Capital requirements regulation (CRR) and directive (CRD), which are the European iterations of the Basel committee recommendations (Basel III) mainly concern large credit institutions and Banks but do not impact all investment firms with the same magnitude, some are even exempted.
With IFR / IFD (Investment Firms Regulation EU 2019/2033 and Investment Firms Directive EU 2019/2034) the European Commission and the Council wish to widen the scope of institutions impacted by Basel related prudential rules, by including all MIFID investment firms. This means that, while Banks and Insurers will mainly remain under CCR / CRD framework, other investment firms like asset managers or advisors will fall under the newly adopted IFR / IFD framework. Some exemptions are still maintained by the regulator as regards small and not interconnected institutions.
Investment Funds Managers regulated under AIFMD and UCITS Directive are only marginally impacted by IFR / IFD. According to article 60 and 61 of the IFD, the own funds of a management company (regulated under AIFMD or UCITS Directive) must at no time be less than one quarter of the fixed overheads of the preceding year. But AIFMD and UCITS Directive remain the primary reference in all common topics like remuneration, reporting or disclosures. However, it is still not clear what will be the obligations of the Firms falling under both AIFMD / UCITS Directive and MIFID).
The goal of this new regulatory piece is to evaluate specific risks incurred by MIFID Investment Firms like trading activity, large exposures, liquidity, leverage and provide a “level playing field” in terms of prudential framework comparable to that applicable in the banking sector, to the industry. The main prudential requirements are thus of the same kind as for Credit Institutions under CRR and CRD and include capital requirements, remuneration rules, reporting and disclosure obligations. That said, the legislator has confirmed his objective to consider the proportionality so that those requirements apply differently on the institutions depending on the category into which IFR is classifying them so that smaller and less systemic institutions face fewer and less stringent requirements then the large interconnected companies.
However, it is obvious that IFR / IFD will have a significant impact on several prudential aspects of most of the Investment Firms concerned. It will certainly lead to an increase of capital requirement, new remuneration policies and new reporting and disclosure obligations.
Even if we are still missing some important details that will be provided by the EBA through delegated acts over the coming months, we would advise all MIFID Investment Firms to proactively anticipate the possible impact on their institutions in order to be set at the time of the deadline which is quickly approaching.