Prudential supervision of investment firms

KEY POINTS

The directive:

• applies to investment firms authorised and supervised under Directive 2014/65/EU (see summary), also known as the markets in financial instruments directive (MiFID 2), which provides a legal framework for securities markets, investment intermediaries and trading venues;
• does not apply entirely to investment firms whose consolidated assets equal or exceed €15 billion (i.e. class 1 category) – these are supervised for compliance with prudential requirements under Titles VII and VIII of Directive 2013/36/EU (see summary) instead of Titles IV and V of the directive.

Relevant national authorities:

• supervise the activities of investment firms and, where applicable, of investment holding companies and mixed financial holding companies;
• have all the necessary information-gathering and investigatory powers, including the ability to carry out on-the-spot checks;
• have the necessary expertise, resources, operational capacity, powers and independence to do their work;
• can intervene in the activity of investment firms in an effective and proportionate way by increasing the amount of own funds they must have, for instance, in order to be appropriate to their risk profile;
• receive all the information they require from investment firms;
• cooperate closely with other public authorities or bodies supervising credit institutions¹ and financial institutions in their European Union (EU) Member State, with the European System of Financial Supervision and with the European Systemic Risk Board;
• exchange information, particularly on potential problems and risks, and collaborate with counterparts in other Member States;
• consider the impact of their decisions on the financial system in other Member States and in the EU as a whole;
• respect professional secrecy and confidential information;
• may conclude cooperation agreements with non-EU-country supervisors;
• use information on pay scales to assess pay trends and practices;
• make publicly available information including the applicable legislation, criteria and methodologies they use for supervision and statistical data they have collected.

Capital requirements for investment firms are set out by Regulation (EU) 2019/2033. The investment firms directive grants relevant national authorities the right to add to them.

Administrative sanctions and other administrative measures:

• apply to breaches of the directive, its national transposition and Regulation (EU) 2019/2033, such as failure to report the correct information to the relevant authorities;
• are effective, proportionate and dissuasive;
• take account of all relevant circumstances, such as the seriousness and duration of the breach;
• may consist of a fine of:
  • up to 10 % of a firm’s total annual net turnover or twice the amount of profits gained or losses avoided due to the breach, in the case of a firm, or
  • up to €5 million for an individual;
• are, when applied, published on the relevant authority’s website, with details of the breach and the perpetrator, and reported to the European Banking Authority.

Investment firms:

• must record all their transactions and document their systems and processes that are subject to this directive and to Regulation (EU) 2019/2033, thereby allowing for effective supervision by relevant authorities;
• must apply appropriate internal procedures that enable employees to report any breaches of the directive, its transposition under national law or Regulation (EU) 2019/2033;
• must have robust governance arrangements, including:
  • a clear organisational structure with well-defined, transparent and consistent lines of responsibility,
  • effective processes to identify, manage, monitor and report the risks they, or others, might be exposed to,
  • adequate internal control mechanisms, including sound administration and accounting procedures,
  • pay policies consistent with sound and effective risk management;
• must provide information on branches in other Member States or in non-EU countries, such as turnover, profits and losses, and the number of employees, on an annual basis;
• may not, if they benefit from special public financial support, make any variable payments to members of the management body.

Supervisory and evaluation rules state that relevant authorities must:

• review and evaluate the arrangements, strategies, processes and mechanisms investment firms have in place to comply with the directive and Regulation (EU) 2019/2033;
• require investment firms to take, at an early stage, the necessary measures if they do not comply with the directive and Regulation (EU) 2019/2033 or if they are likely to breach national provisions.

The European Banking Authority:

• draws up, in consultation with the European Securities and Markets Authority, various draft regulatory technical standards;
• prepares a report on technical criteria related to environmental, social and governance objectives;
• assesses information from relevant authorities on their review and evaluation processes in order to develop consistency across the EU;
• reports to the European Parliament and the Council of the European Union on the degree of convergence being achieved under the review process.

Amending Directive (EU) 2023/2864 inserts an article in Directive (EU) 2019/2034 requiring Member States, from 10 January 2030, to ensure that, when making public any regulated information to investors, investment firms or parent undertakings submit that information at the same time to the collection body, and notify the European Securities and Markets Authority thereof for the purposes of making it accessible on the European single access point, set up under Regulation (EU) 2023/2859.

The European Commission has the power to adopt delegated acts for 5 years from 25 December 2019. The Parliament or the Council may revoke this power at any time. The Commission has since adopted the following delegated acts:

• Delegated Regulation (EU) 2021/2153 on technical standards specifying the criteria for subjecting certain investment firms to the requirements of Regulation (EU) No 575/2013 (see summary).
• Delegated Regulation (EU) 2021/2154 on technical standards specifying appropriate criteria to identify categories of staff whose professional activities have a material impact on the risk profile of an investment firm or of the assets that it manages;
• Delegated Regulation (EU) 2021/2155 on technical standards specifying the classes of instruments that adequately reflect the credit quality of the investment firm as a going concern and possible alternative arrangements that are appropriate to be used for the purposes of variable payments;
• Delegated Regulation (EU) 2022/2579 on technical standards specifying the information to be provided by an undertaking in the application for authorisation in accordance with Article 8a of Directive 2013/36/EU (see summary).
• Delegated Regulation (EU) 2023/1117 on technical standards specifying requirements for the type and nature of the information to be exchanged by competent authorities of home and host Member States;
• Delegated Regulation (EU) 2023/1118 on technical standards specifying the conditions under which colleges of supervisors exercise their tasks.
• Delegated Regulation (EU) 2023/1651 on technical standards for the specific liquidity measurement of investment firms under Article 42(6) of the Ddirective;
• Delegated Regulation (EU) 2023/1668 on technical standards specifying the measurement of risks or elements of risks not covered or not sufficiently covered by the own funds requirements set out in Regulation (EU) 2019/2033 and the indicative qualitative metrics for the amounts of additional own funds;

In the context of a review clause, the Commission is tasked by the directive to prepare, in close cooperation with the European Banking Authority and European Securities and Markets Authority, a report on various aspects of the directive for the European Parliament and the Council.