Regulation and Directive on investment firms - IFR/IFD

The new prudential regime for investment firms consists of Regulation (EU) n° 2019/2033 (IFR) and Directive (EU) n° 2019/2034 (IFD), both published on 5 December 2019 in the OJEU. They entered into application on 26 June 2021. The IFR Regulation and the transposed provisions of the IFD Directive are applicable from 26 June 2021. The IFD has been transposed in France by Order 2021-796 of 23 June 2021 and Decree 2021-941 of 15 July 2021.

The investment firms’ prudential framework is completed by a number of Technical Standards, Guidelines & Recommendations published by the European Banking Authority (EBA)

Objectives and content of the legislative package

The IFR/IFD legislative package sets out prudential requirements and supervisory measures tailored to the risk profile and business model of investment firms to ensure that firms authorised to operate in the EU operate on a sound financial basis and are managed in an orderly manner, including in the best interests of their clients, while ensuring financial stability. To this end, it establishes requirements for own funds, minimum capital levels, concentration risk, liquidity, reporting and disclosure. It applies individually to all investment firms that are not systemically important. Previously, these firms were subject to prudential requirements modelled on those of the banking sector.

Classification of investments firms

The IFR/IFD framework introduce a proportionate supervisory regime through a categorisation of investment firms and an adaptation of the rules according to the size, activities and risks of each firm:

• The largest and most complex investment firms (so-called "Class 1") are included in the new definition of credit institution in Article 4.1(1) of Regulation (EU) n° 575/2013 (CRR), due to their systemic importance and are required in France, to obtain a credit and investment institution authorisation (Article 8a of Directive (EU) n° 2013/36/EU (CRD) and Article L.516-1 of the Monetary and Financial Code (MFC)). Pursuant to MSU Regulation (EU) n° 1024/2013 and MSU Framework Regulation (EU) n° 468/2014, they are supervised by the ECB.
   
• Other types of large and complex investment firms (so-called "Class 1a") are also treated as Institutions (Article 2.5 CRR) and apply the CRD if their size or activities present risks to stability (Article 1.2 IFR) or on a voluntary basis (opt-in under Article 1.5 IFR). However, the latter differ from Class 1 firms in that they remain under national supervision and keep their status as investment firms.
   
• Other non-systemic investment firms (so-called "class 2") apply all the prudential requirements of the new regime. To account for the higher risks of investment firms, the minimum own funds requirement for such Class 2 firms should be the higher of their permanent minimum capital requirement, a quarter of their fixed overheads for the preceding year, or the sum of their requirement under the set of risk factors tailored to investment firms (‘K‐factors’) which sets capital in relation to the risks in specific business areas of investment firms.
• Smaller, non-interconnected investment firms (so-called "Class 3"), which meet the conditions of Article 12 of IFR are subject to greatly simplified prudential requirements.
  In order to ensure a simple application of the minimum own funds requirement for them, they should have own funds equal to the higher of their permanent minimum capital requirement or a quarter of their fixed overheads measured on the basis of their activity of the preceding year. Those that prefer to exercise further caution and avoid cliff effects in the case of reclassification should not be prevented from holding own funds in excess of, or applying measures stricter than, those required by this Regulation.