European Commission call for advice to EBA and ESMA to evaluate IFR/IFD prudential requirements

The European Commission has published a call for advice to the EBA and ESMA to provide an evaluation of the new prudential framework for investment firms that became applicable in June 2021.

The entry into application of the IFR/IFD framework has carved out most investment firms from the CRR/CRD framework and subjected them to a new bespoke prudential regime that is aimed to be more proportionate to the nature, size, and complexity of their activities. In accordance with Article 60 of IFR and with Article 66 of IFD, the Commission is required to submit, by 26 June 2024, two reports to the European Parliament and the Council (having consulted with the EBA and ESMA – and this call for advice is intended to fulfil this obligation to consult).

The EBA and ESMA  have been requested in their evaluation to provide information about the structure of the market, distinguishing between investment firms' categories and business models, in a way that would allow the Commission to judge whether the objective of proportionality, which underpins the prudential framework, has been met without creating any undue risk to financial stability and regulatory arbitrage opportunities.

Specific matters identified for consideration by the call for advice include the following matters:

• the appropriateness of categorising investment firms and whether the implemented categorisation of investment firms is adequate and effective to differentiate prudential requirements according to the nature, size and complexity of the considered business models.
  
  
• Interactions with the CRR/CRD (prudential consolidation/liquidity requirements/scope of K factors/implications of the adoption of the Banking Package/remuneration/investment policy disclosure).
  
  
• Considerations on ESG Risks and the extent to which these risks can be sufficiently addressed by the current prudential framework for investment firms.
  
  
• Future proofing IFR/IFD regime (among other considerations, might changes be needed as a result of the emergence of new market players or transformation of businesses as a result of digitisation, and the impact of crypto’s on investment firms).
  
  
• Specific considerations on commodity and emission allowance dealers and on energy firms

The Commission also asks if the report could contain information on any other issues or inconsistencies that authorities in the EU may have identified during the implementation of the IFR/IFD framework. Suggestions on how to rectify the issues or how to clarify the terminology used would also be welcome.

The EBA and ESMA are asked to deliver their joint report to the Commission by 31 May 2024.

The call for advice dated 1 February 2023, is available here.