9.5 Conclusions

477. The new prudential regime for investment firms is a significant improvement in risk sensitivity for the specific risks of the investment firm sector.1 Although there are several aspects of the new capital requirements that contain questionable choices, the IFR and IFD result in a more appropriate regime for investment firms that do not deal on own account. The regime for RtM and RtF included in the IFR proposals will not provide an improvement to the existing supervisory regime in the CRD 2013 and the CRR. Certain K-factors, such as K-NPR, K-CON, K-TCD and K-DTF, even seem to either measure inappropriate risks or address these risks themselves incorrectly and thereby fail to consider the specific risks posed by investment firms.

478. If we take a look once again at the objectives of the IFR and the IFD,2 as included in Section 9.1.1, the new regime seems only to meet the objectives for those investment firms that do not deal on own account. If we consider the changes made in the Presidency Compromise versions of the IFR and IFD, the new regime actually seems to meet fewer of the objectives set by the EC. The original IFR and IFD proposals provided for a prudential framework that is: 1) more accommodating for the business of certain investment firms; 2) more appropriate and more risk-sensitive for investment firms only subject to RtC; and 3) provides a more streamlined regulatory and supervisory toolkit for the national supervisory authorities responsible for supervising investment firms.

479. The Presidency Compromise has complicated the proposed regime significantly, by introducing the new Class 1a and Class 1b categories. These new Class 1 firms will be (or might be in the case of Class 1b) subject to the CRD 2013 and CRR requirements, which both the EBA in its reports and the EC have concluded to be inappropriate for investment firms. Why these investment firms should still remain subject to the CRD 2013 and CRR requirements is not further explained and appears to be purely a political choice. The most striking – and one must hope unintentional – consequence of keeping these Class 1a and Class 1b investment firms under the CRD 2013 and CRR requirements is that the actual capital requirements might be even lower under the old regime then they would have been under the new IFR and IFD regime.3 The introduction of these new categories in Class 1 will not provide for an appropriate risk measurement framework for those investment firms and will thus lead to suboptimal capital requirements. What makes this even more unfortunate is that for Class 1a and 1b firms subject to the inappropriate CRD 2013 and CRR regime, a better, more risk-sensitive and more appropriate prudential supervisory regime does exist (albeit with its own imperfections) within the IFR and IFD, from which they are subsequently excluded for political reasons.

480. Certain aspects of the IFR could require further clarification or adjustments. Especially the K-factors under Risk to Market and Risk to Firm lack the appropriate risk sensitivity sought by the EC. K-factors such as K-TCD, K-DTF and K-CON are intended by the EC to address risks which either appear to be more suitable for banks than for investment firms, or the actual wording of those K-factors appears to address a different risk entirely than those the EC intended to address. Furthermore, the K-factors K-CON and K-TCD appear to have been introduced at the last moment by the EBA, even after the EBA had consulted on its discussion paper with the public. This last- minute introduction of these K-factors by the EBA, and the subsequent inclusion of these by the EC without any further thought, analysis or even justification, creates a regime within the IFR that will not only measure the wrong risk or address an appropriate risk incorrectly, but also complicate a regime that was intended to simplify the incredibly complex supervisory regime of the CRD 2013 and the CRR.

481. It is unfortunate that these shortcomings have not been amended in the final trilogue negotiations by the European legislators. One must hope that the review4 which will be conducted three years after the date of application of the IFR and the IFD will address these shortcomings. This will mean that investment firms will be subject to a supervisory regime in the IFR and the IFD with obvious shortcomings and inappropriate capital requirements until these might be addressed as a result of the review.