The European Commission (Commission) has published an inception impact assessment on its review of the appropriate prudential treatment for investment firms. The impact assessment aims to inform stakeholders about the Commission’s work in order to allow them to provide feedback on the intended initiative and to participate effectively in future consultation activities.

The impact assessment relates to the Commission’s Work Programme as a REFIT-exercise mandated by Articles 293(2), 498(2), 508(2) and 508(3) of the Capital Requirements Regulation (CRR) in recognition of the fact that the current framework, which is largely focussed on credit institutions, is not fully suited to all investment firms. It covers all investment firms including those identified as global or other systemically important institutions in accordance with Article 131 of the Capital Requirements Directive IV (CRD IV).

The impact assessment notes that under the CRR / CRD IV framework, investment firms fall into 11 categories depending on the services they perform based on historic and implicit assumptions of their prudential relevance. Some firms are largely exempt from prudential regulation, some are subject to varying combinations of lighter prudential rules, and others are subject to the full rulebook. The result is that, in contrast to credit institutions, rules for the majority of investment firms are not as fit-for purpose.

The aim of the Commission’s review will be to: (i) evaluate the appropriateness of existing prudential requirements applicable to investment firms under the CRR and CRD IV in terms of capital, liquidity, leverage, large exposures, corporate governance etc, and; (ii) where necessary introduce more appropriate prudential requirements in order to reflect the business models and capture the risks faced and posed by different types of investment firms in a better way.

The impact assessment states that revisions in the shape of amendments to the existing EU legal framework (comprising a Regulation and a Directive) are preferred over soft law or other policy instruments.

In terms of consultation strategy the impact assessment states that the European Banking Authority will deliver a report to the Commission in June 2017 outlining their advice on a new prudential treatment for investment firms.  In light of this the Commission will not run its own general public consultation but instead engage in a targeted consultation with stakeholders to gather views on the proposal.

The impact assessment states that the bulk of any new rules will take the form of a directly applicable  Regulation, and any applicable elements which for legal reasons would have to be in an accompanying Directive, would be similar to the existing regime, such as organisational and authorisation requirements and corporate governance. The impact assessment indicates that the Commission intends to adopt a legislative proposal in Q4 2017.

View European Commission inception impact assessment on new prudential framework for investment firms, 22 March 2017