MiFID investment firms will be subject to a new prudential
regime from 26 June 2021 under the Investment Firms Directive and
Investment Firms Regulation. Firms will be classified by reference
to asset-levels, activities and systemic importance, with the
largest systemic firms needing re-authorisation as credit
institutions. Regulatory activity is increasing in advance of the
new regime, with the Central Bank of Ireland launching a
consultation and the EBA progressing the key actions set out in its
June 2020 Roadmap.
From 26 June 2021, a new prudential regime will apply to Markets
in Financial Instruments Directive (MiFID)
investment firms across the EU. The changes are being introduced by
the Investment Firms Regulation
(IFR) and the Investment Firms Directive
The core aim of the IFR/IFD is to introduce more proportionate
rules for all MIFID investment firms in relation to capital,
liquidity and other risk management requirements, while ensuring a
level-playing field between large and systemic financial
While the IFR will be directly applicable across the EU once it
enters into force in full, Member States must implement the IFD
into national law by way of domestic legislation. Implementing
legislation for Ireland has not yet been published.
Which of the new rules will apply to a particular MiFID
investment firm will depend on that firm’s classification under
the new IFR/IFD regime.
Depending on their size and certain other factors, under the
IFR/IFD investment firms will be classified as follows:
|Systemically important firms that are authorised to
deal on own account and/or underwrite or place financial
instruments on a firm commitment basis and whose total assets
exceed ?30 billion (individually or on a group basis) will be
‘Class 1’ firms.
|‘Class 1’ firms will be
required to be authorised as credit institutions, subject to direct
supervision by the European Central Bank under the Single
They will be regulated from a prudential perspective under the
existing Capital Requirements Regulation
(CRR2)/Capital Requirements Directive
|‘Class 1 minus’ firms are
firms that are authorised to deal on own account and/or underwrite
or place financial instruments on a firm commitment basis and whose
total value of consolidated assets exceeds ?15 billion but does not
meet the ?30 billion ‘Class 1’
|National competent authorities
(NCAs) will also be able to classify firms that
carry on ‘bank-like’ activities but whose
consolidated assets are between ?5 billion and ?15 billion as
‘Class 1 minus’ firms.
|There will be no requirement for these
‘Class 1 minus’ firms to re-authorise as a
credit institution (unlike ‘Class 1’
firms), but they will nonetheless be subject to the more onerous
prudential and remuneration requirements under CRR2/CRDV.
|Firms that are not systemically important but that
hold a particular level of own funds will be classified as
|These firms will need to comply with the new
IFR/IFD regime (rather than CRR2/CRDV), unless they are part of a
group that is subject to consolidated supervision under the
|Small and non-interconnected investment firms that
do not meet certain thresholds and do not hold client assets will
be classified as ‘Class 3’.
|These firms will need to comply with the new
IFR/IFD regime (save for the remuneration requirements), unless
they are part of a group that is subject to consolidated
supervision under the CRR2/CRDV regime.
IFD sets new initial capital requirements for all MiFID
investment firms, which will depend on their activities.
As explained above, ‘Class 1’ and
‘Class 1 minus’ firms will remain subject
to the CRR2/CRDV regime in relation to ongoing capital
requirements. ‘Class 2’ and
‘Class 3’ firms will be subject to the new
IFR/IFD requirements in relation to the calculation of their
‘Class 2 ‘firms will be subject to new
risk-based regulatory capital requirements. They will be required
to hold minimum own funds based of the higher of their permanent
minimum capital requirement, their fixed overhead requirement or a
new ‘K-factor’ own funds requirement (a directly
proportional capital requirement based on the specific risks
investment firms face and the risks they pose to customers/markets
(effectively a series of risk parameters/indicators).
‘Class 3’ firms will be required to
hold minimum own funds based on the higher of their permanent
minimum capital requirement or their fixed overhead requirement
(they will not be subject to the new ‘K-factor’
IFR/IFD also introduces new liquidity rules, ICAAP requirements
and detailed disclosure rules (including under Pillar 3 and in
relation to environmental, social and governance
(ESG) risks) and new remuneration rules (described
In a similar manner to CRR2/CRDV, IFR/IFD requires relevant
‘Class 2’ and ‘Class
3’ firms to comply with capital requirements,
disclosure and reporting on a consolidated basis unless the
competent authority grants a waiver from such requirements.
