Investment Firm Directive and Investment Firm Regulation
New prudential risk-sensitive rules
IFD and IFR amend the capital requirements for investment firms. Basel III forms the basis of the CRDV /CRRII requirements for banks and does not fully take into account the specifics of investment firms, therefore these firms will fall within the scope of IFD/IFR.
Investment firms will fall in scope of one of four prudential classes depending on the type of activities they are licensed to perform, the scale of their activity and size of their assets. The largest firms (class 1) will be subject to the full banking prudential regime (CRDV/CRRII requirements) and would be supervised as credit institutions.
Smaller firms that are not considered systemic will have a new bespoke regime with specific prudential requirements. The GFSC will have the disctrection to allow firms to continue applying banking requirements on a case-by-case basis, to avoid disruptions.
Class 2 firms would be those investment firms not categorised as systemic. Class 2 firms would have a tailored prudential regime. MiFID firms that are not be able to satisfy the criteria required to be a small and non-connected investment firm Class 3 firms would be Class 2 firms. Class 3 firms are defined as ”small and non-interconnected investment firms”.
New numerical metrics termed "K-factors" are used in the classification of investment firms as opposed to the current service based approach to classification. K-factors are quantitative indicators that are intended to identify risks that an investment firm may pose to clients, market access or liquidity, and to the firm itself. There will be three K-factor groups:
- Risk to customers (RtC)
- Risk to market (RtM)
- Risk to firm (RtF)
The new regime will continue to have a three-pillar structure. Pillar 1 representing the minimum capital requirement, Pillar 2 the ICAAP and SREP process with the possibility of capital add-ons and Pillar 3 a disclosure regime.
The new IFD/IFR framework is expected to come into effect in Q4 2020 or Q1 2021, depending on publication in the Official Journal of the European Union.
Investment firms are expected to familiarize themselves with the requirements.
The GFSC has set-up up a working group with industry to consider, implement and operationalise the requirements. We will also be working on derogations.
We will be issuing further information as we develop our approach to the requirements, after discussing these with the working group.
Further information on the Bank Recovery and Resolution Directive can be found here.
Further information on changes to the Capital Requirements Framework can be found here.