From 26 June 2021, a new prudential regime will apply to Markets in Financial Instruments Directive (MiFID) investment firms across the EU as well as UK and Gibraltar. The changes are being introduced by the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD). 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 institutions. 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.
Said new directives and regulations will affect companies on various levels such as the ones below:
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.
IFD sets new initial capital requirements for all MiFID investment firms, which will depend on their activities.
‘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 ongoing capital.
‘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’ requirement).
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.
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 purposes:
• ‘Class 1’ firms and ‘Class 1 minus’ firms will remain subject to the CRR2/CRDV remuneration regime
• ‘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: fixed to variable remuneration ratio, guaranteed bonuses, pay-out (payment in shares and in equivalent interests), malus and clawback, deferral, discretionary and pension benefits, payments and termination and proportionality.
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 funds requirements;
• 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 remuneration; and
• 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 sector.
Firms will be also required to report to their Financial Intelligence Units 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 4 months to go until the implementation date, firms should be progressing their implementation projects and re-authorisation applications.
The GFSC together with GACO, GFIA and GBA have been working on all the above topics in a specific working group to tackle all the above subjects.
Last year under GACO's umbrella we held a seminar providing an overview on all of the above topics in conjunction with Caroline Dawson from Clifford Chance UK. We are very happy to inform you that we have been able to engage Caroline Dawson for a follow up/Sequel webinar on the above subject and she will be able to show us the progress that has been done in the UK and how the various directives are being implemented and the practical impact it will have on the regulated firms in said sectors.
At the beginning of the seminar Joanne Beiso from the GFSC will provide us an update from the Gibraltar regulator on all the above fields and give us an overview of the next steps.
This webinar will take place over Gotomeeting on the following date and time:
Date: 3rd March 2021
Time: 10.30am CET
Duration: 1.5 hours
Course Fee: £30 for GACO, GFIA, GBA and GANT-Members, £50 for non-Members