At present, CRR2/CRDV-scope MiFID investment firms are subject
to the CRR2/CRDV remuneration requirements.
Under IFR/IFD, this will change as MiFID investment firms will
fall into one of three separate categories for remuneration
- ‘Class 1’ firms and ‘Class
1 minus’ firms will remain subject to the CRR2/CRDV
- ‘Class 2’ firms will be subject to the
new IFR/IFD remuneration regime
- ‘Class 3’ firms will not be subject to
the new IFR/IFD remuneration regime and will be subject to the
high-level MiFID requirements
The new remuneration rules applicable to ‘Class
2’ firms will apply to all staff whose professional
activities have a material impact on the firm’s risk profile:
senior management, risk takers, control functions, and employees
receiving overall remuneration equal to at least the lowest
remuneration of any risk taker or member of senior management.
As an overarching requirement, all firms with on and off-balance
sheet assets exceeding ?100 million must have a gender-balanced
remuneration committee (which can be established at group level)
whose members must not hold executive roles in the firm.
The following types of variable remuneration will be affected by
the new remuneration rules:
|TYPE OF VARIABLE REMUNERATION
|Fixed to variable remuneration
|Firms must set a ratio between fixed and variable
remuneration and make provision for cases in which paying variable
remuneration would be inappropriate. Member States will be allowed
to cap variable remuneration in their IFD implementing legislation,
but the IFD does not (unlike the existing CRR2/CRDV regime) provide
for an express bonus-cap.
|These may only be awarded by firms, with a strong
capital base, to new staff in their first year of employment.
|Pay-out (payment in shares and equivalent
|50% or more of the variable element of remuneration
must be paid in certain instruments (e.g. shares or equivalent
ownership interests), and such instruments must be connected to the
firm’s retention policy. Member States may limit the types and
designs of these instruments or ban certain instruments, as
|Malus and clawback
|Malus and clawback requirements will apply to
|40% or more (or at least 60% in cases of
‘high’ pay-outs) of the variable remuneration must
be deferred over a period of 3 to 5 years, vesting pro-rata.
|Where employees leave a firm before reaching
retirement, the firm must hold discretionary pension benefits for 5
years in the form of instruments. If an employee reaches
retirement, benefits must be paid as instruments which are subject
to a 5-year retention period.
|Payments on termination
|These payments may not be used to reward failure or
misconduct on behalf of the employee.
|Firms are free to dis-apply the rules on pay-out
and deferral if:
- the value of firm’s on and off-balance sheet assets are on
average equal to or less than ?100 million over the 4-year period
immediately preceding the given financial year; and
- the individual’s variable remuneration does not exceed
?50,000 and does not represent more than one quarter of the
individual’s total annual remuneration.
Disclosures and Reporting
Firms will be required to disclose detailed information
depending on their classification. This will include:
- information on internal governance arrangements, such as the
number of directorships held by members of the management body and
details of the diversity policy relevant to selection for
membership of the firm’s management body;
- ESG risks including physical risks and transition risks;
- details on the firm’s own funds and compliance with its own
- remuneration policy and practices, including aspects related to
gender neutrality and the gender pay gap, the level of variable
remuneration and the ratios between fixed and variable
- details of the firm’s investment policy, such as the
proportion of voting rights attached to the shares held directly or
indirectly by the investment firm, broken down by Member State and
Firms will be also required to report to their NCA details of
the number of staff that receive remuneration of ?1 million or more
in any given financial year, including information on their job
responsibilities, business area and details relating to salary,
bonus, long-term award and pension contribution.
The new IFR/IFD requirements will introduce significant changes
for many investment firms. With exactly 5 months to go until the
implementation date, firms should be progressing their
implementation projects and re-authorisation applications.
It is unclear when the Department of Finance will issue the
domestic implementing legislation, albeit work is underway. In
2020, the Department of Finance ran a consultation (which closed on 6 July
2020) on the national discretions available under the IFD, which
are centred on variable remuneration.
