regulation (EU) 2022/389 of 8 March 2022 | EBA/CP/2021/02 (11 February 2021) Final draft ITS: EBA/ITS/2021/04 (21 June 2021) |
|
| RTS on information exchange between competent authorities of home and host Member States in accordance with Article 13(7) IFD | EBA/CP/2021/04 (24 February 2021) Final draft RTS: EBA/RTS/2021/07) (5 July 2021) |
||
| ITS on information exchange between competent authorities of home and host Member States in accordance with Article 13(8) IFD | EBA/CP/2021/04 (24 February 2021) Final draft ITS: EBA/ITS/2021/07) (5 July 2021) |
||
| RTS on Pillar 2 add-ons under Article 40(6) | EBA/CP/2021/34 (18 November 2021) | ||
| RTS on colleges of supervisors for investment firm groups in accordance with Article 48(8) IFD | EBA/CP/2021/05 (24 February 2021) Final draft RTS: EBA/RTS/2021/06) (5 July 2021) |
RTS/ITS: Liquidity requirements
| RTS/ITS | Official Journal version | Commission adopted version | Timing of decisions | EBA consultation |
| RTS on the specific liquidity measurements requirements under Article 42(6) IFD | EBA/CP/2021/41 consultation paper (Consultation closes 10 March 2022 |
EU Level 3
| Level 3 measure | Final measure | Consultation process |
| Guidelines on sound remuneration policies under Art 34(3) IFD | EBA/CP/2020/26 (17 December 2020) | |
| Guidelines on internal governance under Art 26(4) IFD | EBA/CP/2020/27 (17 December 2020) | |
| Guidelines on common procedures and methodologies for the supervisory review and evaluation (SREP) under IFD | ESMA35-36-2621 (20 July 2022) - Final report on joint EBA and ESMA Guidelines | EBA/CP/2021/35 (18 November 2021) |
| Guidelines on liquidity requirements exemptions for small and non-interconnected investment firms under Art 43(4) IFR | EBA/CP/2021/42 (10 December 2021) |
Background materials
EBA report (December 2015) highlighting weaknesses in existing prudential framework for investment firms.
First EBA opinion (October 2016) containing advice on analysis relating the class 1 firms.
EBA discussion paper (November 2016) on new prudential framework (including K-factors) for class 2 and 3 investment firms.
Second EBA opinion (September 2017) containing advice on the prudential requirements for class 2 and 3 investment firms.
Commission proposals for an Investment firms regulation (IFR) and an Investment firms directive (IFD) (December 2017).
Third EBA opinion (July 2021) on appropriate supervisory and enforcement practices for the process of authorising investment firms as credit institutions under Article 8a.
Legislation, rules & guidance under the UK IFPR regime
- HM Treasury policy statement (23 June 2020) on implementation of the EU prudential regimes (for credit institutions and investment firms)
- FCA discussion paper (DP20/2) on the UK prudential regime for investment firms (June 2020)
- HM Treasury consultation paper (February 2021) on implementation of the IFPR and Basel 3 standards and consultation response (June 2021)
- Financial Services Act 2021
FCA rules and guidance
| Consultation paper | Policy statement |
| First consultation paper (CP20/24), December 2020 – Read our briefing note. | First policy statement (PS21/6), June 2021 |
| Second consultation paper (CP21/7), April 2021 - Read our briefing note. |
Second policy statement (PS21/9), June 2021 – Read our briefing note.
The final rules were published in October 2021 under legal instruments: FCA 2021/38 and FCA 2021/39 |
| Third FCA consultation paper (CP21/26), August 2021 – Read our briefing note. |
Third policy statement (PS21/17), November 2021.
The final rules are in the legal instruments FCA 2021/38 and FCA 2021/39, October 2021 |
Other relevant sources:
Events
IFPR Webinar Series
- Session 1: Overview on the UK IFPR with focus on the second FCA CP (July 2021)
- Session 2: Remuneration & Governance (July 2021)
- Session 3: Consolidation and ICARA & SREP (August 2021)
- Session 4: It’s a wrap – Key points from recent FCA policy statements and the third FCA CP (October 2021)
- Bonus Session 5: ICARA Q&A (November 2021)
FRG Breakfast Briefings
- FRG Breakfast Briefing on Chancellor’s statement and FCA DP20/2 (July 2020)
- FRG Breakfast Briefing on FCA’s second CP on UK IFPR (June 2021)
- FRG Breakfast Briefing which includes an IFPR Update, reflecting on some key points from the FCA’s recent policy statements and third consultation paper (September 2021)
FCA policy statement (PS21/9) sets out near-final remuneration rules under IFPR
July 2021
Key Contacts
Please speak to one of our key contacts
