New Prudential Framework: Impact Analysis for EU Investment Firms

December 20, 2017 by Michael Chambers

The European Commission today issued its proposals announcing a new prudential rule book for investment firms.  This is based largely on the opinion and final report issued by the European Banking Authority (EBA) earlier this year.

The new rules will seek to move smaller non-bank-like investment firms away from the current regime governed by the Capital Requirements Directive (CRD) and Capital Requirements Regulation (CRR) (collectively CRD IV), which had been designed with banking institutions primarily in mind.

The premise of the new rules will be to ensure investment firms have a prudential framework designed to be simpler and more proportionate to the operations of these types of firms. However, these changes will result in significant alteration to how investment firms measure their capital for regulatory purposes. And some firms, which have previously been exempt from the majority of the requirements of CRD IV, will now find themselves in scope.

This proposal will start the legislative process in earnest. But as with all new Directives and Regulations the road is long but the final rules could be in place as early as 2019. Then of course there’s the impact of Brexit to consider – will the Financial Conduct Authority abandon these proposals in favour of its own “post-Brexit” regime? Anything’s possible but for the time being it may be safest to work on the basis that the UK will adopt the new rulebook.

The Opinion and final report issued by the EBA in September 2017 contains 62 recommendations and accompanying Annexes and will be the basis of the EC draft rules within their consultation paper. The process to arrive at the EBA’s Opinion have been at least three years in the making, consisting of reports, discussion papers, a number of data gathering exercises, opinions and recommendations.

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About the Author

Michael is Head of Prudential Practice within ACA’s Financial and Regulatory Reporting team, responsible for regulatory reporting and prudential consulting services, technical interpretation of new and existing rules and prudential training sessions for clients.

Michael works with ACA’s clients including alternative fund managers, corporate finance firms, broker dealers and other investment firms, across a variety of strategies to address their obligations. He represents ACA in its Affiliate Membership with the Investment Association on their Prudential Committee.

Michael holds a BSc (Hons) degree in Accounting and Management Information Systems from the University of Hertfordshire, and is an Associate Chartered Accountant with the ICAEW.