- Central Bank Consultation
The Central Bank began its consultation on competent authority
discretions on 14 January 2021, in anticipation of being designated
as the Irish NCA. Among the Central Bank’s proposals are:
- to maintain the discretion to, on a case-by-case basis,
designate certain investment firms as ‘Class 1
minus’ where the relevant firm carries out
‘bank-like’ activities on such a scale that its
failure or distress could lead to systemic risk, or where the firm
is a clearing member that offers its clearing services to other
financial sector entities which are not clearing members
themselves, or where the Central Bank considers that classification
to be justified in light of the size, nature, scale and complexity
of the activities of the investment firm concerned;
- to prevent investment firms from having a qualifying holding
which exceeds 15% of own funds or total qualifying holdings which
exceed 60% of own funds, in each case in undertakings that are not
financial sector entities;
- to allow ‘Class 2’ firms (which would
otherwise be subject to the IFR/IFD) that are supervised on a
consolidated basis with a credit institution to continue to apply
the CRR prudential requirements;
- to only exempt ‘Class 3’ firms on an
exceptional basis from the requirement to hold one-third of their
fixed overhead requirement in liquid form; and
- to require all ‘Class 3’ firms to
perform an assessment of internal capital and liquid assets.
The consultation will close on 26 March 2021. Once the Central
Bank has reviewed the feedback from this consultation, it will
publish a regulatory notice on ‘Implementation of NCA
Discretions in IFD/IFR’ by the end of June 2021, setting
out its approach to the various discretions.
The Central Bank also plans to consult on some of the changes
arising from the CRR2/CRDV regime later in 2021 – this will impact
both ‘Class 1’ and ‘Class 1
The EBA published its Roadmap on Investment Firms in June 2020,
which summarises its key mandates under IFR/IFD which span six
|THRESHOLDS AND CRITERIA
|CAPITAL REQUIREMENTS AND
|A particular focus is the transition of
‘Class 1’ investment firms to
‘credit institution’ status.
|A key focus is the measuring methodology for each
of the ‘K-factor’ calculations.
|REPORTING AND DISCLOSURES
|REMUNERATION AND GOVERNANCE
|The area of reporting covers own funds, minimum
capital levels, concentration risk, liquidity requirements, levels
of activity for ‘Class 3’ firms, and the
reporting requirements for ‘Class 1 minus’
The area of disclosures covers capital resources, capital
requirements, remuneration policies and practices, governance
standards, own funds and investment policy.
|The EBA is focused on ensuring consistency between
the governance and remuneration framework under the IFD and CRDV,
while taking into account the requirements contained in the
Alternative Investment Fund Managers Directive and the UCITS
|SUPERVISORY CONVERGENCE AND
|ESG FACTORS AND RISKS
|The EBA’s strategy will include a focus on
anti-money laundering/countering the financing of terrorism, the
consistent and proportionate application of Pillar 2 methodologies
across the EU, and ensuring cross-sectoral consistency between
supervisory cooperation, the SREP and the Pillar 2 framework under
CRDV and the IFD.
|The EBA’s ESG mandate under IFR/IFD is similar
to its ESG mandate under CRR2/CRDV (covering common definitions,
risk management tools, prudential treatment and disclosures) and it
is exploring synergies between the two.
The EBA plans to deliver on its mandate in four stages – while
it plans to complete much of its work by December 2021, aspects of
its work on supervisory convergence, SREP and ESG are pencilled in
for 2022-2025, although work on Pillar 2 add-ons and an initial
report on ESG risks are to be delivered by the end of 2021.
To date, it has launched a consultation on guidelines on sound remuneration
policies under IFD, a consultation on internal governance under IFD,
and a package of seven draft RTS covering matters
such as the calculation of regulatory capital requirements,
identifying firms on the basis of their systemic importance and the
information needed to support an application by a firm for
authorisation as a credit institution.
21 January 2021, it also announced the publication of final draft RTS
on classes of instrument that can be used for variable
remuneration, and on criteria for the identification of categories
of staff whose professional activities have a material impact on a
firm’s risk profile or the assets that it manages.
This article contains a general summary of developments and
is not a complete or definitive statement of the law. Specific
legal advice should be obtained where appropriate.