Prudential requirements of investment firms

 

SUMMARY OF:

Regulation (EU) 2019/2033 on the prudential requirements of investment firms

WHAT IS THE AIM OF THE REGULATION?

• Regulation (EU) 2019/2033 sets out new prudential requirements* and supervisory arrangements for certain categories of investment firms.
• For these categories, it sets out specific requirements on own funds, concentration risk, liquidity risk, reporting and public disclosure.
• The regulation, also known as the investment firms regulation (IFR), introduces prudential requirements that are proportionate to a firm’s size, nature, complexity, risk profile and business model, while ensuring adequate protection of its customers and of the markets in which it operates.

KEY POINTS

• The IFR sets out prudential requirements that are proportionate to the nature, size and complexity of an investment firm’s activities.
• The IFR applies to investment firms that:
  • are not subject to Regulation (EU) No 575/2013 (capital requirements regulation (CRR) – see summary) and are sufficiently small and non-interconnected (‘class 3’ investment firms – see IFR, Article 12); or
  • do not fall under either of the two other categories (‘class 2’ investment firms); the ‘class 2’ category comprises investment firms that are too small for the ‘class 1’ category (subject to CRR rules) yet are bigger and more interconnected than the ‘class 3’ category.
• Investment firms that deal on their own account, underwrite financial instruments and/or place financial instruments on a firm commitment basis are subject to the CRR rules if:
  • their consolidated assets are over €30 billion (‘class 1’ firms); or
  • their consolidated assets are over €15 billion; or
  • their consolidated assets are over €5 billion and they are designated by their competent authorities based on specific criteria (‘class 1 minus’ firms).
• ‘Class 1’ firms have to apply for authorisation as credit institutions, while ‘class 1 minus’ firms remain authorised as investment firms but are subject to the prudential requirements applicable to banks under the CRR and the capital requirements directive.

Capital requirements set out in the IFR consist of:

• a fixed overheads requirement (FOR) equal to a quarter of the firm’s annual fixed overheads;
• a permanent minimum capital requirement (PMR) of €75,000, €150,000 or €750,000, depending on the firm’s activities; and
• an overall ‘K-factor’ capital requirement based on three main types of risks:
  • risk to client,
  • risk to market, and
  • risk to firm.

‘Class 3’ firms are subject to lighter requirements than ‘class 2’ firms: while the capital requirements for a ‘class 3’ firm are equal to whichever of its FOR and PMR is higher, the capital requirements for a ‘class 2’ firm are equal to whichever of its FOR, PMR and overall K-factor requirement is higher.

Disclosure rules for investment firms require them to provide annual information on:

• their risk management objectives and policies;
• their governance arrangements;
• their own funds compositions and requirements;
• their pay policies and practices for the staff categories that have a material impact on the firms’ risk profile, including aspects related to gender neutrality, the gender pay gap and fixed and variable payments;
• their investment policies;
• their environmental, social and governance risks.

In amending Regulation (EU) No 600/2014 (the markets in financial instruments regulation – see summary), the IFR has also enhanced and reinforced the regulation’s ‘equivalence framework’. This framework establishes rules in accordance with the markets in financial instruments directive (MiFID) for the provision of services in the European Union (EU) by firms based in non-EU countries for which the European Commission has adopted an ‘equivalence decision’. Such a decision means that the Commission has assessed that those countries’ legally binding prudential, organisational and business conduct rules are equivalent to those in place in the EU.

The IFR also amends Regulations (EU) No 1093/2010 (see summary), (EU) No 575/2013 and (EU) No 806/2014 (see summary).

Delegated acts

The Commission has powers to adopt delegated acts in the form of regulatory and implementing technical standards developed by the European Banking Authority (EBA), in close cooperation with the European Securities and Markets Authority where applicable, to supplement the regulation and ensure that its requirements are applied uniformly.

EBA roadmap

• An overview of the EBA’s work plan for the development of these technical standards is available here: EBA Roadmap on Investment Firms.
• Some of these technical standards have already been published in the Official Journal of the European Union (see ‘Related documents’ below) and may be found on the EBA’s website.

