New regulatory capital regime for MiFID investment firms

European Commission proposals

The European Commission recently issued proposals for a regulation and a directive to amend the prudential rules for investment firms.

Regulatory Newsflash | 6 February 2018


On 5 February 2018, the European Commission (‘the Commission’) set out its plans for a regulation and directive to amend the prudential rules for investment firms. The Commission’s proposals are closely aligned to recommendations published by the EBA last September, with some important clarifications.

A three-tier categorisation system based on the scale and scope of activities undertaken should create a more risk-focussed prudential regime for MiFID investment firms:

  • Class 1 - Systemic investment firms
  • Class 2 - Larger investment firms
  • Class 3 - Small and non-interconnected firms
Regulatory Newsflash

Overview of the proposals

For Class 1 firms, the Commission plans to change the definition of ‘Credit Institution’ to include dealing on own account or underwriting or placing financial instruments on a firm commitment basis, where the total value of the assets of the undertaking are EUR 30 billion or more. The directive also specifies arrangements for firms seeking authorisation as a Credit Institution.

A Class 2 categorisation will apply if a firm exceeds specific business-related thresholds, and Class 3 firms should be small in nature and subject to a simpler regime.

Further details are available in the newsflash.

The equivalence regime

The proposals undertake targeted changes to the existing equivalence regime for third-country firms under Articles 46 and 47 of MiFIR to maintain a level playing field between EU firms and third-country firms. The Commission notes that this is to ensure that third-country firms providing services cross-border to EU professional clients and eligible counterparties do not benefit from a more favourable treatment than EU firms in terms of prudential, tax and supervisory requirements.

Access to the EU will be conditional on the Commission adopting an equivalence decision, and ESMA registering the third-country firm. Third-country firms will be required to report information annually to ESMA concerning the scale and scope of services provided, and activities carried out in the EU. The Commission is required to take into account the potential risks posed by these services and activities in their equivalence considerations. The Commission may also consider whether a jurisdiction is identified as a non-cooperative jurisdiction for tax purposes, or as a high risk third-country.

While this is not currently relevant for UK based firms setting up subsidiaries in the EU27 as part of their Brexit related contingency plans, it will be relevant to firms seeking to use the equivalence provisions to provide services to EU professional clients and eligible counterparties without establishing a branch. Furthermore, depending on a Member State’s decision to opt into the MiFID II requirement for third-country investment firms to establish a branch, firms may have to establish a branch in the Member State where they intend to perform their services and carry out their activities.

Remuneration requirements

MiFID II remuneration requirements are deemed appropriate for class 3 firms, and CRR IV provisions considered suitable for class 1 firms. No specific limits have been set on the ratio between variable and fixed components of remuneration, with investment firms expected to set appropriate ratios themselves.

Additional Regulatory Technical Standards will clarify requirements in this area, as well as in the areas of supervisory information sharing, credit institution authorisation and branch arrangements, and the application of additional capital requirements (in certain circumstances where a competent authority considers the calculated capital requirement to be inadequate).

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