by Mateusz Stefański
BR-AG | Senior Business Analyst, Practice Lead
In the European Union (EU), the Investment Firms Regulation (IFR) and the Investment Firms Directive (IFD) took effect from June 26, 2021, as the new prudential framework for investment firms. For such firms, the IFD/IFR framework supersede the prudential requirements of the Capital Requirements Regulation (CRR) and the Capital Requirements Directive (CRD). The framework is closely aligned to the business model of an investment firm and is designed to address the specific risks posed by this sector.
Specifically, IFD/IFR framework represents a complete overhaul of “prudential” regulation within the EU. As it was intended, the IFD/IFR regulatory framework provides more risk-sensitive and proportionate prudential requirements for investment firms. For example, the solvency requirements are based on indicators appropriate to the specific risks of investment firms, such as assets under management and advice.
Under the investment firms’ prudential framework, a significant number of mandates have been given to the European Banking Authority EBA to deliver regulatory products on the following areas:
- Thresholds and criteria
- Capital requirements and composition
- Reporting and disclosure
- Remuneration and governance
- Supervisory convergence and SREP
- Environmental, Sustainable and Governance factors and risks (ESG)
The EBA’s complete work plan for delivering on those regulatory products is outlined in the IFD-IFR Roadmap.
Source: EBA Roadmap on Investment Firms
In the IFR/IFD, a significant number of mandates has been given to the European Banking Authority (EBA), often in consultation with the European Securities and Markets Authority (ESMA), which has direct implications for the implementation of the framework.
The EBA and ESMA are asked to deliver their joint report to the European Commission (Call for advice) on the prudential framework for investment firms by 31 May 2024. 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).
The report should cover topics including:
- the conditions for investment firms to qualify as small and non-interconnected firms;
- the modification of the definition of credit institution in the CRR to include systemically important investment firms;
- the framework for equivalence in financial services; the Article 1(2) conditions for investment firms to apply the requirements of the CRR;
- the provisions on remuneration in the IFD and the IFR as well as in the AIFMD and the UCITS Directive, with the aim of achieving a level playing field for all EU investment firms and the cooperation of the EU and member states with third countries in the application of the IFD and IFR.
Although the EU’s prudential regime for investment firms has been in place since 2021, for significant EU investment firms Regulatory Technical Standards on the reclassification of investment firms as credit institutions in accordance with Article 8a (6)(b) of Directive 2013/36/EU remain outstanding.
The Commission is also inquiring whether the report could include details regarding any additional concerns or discrepancies that EU authorities may have encountered while implementing the IFR/IFD framework. Recommendations for addressing these issues or enhancing clarity in the terminology employed would be appreciated as well.
For UK investment firms and their holding companies, the UK introduced a prudential regulatory framework, its own version of IFR/IFD, the Investment Firms Prudential Regime (IFPR), which took effect from January 1, 2021.
The Financial Conduct Authority (FCA) carried out a multi-firm review in 2023 to assess the progress of firms in adopting the new regulatory regime for MiFID investment firms, including the conduct of their Internal Capital Adequacy and Risk Assessment (ICARA) processes. This focused on capital adequacy, liquidity adequacy and wind-down planning under the ICARA process.
The FCA also considered how firms were reporting under MiFIDPRU. It has pinpointed several areas that could be enhanced and is currently pursuing further action with firms that took part through its standard supervisory procedures. The FCA urges firms to persist in refining their ICARA process, aiming to implement practices that surpass those identified in the review findings.
With our regulatory reporting tool ATOME Particles, BR-AG supported numerous investment firms and other financial institutions in their regulatory reporting processes.
This also includes preparation of regulatory reporting in the XBRL format, a uniform electronic reporting format designed to enhance the accuracy and transparency of financial and regulatory reporting.
Regulatory authorities keep transitioning to XBRL format adoption as a mandatory format for regulatory reports. For instance, according to the Bundesbank, regulatory reporting submissions will only be accepted in the XBRL format exclusively starting from January 1, 2024 for reports with the reporting reference date of December 31, 2023. Previously, investment firms had the flexibility to submit their regulatory reports using Excel documents
Creating XBRL reports can be technically demanding, often requiring specialized software or technical assistance. Our solution is designed to provide powerful XBRL reporting and validation capabilities for your IFR/IFD, COREP, FINREP, and other reporting needs.
See the full list of supported reporting frameworks
Developed and supported by a team of specialists in regulatory reporting and data standards, ATOME Particles ensures the accurate validation of your regulatory reports against the supervisory authorities’ rules. Once validated, it allows for the easy generation of an XBRL reports, ready for submission to the relevant authorities.