9.1.2 The Investment Firm Regulation and Directive

356. The IFR lays down requirements on the following topics: “Capital requirements, requirements limiting concentration risk, liquidity requirements, reporting requirements and public disclosure requirements”.1 The IFR contains the capital requirements and the calculation method for these capital requirements. The IFD lays down rules concerning “initial capital of investment firms, supervisory powers by competent authorities, prudential supervision by competent authorities in a manner that is consistent with IFR and publication requirements by competent authorities”.2 The requirements in the IFD address the powers, tools and obligations of national competent authorities. The IFD also lays down rules regarding the initial capital of an investment firm, which is part of the requirements an investment firm needs to comply with when obtaining its authorisation.3 The IFR Proposal and the IFD Proposal have both been amended by two Presidency Compromise proposals4 that incorporated the political discussions between the European Council, the European Parliament and the member states and which lead to the final texts of the IFR and IFD that have been published on 5 December 2019. The following paragraphs will discuss these requirements in further detail. The study will first discuss the rationale for the use of the legislative instruments of the IFR and IFD.

357. This division between a directive and a regulation is mostly justified in the EC proposals on the grounds that they replace the existing CRD5 and the CRR for investment firms. With the IFR the EC has chosen a regulation as a legislative instrument, because this “achieves the same direct legal effect as the current rulebook, ensuring that the objectives of the proposal are achieved consistently across the EU and helping create greater certainty and a level playing field for firms”.6 For the IFD the EC states that a directive “ensures that its provisions can be transposed by member states in accordance with relevant national administrative arrangements consistent with existing practice”.7

358. The EC has reproduced the division of rules and regulations between the directive and regulation from the CRD 2013 directive and the CRR regulation. When introducing the CRD 2013 and the CRR the EC argued for this division into a directive and regulation as follows: “the regulation is directly applic able, which means that it creates law that takes immediate effect in all Member States in the same way as a national instrument, without any further action on the part of the national authorities. This removes the major sources of national divergences (different interpretations, gold-plating). It also makes the regulatory process faster and makes it easier to react to changed market conditions. It increases transparency, as one rule written in the regulation will apply across the single market. […] Areas of the current CRD where the degree of prescription is lower and where the links with national administrative laws are particularly important will stay in the form of a directive. This concerns in particular the powers and responsibilities of national authorities (e.g. authorization, supervision, capital buffers and sanctions), the requirements on internal risk management that are intertwined with national company law as well as the corporate governance provisions. By contrast, the detailed and highly prescriptive provisions on calculating capital requirements take the form of a regulation”.8

359. This division between detailed and highly prescriptive requirements that should be in a regulation and requirements that require a lower prescriptive level or that are intertwined with national requirements seems logical at first glance. The powers of and tools used by competent authorities are regulated on a national basis and any amendments should thus be made on a national level. However, as the IFD is intended as full harmonization9 of the rules and requirements across the European Union, the necessity to have national transpositions becomes less obvious if member states are not allowed to deviate from the prescriptive articles in the IFD. The fact that certain requirements should intertwine with national company law should not in itself be a reason why a regulation is not considered an appropriate legal tool. Having all requirements in a regulation still leaves the possibility for national legislators to intertwine these requirements with national company or administrative law. One could argue that a requirement included in a regulation that touches upon requirements included in national administrative or company law should not interfere with the intended requirements in national law. Regulations are, on a national level, an important principle of European law and the direct binding effect and direct application of provisions of European regulations are in fact national law, albeit that the requirements included in regulations supersede national law if there are conflicts. As such, national law- makers should be able to integrate the substantive law provisions of a regulation in their national law. From a legislative implementation standpoint, it should not matter if national administrative and company law were amended to fully include a maximum harmonization directive or if both were amended to comply with the requirements included in a regulation. The Dutch legislator often uses the legislative tool of “dynamic referencing”10 to include require ments, including any future changes to those requirements, of directives or regulations within the Dutch legislative framework.

360. The freedom for the EC to include requirements in a regulation are limited, however, by Article 59 of the Treaty on the Functioning of the European Union,11 which states that for the liberalization of services the EC should only use directives to achieve harmonization within the European Union. Any requirements that touch upon the freedom to provide services can therefore only be included at directive level, which means, for instance, that the authorisation requirements should be included in a directive. Although the initial capital requirements in the IFR are “detailed and highly prescriptive provisions” and, according to the logic of the EC followed for the other prudential requirements, should thus be included in a regulation, the Treaty on the Functioning of the European Union prohibits the EC from including these initial capital requirements in a regulation. However, other parts of the IFD, such as Chapter 2, which includes the supervisory review process, are also “detailed and highly prescriptive” provisions, are not directly related to the freedom to provide services and it would therefore, have been more consistent to be regulated at the level of the IFR. By simply reproducing the division of topics between a regulation and a directive as applied in the existing CRD 2013 and the CRR, the EC did not fully assess whether a directive was still needed. The need for a separate directive is less obvious than the EC purports to argue in its proposal for the IFD, even considering the obligation to use a directive included in Article 59 of the Treaty on the Functioning of the European Union.