EBA recommendations for new prudential regime for investment firms

Published: 10 October 2017

The European Banking Authority (EBA) has published its opinion and advice to the European Commission regarding a new prudential regime for investment firms. It is expected that the European Commission will issue a proposal in November or December 2017 which should not significantly differ from the EBA’s recommendations. The main features of this new prudential regime are expected to be:

* A three class categorisation: Class 1 firms will regroup firms that are systemic or bank-like. This should apply to a very limited number of firms. Class 3 firms should regroup firms meeting specific thresholds such as (among others) AUM of maximum EUR 1.2 billion, no trading or dealing on own account, total balance sheet not higher than 100 million, etc. All other firms should belong to Class 2 category.

* Class 1 firms should remain subject to the full CRD/CRR regime, Class 3 firms’ capital requirements should be the highest of the initial capital (see below) or fixed overheads (FOR – 25% of the fixed overheads of the previous year).

* Initial capital will be equivalent to permanent capital and three amounts level have been recommended: EUR 75,000; EUR 150,000 and EUR 750,000 depending on the type of MiFID services the company is providing. A transition period has been recommended for smaller firms.

* Class 2 firms’ level of capital requirements should be measured with the use of k-factors, based on AUM or asset safeguarded or administered volume (k-AUM, k-ASA), client orders handled (k-COH), client money held, or –possibly- controlled (k-CMH); and, for firms dealing on own account, factors measuring the risk applying to their trading books (trading counterparty default, daily trading flow and concentration risk). Some coefficients will then be applied to these factors, among these, K-AUM will have a coefficient of 0.02% (equivalent to AIFMD) and K-CMH a coefficient of 0.45%.

* Pillar 2 and pillar 3 requirements should be simplified, with almost no reporting required for Class 3 firms.

* In terms of remuneration and governance, requirements have been simplified as well. The EBA also recommends a bonus cap.

* Given that this new regime might result in significant capital requirements increase for some investment firms, the EBA also recommends a transition period of three years where the increase would be limited to twice the current level of capital. For firms not previously subject to capital requirements, the cap would be equivalent to twice the level of the fixed overheads (FOR).

If you have any questions or comments, please contact Marie Adelaide de Nicolay.