Investment firm review: Mission impossible?

19 January 2016

Those of you with a keen interest in prudential regulation for non-banks will have seen that the European Banking Authority (EBA) released its first report on the investment firm review on 14 December 2015. In case you’re not familiar with the topic, this is the first step towards a complete overhaul of the prudential regime for MiFID investment firms, most of which are currently subject to the capital requirements directive and regulation (CRD/CRR).

The problem is that, over the years, the prudential regime for investment firms has grown into a complex framework which was really designed with banks in mind. The MiFID investment firm population covers a wide range of business models such as broker-dealers, trading platforms, asset managers, corporate finance firms or commodity dealers, to name a few. Given the great disparity in the nature of their business, size, complexity and systemic importance, why should they be subject to the same requirements as banks in terms of capital, reporting or recovery and resolution planning?

Well, this review is certainly going to be a very extensive and interesting exercise! Aside from the titanic task of designing a new framework that’s sound, proportionate and suitable for all investment firms, regulators will need to consider the timing of implementation and the interaction with other directives such as the RRD, MiFID II, CRD IV and Basel IV/CRD V. At the moment we don’t have an indication of the timeframe for the new regime, although it seems that regulators are working towards the next year or so. What can realistically be achieved in that time? It would be like redesigning the Basel framework for banks in a year… And yet this is the challenge regulators are facing.

As investment firms, what does this mean for you?

First, the EBA’s initial report should be seen as the beginning of the review process. At this stage, it has proposed to keep ‘bank-like’ firms on the full CRD/CRR regime, so the focus will be building a new framework for ‘non-systemic’ and ‘non-interconnected’ firms. That said, the detailed policy options analysed in the report are by no means set in stone.

So for now, you should read the EBA’s report, which presents its assessment of a convoluted, web-like state of play. See where you fit within it. Next, it’s likely that the EBA will consult on specific questions in due course, and when it does, it will be crucial that you respond. This will be the most effective way to voice your opinion (before it's too late!) and contribute to building a regime that will be appropriate for you.

Meanwhile, you can read our briefing paper here. And of course, please feel free to get in touch with me.