European single access point

Amending Regulation (EU) 2023/2869 incorporates within Regulation (EU) 2019/2033 a new article concerning the accessibility of information on the European single access point (ESAP), established under Regulation (EU) 2023/2859 – see summary. The ESAP will provide access to public financial and sustainability-related information about EU companies and EU investment products. From 10 January 2030, when making public any information required under Regulation (EU) 2019/2033, the amending act requires that investment firms submit that information at the same time to the EBA, as the relevant collection body for the purpose of making it accessible on the ESAP. The amending regulation also sets out the conditions with which that information must comply.

Report

The Commission, after consulting the EBA and the European Securities and Markets Authority, had to submit a report to the European Parliament and the Council of the European Union on the application of the IFR by 26 June 2024, together with a legislative proposal to review the framework if needed.

FROM WHEN DOES THE REGULATION APPLY?

It has applied since 26 June 2021.

BACKGROUND

• Several thousand investment firms operate in the European Economic Area. They play key roles in savings and investmentand range from one-person companies to large international groups.
• Until 25 June 2021, they were subject to the same capital, liquidity and risk management rules as banks to ensure they had sufficient resources to cover any potential losses from their activities. However, these rules failed to take fully into account the firms’ specific features.
• For further information, see:
  • Prudential rules for investment firms (European Commission)
  • Investment firms (European Banking Authority).

KEY TERMS

MAIN DOCUMENT

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).

Successive amendments to Regulation (EU) 2019/2033 have been incorporated into the original text. This consolidated version is of documentary value only.

RELATED DOCUMENTS

Regulation (EU) 2023/2859 of the European Parliament and of the Council of 13 December 2023 establishing a European single access point providing centralised access to publicly available information of relevance to financial services, capital markets and sustainability (OJ L, 2023/2859, 20.12.2023).

See consolidated version.

Commission Delegated Regulation (EU) 2022/25 of 22 September 2021 supplementing Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to regulatory technical standards specifying the methods for measuring the K-factors referred to in Article 15 of that Regulation (OJ L 6, 11.1.2022, pp. 1–6).

Commission Delegated Regulation (EU) 2022/26 of 24 September 2021 supplementing Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to regulatory technical standards specifying the notion of segregated accounts to ensure client money’s protection in the event of an investment firm’s failure (OJ L 6, 11.1.2022, pp. 7–8).

Commission Delegated Regulation (EU) 2022/76 of 22 September 2021 supplementing Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to regulatory technical standards specifying adjustments to the K-factor ‘daily trading flow’ (K-DTF) coefficients (OJ L 13, 20.1.2022, pp. 1–3).

Commission Delegated Regulation (EU) 2022/244 of 24 September 2021 supplementing Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to regulatory technical standards specifying the amount of total margin for the calculation of the K-factor ‘clear margin given’ (K-CMG) (OJ L 41, 22.2.2022, pp. 1–4).

Commission Delegated Regulation (EU) 2022/1159 of 11 March 2022 supplementing Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to regulatory technical standards for public disclosure of investment policy by investment firms (OJ L 179, 6.7.2022, pp. 11–24).

See consolidated version.

Commission Implementing Regulation (EU) 2021/2284 of 10 December 2021 laying down implementing technical standards for the application of Regulation (EU) 2019/2033 of the European Parliament and of the Council with regard to supervisory reporting and disclosures of investment firms (OJ L 458, 22.12.2021, pp. 48–172).

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).

See consolidated version.

Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, pp. 84–148).

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.

Regulation (EU) No 806/2014 of the European Parliament and of the Council of 15 July 2014 establishing uniform rules and a uniform procedure for the resolution of credit institutions and certain investment firms in the framework of a Single Resolution Mechanism and a Single Resolution Fund and amending Regulation (EU) No 1093/2010 (OJ L 225, 30.7.2014, pp. 1–90).

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.

Regulation (EU) No 1093/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Banking Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/78/EC (OJ L 331, 15.12.2010, pp. 12–47).

See consolidated version.

last update 25.09.2024