On Wednesday 20 December, the European Commission presented a new prudential and supervisory framework for investment companies, as announced in its mid-term review of the action plan on the Capital Markets Union (see EUROPE 11804).
The reform has two objectives: to simplify the prudential requirements upon small investment companies and subject the larger ones, of systemic importance, to the same rulebook as European banks.
Previously, the 6,000 investment companies in the EU were subjected, as credit institutions, to the same prudential rules laid down in the CRR/CRD IV legislative package on capital requirements and the MiFIR/MiFID II framework governing the financial instruments market.
The new rules, which take the form of a directive and regulation, amend this framework to make the key prudential requirements applicable to investment companies more proportionate.
A new three-category classification system based on risk
The system proposed by the Commission broadly uses the three-category classification architecture on the basis of risk profiles proposed by the European Banking Authority (see EUROPE 11874), but with a number of changes.
Under the proposal, the first category will include investment companies of systemic importance, providing underwriting services and dealing on own account and with total assets above €30 billion. These companies, which are considered to present similar risks to those of banks, will be included in the definition of bank under the CRR regulation and will therefore be covered by the requirements of the CRR/CRD IV package, like banks.
Basically, this means that in the future, they will be regulated and supervised in the same way as banks, in other words by the European Central Bank in the framework of the Single Supervisory Mechanism within Banking Union.
Non-systemic investment companies will be divided into two groups. The second category is made up of non-systemic investment companies above certain thresholds, such as: - companies with assets under management of more than €1.2 billion; - those processing customer orders of at least €100 million per day for cash trades or of at least €1 billion per day for derivatives; - those with a balance sheet total above €100 million; - those with total gross turnover above €30 million.
Under the proposal, these companies will continue to apply certain provisions of the CRR/CRD IV framework, for instance specific governance provisions and remuneration rules that are better suited to the business models of investment companies.
Finally, the third category includes other non-systemic investment companies below the thresholds stipulated for the second category. For these companies, the Commission is proposing to set in place less complex rules, for capital requirements, amongst other things. In terms of governance and remuneration, they will continue to be subjected to the rules set out in the MiFID regulation, which were considered sufficient for these companies.
Tightening up the equivalency rules with third countries
As the proposals modify the EU prudential rules applicable to investment companies, the equivalency criterion must also be adapted to include these new rules, the Commission stated.
In particular, the text provides for an update of the equivalency test to make it more proportional to the risk and a more detailed equivalency assessment of prudential convergence with the EU if the quantity of investment services provided by a third country is considered systemic for the EU.
“We intend to send out a clear signal to our international partners: the EU wants an integrated capital market that is favourable to the principle of equivalency, but we also need to look at what happens when there is provision of financial services, so the supervisory rules need to be in line with ours”, the European Commissioner for Financial Services, Valdis Dombrovskis, told a press conference, adding that the equivalency decisions are a matter for the Commission's discretion.
New rules proposed in light of Brexit
The tightening-up of the equivalency rules with third countries calling for greater alignment on the European rules is not the only point of this proposal to be interpreted from the point of view of the forthcoming departure of the UK from the EU.
Most systemic investment companies, such as Goldman Sachs, Morgan Stanley and UBS, are currently based in the UK, but many of them are currently moving some of their operations to the EU27. Consequently, these companies will be subjected to the supervision of the European Central Bank, where they are currently supervised by the British prudential regulation authority.
The proposal must now be approved by the Council and the European Parliament. (Original version in French by Marion Fontana)