On 26 February 2019, the Presidency of the Council of the EU announced that provisional agreement had been reached with the European Parliament on the legislative proposals for a new prudential regime for investment firms.

The press release makes the following points:

  • investment firms will be subject to the same key measures in the CRD IV, in particular as regards capital holdings, reporting, corporate governance and remuneration, but the set of requirements they would need to apply would be differentiated according to their size, nature and complexity;
  • the largest firms (class 1) would be subject to the full banking prudential regime and would be supervised as credit institutions: (i) investment firms that provide “bank-like” services, such as dealing on own account or underwriting financial instruments, and whose consolidated assets exceed EUR 15 billion would automatically be subject to Capital Requirements Regulation and Capital Requirements Directive IV (CRR / CRD IV); (ii) investment firms engaged in “bank-like” activities with consolidated assets between EUR 5 and 15 billion could be requested to apply CRR / CRD IV by their supervisory authority, in particular if the firm’s size or activities would involve risks to financial stability; and
  • smaller firms that are not considered systemic would be subject to a new bespoke regime with dedicated prudential requirements. These would, in general, be different from those applicable to banks, but Member State national competent authorities (NCAs) could allow to continue applying banking requirements to certain firms, on a case by case basis, to avoid disrupting their business models. Such an option will be framed with a safeguard preventing regulatory arbitrage, in particular through the application of lower capital requirements under CRR / CRD IV as compared to Investment Firms Regulation in a disproportionate manner. The text also provides for a 5-year transitional period to give companies enough time to adapt to the new regime.

The announcement also states that the agreement strengthens the equivalence regime that would apply to third country investment firms. It sets out in greater detail some of the requirements for giving them access to the Single Market and grants additional powers to the European Commission. In particular, the Commission is charged with assessing capital requirements applicable to firms providing bank-like services to make sure that those are equivalent to those applicable in the EU. In addition, in case the activities performed by third country firms are likely to be of systemic importance, the new regime allows the Commission to apply some specific operational conditions to an equivalence decision to ensure that the European Securities and Markets Authority and NCAs have the necessary tools to prevent regulatory arbitrage and monitor the activities of third country firms.

The text also complements the existing MIFIDII/MIFIR framework by extending the “tick size” regime to systematic internalisers, thus  enhancing level-playing field between systematic internalisers and trading venues.

The political agreement will now be submitted to EU ambassadors for endorsement. It will then undergo a legal linguistic revision. The European Parliament and Council will be called on to adopt the proposed package of measures at first reading.