Financial Services Regulation and Compliance – Investment Firms Dec 2021


CBI publishes “Dear CEO” letter addressed to MiFID authorized firms and credit institutions offering MiFID investment services

On 1 December 2021, the CBI published a “Dear CEO” letter (the letter) addressed to MiFID approved investment firms and credit institutions offering MiFID investment services (the firms). The letter details the CBI’s findings following its review of compliance with MiFID II suitability requirements. The review was carried out as part of a joint supervisory action coordinated by ESMA. While the CBI has identified evidence of positive practices, it has also identified other actions required by companies, including the following:

  1. practices need to adopt a more client-centric approach, for example ensuring a personalized approach that recognizes all aspects of a client’s situation and circumstances
  2. companies need to improve their assessment of customers’ knowledge and experience, their financial situation and their investment objectives
  3. companies should ensure that suitability reports are sufficiently detailed and tailored to individual client goals and circumstances

The quality of supervision is of particular concern in cases where a client insists on proceeding with the transaction on their own initiative against suitability advice.

In addition, the CBI requires all Irish MiFID approved firms and credit institutions, which provide portfolio management and advisory services to retail clients, to carry out a thorough review of their individual sales practices and their adequacy agreements. The review should be documented and include details of the steps taken to address the findings in ESMA’s public statement and letter. The review is expected to be completed, and an action plan discussed and approved by each company’s board of directors, by the end of the first quarter of 2022.


EBA publishes consultation papers on RTS and guidelines on liquidity requirements for investment firms

On 10 December 2021, the EBA published consultation documents on the guidelines on liquidity requirements under the Investment Firms Directive (IFD) and the Regulation on Investment Firms (IFR).

The draft RTS has been prepared in accordance with Article 42(6) of the IFD, which instructs the EBA to specify how liquidity risk and elements of liquidity risk are to be measured for the purposes of specific liquidity.

The draft RTS on the specific measure of liquidity sets out the elements of liquidity risk which may give rise to major concerns for investment firms and which competent authorities will be required to take into account when setting liquidity requirements. following the prudential review and evaluation process of an investment firm (SREP). The draft RTS specifies that these elements must be considered under normal and severe, but plausible conditions. Furthermore, to ensure proportionality, competent authorities should only assess a limited set of elements for small non-interconnected investment firms.

The guidelines which have been developed pursuant to the mandate set out in Article 43(4) of the IFR, specify the criteria under which competent authorities may exempt smaller non-interconnected investment firms from liquidity requirements.

The guidelines propose to address the following three main elements:

  1. a set of investment services and activities provided by investment firms eligible for the exemption
  2. exemption criteria
  3. guidance on the process for competent authorities when granting the exemption

As small and non-interconnected investment firms do not hold client assets, the liquidity requirements of these firms are not intended to cover the risks of potential losses of client assets. The guidelines, on this basis, specify that the exemption must be based on the assessment of the need for financial resources for the orderly liquidation of an investment firm.

The deadline for submitting comments is 10 March 2022. The EBA intends to publish the final guidance by mid-2022, with the guidance applying two months after publication.

EBA publishes methodology for the reclassification of investment firms into credit institutions

On 20 December 2021, the EBA published two final draft regulatory technical standards (RTS) concerning the reclassification of investment firms as credit institutions.

The identification of large investment firms, which will be reclassified as credit institutions and therefore subject to the application of the regulation on capital requirements (CRR) and the Capital Requirements Directive (CRD), depends on the size of the investment firms and the groups to which they belong.

The first RTS provides a methodological framework for determining the need for reclassification of an investment firm as a credit institution, which is neutral vis-à-vis geographical limitations. This is to ensure a proportionate and consistent calculation of the level of total assets to be compared to the threshold of 30 billion euros. The second RTS provides supervisors with the information needed to monitor these thresholds.

ESMA publishes guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation

On 7 December 2021, the European Securities and Markets Authority (ESMA) published guidelines on the methodology, oversight function and record keeping under the benchmarks regulation.

The objective of these guidelines is to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision (ESFS). They will also ensure the common and uniform application of the requirements relating to significant changes in methodology and the use of an alternative methodology in exceptional circumstances and to the monitoring function. In addition, the guidelines aim to ensure the harmonized application of record keeping requirements related to the use of an alternative methodology for all benchmark administrators.

With respect to non-material benchmarks, these guidelines amend the existing guidelines in accordance with the new guidelines introduced for administrators of critical and material benchmarks, with respect to the oversight function and the use of an alternative methodology in exceptional circumstances.

The guidelines should apply from 31 May 2022.