Review of the EU prudential rules for investment firms: The practical implications for fund and asset management firms

Agathi Pafili

Journal of Financial Compliance, 2019, vol. 2, issue 4, 362-370

Abstract: In December 2017, the European Commission proposed a review of the prudential rules for investment firms, with the aim of introducing more proportionate, risk-sensitive rules and further distinction between those firms that need to continue to be within the scope of the Capital Requirement Directive/Capital Requirement Regulation (CRD/CRR) regime and those that merit a more specific, tailor-made regime. This paper presents an in-depth analysis of the changes that are introduced by the proposals, one which sheds some light on the practical implications they may have for fund and asset management firms. Under the new prudential regime, investment firms will fit into one of three categories, the first one containing those institutions that will continue to be regulated according to the CRD and CRR, and the second and third tier containing investment firms of differing size and complexity. Those in the second and third tier will be brought within the proposed new regime, namely the Investment Firm Directive (IRD) and the Investment Firm Regulation (IRR). The European Fund and Asset Management Association (EFAMA) believes a new regime with a simpler set of requirements for ratio of capital, liquidity and other indicators should be more tailored to different firms’ risk profile and business. In that way, the right balance can be achieved between protecting investors’ interests and the oversight function of national competent authorities and the capacity of investment firms to provide services to capital markets and customers. Although EFAMA welcomed the Commission’s proposal, the European association suggests further improvements that could help achieve this balance. Numerous sections of the proposal still mirror requirements intended for credit institutions, which should not be carried over into the new regime. The paper also touches on specific points for improvements from the perspectives of the limited MiFID (Markets in Financial Instruments Directive)-licensed asset management companies, including firm categorisation, the treatment of ‘limited authorisation firms’, group consolidation, ‘K-factor’ formula approach, liquidity requirements and remuneration rules, reporting and supervisory powers.

Keywords: prudential rules; MiFID; investment firms; Investment Firm Directive; (IRD); Investment Firm Regulation; (IRR) (search for similar items in EconPapers)
JEL-codes: E5 G2 K2 (search for similar items in EconPapers)
Date: 2019
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