Investment Firms: New regulatory regime
Investment Firms: New regulatory regime
The Investment Firm Regulation1 (IFR), combined with the Investment Firm Directive2
(IFD), introduce a bespoke prudential regime for the vast majority of EU’s investment firms;
the latter being currently subject, along with credit institutions, to Basel-derived prudential
rules set out in the Capital Requirements Regulation3 (CRR) and Directive4 (CRD IV), as
revised by CRD V5. The CRR/CRD regime has been criticised for failing to address the
differences, in terms of business models and risk profiles, between most investment firms and
credit institutions. Against this background, the IFD and IFR were introduced to ensure that
said differences are reflected in the EU’s prudential framework. The new regime will apply
from the 26th of June 2021, with limited transitional provisions. This article briefly outlines
the key points of convergence and divergence between the two aforementioned prudential
frameworks:
1. Classification of investment firms – Reclassification as credit institutions
The IFR/IFD establish a new, three-tier classification system for investment firms, based on
their size, activities, interconnectedness and systemic importance. Systemic investment firms
that satisfy the criteria for being treated as Class 1 firms under this system will be reclassified
as credit institutions within the meaning of Article 4(1) CRR and therefore will continue to be
prudentially regulated under the CRR and CRD IV/V6. Class 2 firms, on the other hand,
which can be identified as larger, non-systemic firms, will be subject to the full application of
the new IFD/IFR regime, whereas small and non-interconnected firms, known as Class 3
firms, while still subject to the new prudential framework, will be faced with less extensive
requirements7.
2. Authorisation
Under the IFR/IFD framework, Class 1 investment firms, by virtue of their new status, will
be required to obtain authorisation as “credit institutions” under CRD IV/V, as is the case
with all other credit institutions8. By contrast, Class 2 and Class 3 firms will still be licensed
under the EU Markets in Financial Instruments Directive9 (MiFID II).
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