RegSol Blog

Investment Firms: CRD V Structural Reform in EU Prudential Rules

October 2019

In April this year, a review of the prudential framework for investment firms for MiFID II was approved under the auspices of building the Capital Markets Union. The purpose of the revised legislation will be to improve investment flows and ensure proportional rules level the playing field among larger institutions and simpler, less risky firms. 

The legislation will aim to provide clarity on equivalence rules for the provision of investment services by third country firms. And most importantly, is an important step towards the completion of the European post crisis regulatory reforms. 

Together, these reforms affect all European banks and investment firms and require significant implementation over a period of multiple years. There will be material changes to the capital and funding needs of firms as well as to their governance, risk management, systems and controls, reporting, recovery and resolution planning and in some cases corporate structures. 

CRD V will update the framework of harmonised rules established in the wake of the financial crisis, the so-called 'Single Rulebook'.

The 'Single Rulebook' ensures that:

  • banks & investment firms have enough capital to cover unexpected losses and are prepared to withstand economic shocks 
  • obliged entities have fewer incentives to take excessive risks.

Some outstanding elements of the reform that are key to ensure a firm’s resilience but have only recently been finalised by global standard setters (i.e. the Basel Committee on Banking Supervision (BCBS) and the Financial Stability Board (FSB)) include: 

  • New Framework for low prudential risk profile investment firms to mitigate comparative weakness of EU investment bank sector through the Investment Firms Directive in 2021
  • ECB Oversight over systemic investment firms or “class 1” firms which consolidated assets exceeding EUR 15 billion and those over EUR30 billion into same supervisory regime for banks
  • Regulation of Financial Holding companies subject to all requirements of the prudential framework as it relates to their consolidated position and Corporate Governance
  • Intermediate Parent Undertaking: requirement for large third country group to be owned by the IPU. This exists where there is at least one subsidiary that is an EU large investment firm within its group and where the parent entity is established in a non- EU country or third country.
  • Branch regulation- introduction of minimum harmonised reporting requirements for EU branches of third country banks and requirement for EU regulators to cooperate to ensure a consolidated approach to supervision

Even though these structural legislative reforms may be delayed, it would be prudent for investment service firms to work through the implications of the new reforms, in that authorisations may need to be prepared together with a restructuring process and corporate governance planning. 

RegSol is here to assist with regulatory impact analysis and can help you manage the impact of regulatory change.

By Judy de Castro - Regulatory Consultant