Presentation of the IFD/IFR: a new prudential regime for investment firms – Finance et Banque

From 26 June 2021, a new prudential regime applies to investment firms authorized under the Markets in Financial Instruments Directive(“MiFID II”).

This new framework, defined in the Investment Firms Regulation (“IFR”) and the Investment Firms Directive (“IFD”), is revising in depth the body of prudential rules for investment firms by introducing a tailor-made regime.

Based on the principles of risk relevance and proportionality, the new regime applies a series of rules relating to capital requirements, financial and regulatory information, internal governance and the remuneration of investment firms, according to their classification in a spectrum of risks.

Classification of investment firms

Depending on their size, scale and activities, investment firms fall into one of three categories of the IFD/IFR regime: Class 1; Class 2 and Class 3.

Class 1 companies are systemically important undertakings authorized to deal on their own account or to subscribe or place financial instruments with a firm commitment and whose total assets exceed 30 billion euros (individually or in groups).

These companies are subject to the supervision of the European Central Bank and must now apply for authorization as a credit institution. Until the new license is issued, they remain subject to the Capital Requirements Directive(“CRD”) and the Capital Requirements Regulation(“CRR”) capital and remuneration requirements that applied prior to June 26, 2021.

Class 1 minus companies are investment firms authorized to deal on own account or to subscribe or place financial instruments with a firm commitment and whose total value of consolidated assets exceeds €15 billion but does not reach the class 1 threshold of €30 billion euros.

These companies continue to be regulated under the CRD/CRR and remain subject to the capital and remuneration requirements of the CRD/CRR.

Class 2 companies are investment firms which are not systemically important and which exceed certain size and risk thresholds.

This should be the default category for many investment firms.

Class 2 undertakings are subject to IFD/IFR supervision and remuneration requirements (unless they are part of a group subject to consolidated supervision under the CRD/CRR).

Class 2 companies are required to hold minimum capital based on the greater of their Fixed Overhead (“FOR”) requirements, their Permanent Minimum Capital (“PMC”) requirement, or a new capital requirement. “K factor” capital.

K-factors are a set of parameters used to determine the capital requirements of a business, based on the range and extent of services provided by the business.

Class 3 companies are small, non-interconnected companies that do not reach certain thresholds. These are subject to reduced and modified IFD/IFR requirements (unless they are part of a group subject to consolidated supervision under CRD/CRR requirements).

Class 3 companies are required to hold minimum capital based on the greater of their FOR requirement or their PMC.

They are not required to calculate their capital based on the K-factor methodology, but must still calculate K-factors for categorization purposes.

Class 3 companies continue to be subject to the MiFID remuneration requirements and not the IFD/IFR remuneration framework.

Remuneration

DFIs/RFIs introduce remuneration requirements including deferral, payment in instruments and remuneration committees for many investment firms. In line with the principle of proportionality, governance and remuneration requirements will depend on the classification and size of a company’s balance sheet.

The Central Bank of Ireland (“Central Bank”) intends to publish in due course an “Implementation of NCA discretionary powers in IFD/IFR regulatory notice” to set out how it will exercise the discretionary powers of Member State in terms of remuneration which will be granted to him by the Irish Minister for Finance.

National implementation: Ireland

The IFR and IFD entered into force on 25 December 2019. The IFR is directly effective from 26 June 2021 and EU Member States should apply national legislation implementing the IFD from of June 26, 2021.

The Irish Department of Finance has published a Feedback Statement on 24 May 2021 on the results of its public consultation on national discretionary powers under the IFD in May 2020. For more details, see our client’s update Ireland exercises discretionary powers under of the IFD / IFR.

Irish implementing legislation is expected shortly.

On June 23, 2021, the Central Bank issued a Feedback Statement providing further guidance on how it will exercise the discretionary powers of competent authority in IFR and IFD.

Noting that the incorporation into Irish law of Articles 60 and 61 of the FDI will change the capital requirements for managers of AIFs and UCITS with additional MiFID II permissions, the Central Bank clarified that such entities should continue to comply with the current prudential regime specified in their authorization conditions pending further commitment from the Central Bank.

What should investment firms do?

To ensure compliance with the IFD/IFR regime, investment firms should familiarize themselves with the IFD/IFR requirements and the potential impact on their business.

This may involve the following initial considerations:

  • Evaluation of the practice within the framework of the categorization Class 1 / 2 / 3

  • Review of applicable minimum capital requirements

  • Revision of policies and procedures/compensation framework of the firm

  • Prepare for the new regulatory reporting regime to which the firm is subject

Any shortcomings identified in the current business model should be corrected and policies and procedures should be updated to ensure compliance.

In January 2021, the Central Bank indicated that the preparation of investment firms for FDI/IFR should be discussed at board level.

A central bank declaration on July 14, 2021 reminded affected companies to participate in the European Banking Authority’s data collection exercise (as part of its second visit on the draft RTS relating to the calculation of the threshold of Article 8 bis (1) of the CRD) as communicated by their supervisory team and to confirm their IFD/IFR classification by the end of August 2021.

How Maples Can Help

Our Irish Financial Services Regulatory Group is currently working with a number of companies implementing the new regime, including: the review of the remuneration framework and terms and conditions of employment; dialogue with the Central Bank; assess business recategorization and relevant thresholds (particularly in group contexts); advising clients on the interpretation of the main provisions; and how the Ministry of Finance and the Central Bank intend to exercise national discretionary powers.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.