On 3 June 2024, the European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) issued a discussion paper on the potential review of the investment firms’ prudential framework.

The Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR) both contain review clauses requiring the European Commission (Commission) to submit a report and, if needed, a legislative proposal to the Council of the EU and the European Parliament on the functioning of the prudential framework for MiFID investment firms. The Commission’s report should be submitted five years after the entry into force of the IFD and IFR. On 1 February 2024, the Commission submitted a call for advice to the EBA and ESMA seeking advice on the IFD and the IFR.

In the discussion paper it is noted that the EBA is of the overall opinion that the IFD and IFR meet their original general objectives. Nonetheless, market participants and supervisors have highlighted a number of issues or areas of potential improvements that may lead to changes to either the IFD or IFR or to their related delegated regulations. The discussion paper therefore addresses the elements highlighted by the supervisory community as priorities for possible improvements as well as certain other more technical elements.

In particular, the discussion paper:

  • Discusses the categorisation of investment firms, with particular emphasis on the coherence in the definitions of the applicable thresholds and considers suggestions for improving definitions and coherence in calculations and monitoring.
  • Covers the conditions for investment firms that qualify as small and non-interconnected, including the criteria for their categorisation as well as considerations regarding the transition period from one category to another.
  • Analyses the adequacy of the own-funds requirements, looking into the definitions related to the fixed overheads requirements, the parameters and the mechanics of their calculation as well as the length of the wind down period.
  • Reviews the existing K-factors and recommends improvements in definitions or calculation methodologies.
  • Touches upon the possibility to include new K-factors.
  • Discusses the implications of the adoption of the Capital Requirements Regulation 3 and the Capital Requirements Directive 6 concerning the introduction of the fundamental review of the trading book and how this would be applicable to investment firms.
  • Covers prudential consolidation of investment firm groups.
  • Reviews remuneration and its governance in relation to investment firms, alternative investment fund managers and UCITS management companies, including the scope of application, remuneration policies, the requirements on variable remuneration, their oversight, disclosure and transparency.

The deadline for comments on the discussion paper is 3 September 2024. A public hearing will take place via conference call on 20 June 2024 starting at 14:00 CEST.