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New Capital Requirements Framework for Investment Firms

New Capital Requirements Framework for Investment Firms

16th September 2019

Changes to Capital Requirements for Investment Firms

At present, how Europe’s new capital requirements and prudential framework for Investment Firms - the Investment Firm Directive (IFD) and Investment Firm Regulation (IFR) is to be implemented is still to be finalised, however, whilst we await consultation by the FCA, here is a brief recap so far.

Brief Summary: Proposed Prudential Framework for Investment Firms

During the course of 2017, Europe proposed a new prudential regulatory framework for Investment Firms, known as the Investment Firm Directive (IFD) and the Investment Firm Regulation (IFR). Together these aim to be a more sensitive prudential approach to the risks faced by Investment Firms, rather than the existing prudential framework – this being the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD) IV.

Under the new prudential regulatory framework, investment firms would be assessed and categorised into three classes:

• Class 1 being systemically important investment firms;
• Class 2 being Non-systemically Important Investment Firms with threshold conditions; and
• Class 3 being Small & Non-Connected Investment Firms

Whilst Investment Firms under Class 1 would still have the CRD/CRR measures apply, the other two classes of Investment Firms would have varying aspects of IFD/IFR apply.

Increases to Minimum Capital Requirements

Furthermore it has been proposed that current minimum capital requirement bandings, for those under IFD/IFR (Class 2 and Class 3 firms) would increase:

• from €730K to €750K
• from €125K to €150K
• from 50K to €75K

However, even more costly a rise is for those firms that would fall under Class 1 and still have CRR/CRD apply rather than IFR/IFD since their minimum capital requirement is set to increase from €730K to €5 Million! There will of course be an implementation period in order to allow firms to build up their capital reserves.

Implications:

Whilst Europe’s initial proposals (announced in late 2017) would have meant that everyone would have to prepare an ICAAP going forwards, it now seems following the publication of the final rules in Europe in April this year (2019) that Small Non-Connected firms (SNCs) - Class 3 - will have an exemption from this.

Effective Date?

The new rules look set to take effect from January 2021.

Related Reading:

• New K-Factor Calculation Factors

 IFR / IFD: Investment Firm Classes

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