New capital rules for investment firms

On the 20^th of December last, the European Commission published two legislative proposals. These legislative proposals, if adopted, would apply a new prudential regime for, so-called, “non-systemic investment firms”. This is a significant departure from the current regime which is set out in the Capital Requirements Regulation and Capital Requirements Directive, known as CRD IV. In the European Union this regime applies both to credit institutions and a wide range of investment firms.

The new legislative proposals are controversial. They are the result of a process that commenced in December 2014. They are based on 62 recommendations made to the European Commission by the European Banking Authority and published in September of last year.

The proposal for a Regulation as part of the investment firm review, or the “IFR Regulation proposal”, sets out own funds requirements for non-systemic investment firms. Indeed, it applies to all investment firms and applies a minimum own funds requirement. In this regard it is a departure from current practice, particularly for smaller investment firms. The IFR Regulation proposal includes some other controversial provisions, not least those regarding “risk to firm” and “risk to market”. The latter, predicated on provisions in the Capital Requirements Regulation that are also currently under review.

The proposal for  a directive on the investment firm review, or the “IFR Directive proposal”, includes a number of provisions we will be familiar with from the CRD IV legislation. It sets out Pillar II requirements for competent authorities supervising non-systemic investment firms and interestingly it proposes some substantial changes to that prudential supervision including around variable remuneration, an element that is likely to be welcomed by investment firms.

This legislation is now subject to review by the European Union’s Council of Ministers and the European Parliament. Both of these co-legislators will be  proposing amendments to this legislation which we expect is unlikely to be adopted until the middle of 2019.

To learn more about this legislation and what it means for your firm contact us at Norton Rose Fulbright.