10 Conclusions

482. This study discussed the prudential framework for investment firms applicable until June 2021 and the new prudential regime included in the IFR and IFD which will apply as of 26 June 2021, in Chapters 7 and 9, and explored, in Chapter 2, the various investment services and activities that investment firms can provide and the prudential risks to which the provision of these services and activities will expose the investment firm. To better understand what an investment firm is, the activities and the resulting risk profile of an investment firm were compared to that of a bank in Chapter 3 and the effect of asset segregation on the risk profile of investment firms was analysed in Chapter 4.

483. The most notable difference between banks and investment firms is that a bank is allowed to take deposits or other repayable funds from its clients and use these funds to finance its own activities. Investment firms are not allowed to take deposits or other similar funds from clients, and if an investment firm receives monies from its clients, it is required to safeguard1 these monies from its own activities. An investment firm, therefore, cannot use its client’s monies to fund its own activities.

484. Furthermore, an important function of a bank is to grant credit. While investment firms can grant credit, they need separate permission from supervisory authorities to grant “investment credit” to their clients to enable them to purchase financial instruments or conclude a transaction in a financial instrument.2 The (regulated) granting of “investment credit” by an investment firm is therefore limited in scope. As discussed in Section 2.1.3, if an investment firm provides its clients with (investment) credit, it will usually require that client to provide collateral to minimize the credit risk for the investment firm. This will expose the investment firm to market risk, however, on the received collateral and will expose the investment firm to operational risks on the calculations of the required collateral and the systems put in place to monitor any movements in the value of the received collateral as compared to the credit granted and the internal limits set by the investment firm for requiring collateral.

485. These two differences between banks and investment firms have a profound impact on their respective balance sheets and subsequently on the risks to which these two types of business are exposed. Since an investment firm has to segregate the funds and securities of its clients from its own assets, it is not subject to any financial risks on these funds or securities. Nor should the investment firm be susceptible to a bank run if all of its clients want to withdraw their funds or securities. A bank might get in financial difficulties if all of its depositors withdraw their deposits simultaneously, as the bank has used these deposits to finance its activities. Due to the asset segregation requirements, an investment firm is not allowed to use the funds and securities of its clients for its own risk and account and should therefore always be able to repay its clients for the funds belonging to that clients and it should be able to transfer its client’s securities to that client or another investment firm if so chosen by that client.

486. The following sections will draw conclusions based on the research and discussions provided in the previous Chapters. These sections will start with the framework this study has used for assessing the prudential risks of the investment services or activities provided by an investment firm and will follow with the conclusions on what the prudential risks of an investment firm are. The next section of this Chapter will present the conclusions on the prudential framework for investment firms in the CRD 2013 and the CRR and will discuss whether the new regime proposed by the EC in the IFR and the IFD address the prudential risks that are identified in this study. This Chapter will end with recommendations on how to improve the prudential regulatory response implemented in the European Union to better address the prudential risks of investment firms and how this should be incorporated into the review3 the European Commission will have to carry out.