Prudential supervision of investment firms

 

SUMMARY OF:

Directive (EU) 2019/2034 on the prudential supervision of investment firms

WHAT IS THE AIM OF THE DIRECTIVE?

The directive, also known as the investment firms directive, lays down rules for investment firms on:

• initial capital;
• supervisory powers and tools for the prudential supervision of investment firms by the relevant authorities;
• prudential supervision of investment firms in line with Regulation (EU) 2019/2033 (see summary);
• publication requirements for the relevant authorities.

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 to investment firms whose consolidated assets equal or exceed €15 billion (i.e. ‘class 1’ category) – these are covered by Directive 2013/36/EU (see summary).

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 institutions* and financial institutions in their 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 European Union (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 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 and 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 EU Member States or in non-EU countries, such as turnover, profit and loss and 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 on the degree of convergence being achieved under the review process.

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

• 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) 2021/2153 on technical standards specifying the criteria for subjecting certain investment firms to the requirements of Regulation (EU) No 575/2013 (see summary).

The Commission is in the process of drafting, in close cooperation with the European Banking Authority and European Securities and Markets Authority, a report on various aspects of the directive, which will be submitted to the European Parliament and the Council by 26 June 2024.

FROM WHEN DO THE RULES APPLY?

Directive (EU) 2019/2034 had to be transposed into national law by 26 June 2021, except for the rules for providing services on the client’s initiative, which have applied since 26 March 2020.

BACKGROUND

• For further information, see:
  • Prudential rules for investment firms (European Commission).

KEY TERMS

MAIN DOCUMENT

Directive (EU) 2019/2034 of the European Parliament and of the Council of 27 November 2019 on the prudential supervision of investment firms and amending Directives 2002/87/EC, 2009/65/EC, 2011/61/EU, 2013/36/EU, 2014/59/EU and 2014/65/EU (OJ L 314, 5.12.2019, pp. 64–114).

Successive corrections to Directive (EU) 2019/2034 have been incorporated in the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Commission Delegated Regulation (EU) 2021/2153 of 6 August 2021 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory technical standards specifying the criteria for subjecting certain investment firms to the requirements of Regulation (EU) No 575/2013 (OJ L 436, 7.12.2021, pp. 9–10).

Commission Delegated Regulation (EU) 2021/2155 of 13 August 2021 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory 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 remuneration (OJ L 436, 7.12.2021, pp. 17–25).

Commission Delegated Regulation (EU) 2021/2154 of 13 August 2021 supplementing Directive (EU) 2019/2034 of the European Parliament and of the Council with regard to regulatory 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 (OJ L 436, 7.12.2021, pp. 11–16).

Regulation (EU) 2019/2033 of the European Parliament and of the Council of 27 November 2019 on the prudential requirements of investment firms and amending Regulations (EU) No 1093/2010, (EU) No 575/2013, (EU) No 600/2014 and (EU) No 806/2014 (OJ L 314, 5.12.2019, pp. 1–63).

See consolidated version.

Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU (OJ L 173, 12.6.2014, pp. 349–496).

See consolidated version.

Directive 2014/59/EU of the European Parliament and of the Council of 15 May 2014 establishing a framework for the recovery and resolution of credit institutions and investment firms and amending Council Directive 82/891/EEC, and Directives 2001/24/EC, 2002/47/EC, 2004/25/EC, 2005/56/EC, 2007/36/EC, 2011/35/EU, 2012/30/EU and 2013/36/EU, and Regulations (EU) No 1093/2010 and (EU) No 648/2012, of the European Parliament and of the Council (OJ L 173, 12.6.2014, pp. 190–348).

See consolidated version.

Directive 2013/36/EU of the European Parliament and of the Council of 26 June 2013 on access to the activity of credit institutions and the prudential supervision of credit institutions and investment firms, amending Directive 2002/87/EC and repealing Directives 2006/48/EC and 2006/49/EC (OJ L 176, 27.6.2013, pp. 338–436).

See consolidated version.

Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (OJ L 176, 27.6.2013, pp. 1–337).

See consolidated version.

Directive 2011/61/EU of the European Parliament and of the Council of 8 June 2011 on Alternative Investment Fund Managers and amending Directives 2003/41/EC and 2009/65/EC and Regulations (EC) No 1060/2009 and (EU) No 1095/2010 (OJ L 174, 1.7.2011, pp. 1–73).

See consolidated version.

Directive 2009/65/EC of the European Parliament and of the Council of 13 July 2009 on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (OJ L 302, 17.11.2009, pp. 32–96).

See consolidated version.

Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council (OJ L 35, 11.2.2003, pp. 1–27).

See consolidated version.

last update 28.06.2022