Recent publications by the European Banking Authority (EBA) and CBI have provided additional insights into the IFD/IFR requirements.
In December 2020, EBA published a final report on its draft Regulatory Technical Standards (RTS) on the prudential treatment of investment firms. Addressing industry feedback on its June 2020 public consultation, EBA has provided clarifications around definitions and treatments. This included, for example, the definition of a financial entity in the context of IFD/IFR and the scope of a number of K-factor requirements, in particular assets under management (AUM).
On January 14, 2021, the CBI issued a Consultation Paper, CP135 Consultation on Competent Authority Discretions in the Investment Firms Directive and the Investment Firms Regulation. In this document, a number of discretions are addressed:
- Application of the Capital Requirements Directive (CRD) regime to Investment Firms
- Liquidity Requirements
- Assessment of Internal Capital and Liquid Assets
- K-Factor Adjustment
The CBI has signaled its intention to apply these discretions on a case-by-case basis. The onus is on the firm to apply for a discretion where it believes that it is relevant. The CBI has also indicated that in relation to the discretions, it will
- Adopt a prudent approach to the steady-state provisions
- Choose the more risk sensitive option, where one is identified; and
- Be consistent and transparent in the intended approach, and the reasoning behind it.
This consultation is open until March 26, 2021 and the CBI intends to publish an ‘Implementation of NCA Discretions in IFD/IFR’ Regulatory Notice, where it will set out its approach to the exercise of these discretions, by the end June 2021.
The clock is ticking on the implementation of the new regime across the investment firm sector. In EU member states, IFD/IFR becomes effective from June 26, 2021 with a first reporting date of September 30, 2021. The imminence of this timeline was echoed by Gerry Cross of the CBI in his recent speech, where he stressed that “we expect that firms’ preparation for the IFR/IFD has been discussed at board level and that firms have stood up their implementation projects”.
The introduction of IFD/IFR will have significant impacts for Investment Firms. Firms need to take a holistic approach to the new requirements, which will include:
- making an assessment of the classification applicable to the firm,
- reviewing requirements under this classification,
- and ensuring that processes and IT systems are in place to:
- Capture the core data required
- Complete the required calculations
- Validate the results, and
- Convert output to XBRL format for onward submission to the local regulator.