6.1 The regulation of investment firms in European law

222. Investment firms and banks, insofar they provide investment services or activities, in the European Union are regulated by MiFID II and the MiFIR and were regulated by their predecessors, MiFID I1 and the ISD. The prudential supervision of these investment services and activities in the ISD has been ‘supplemented’2 by specific directives such as CAD 1993.3 The prudential supervisory framework for investment firms has from the beginning been defined in two separate frameworks; the CAD and CRD4 frameworks.

223. The prudential supervision of investment firms in the European Union has historically been closely linked with the prudential supervision of credit institutions.5 Up until 31 December 2013 the prudential requirements for investment firms were included in the CAD 2006, or its predecessor the CAD 1993, which referred to the CRD 2006, or its predecessors,6 for specific provisions such as the definition of capital and the own funds requirement. The CRD is at its core a directive which governs the “taking up and pursuit of business” of credit institutions. Whereas the CAD was a Directive which governs the trading book of investment firms and banks and other investment firm specific requirements. The separation between the CAD 2006 and the CRD 2006 gave the European regulator, in establishing the supervisory regime for investment firms, the possibility of including references from the CAD 2006 to the CRD 2006 for specific requirements, while also maintaining a separate supervisory regime for investment firms. It should be noted that, although the predecessors of the CAD 2006 and the CRD 2006 gave the European legislator similar possibilities for cross-referencing between both regimes, the predecessors of the CAD 2006 and the CRD 2006 were not drafted at the same time by the European legislators and therefore these predecessors cannot be seen as containing a single (prudential) regulatory framework for credit institutions and investment firms, but merely supplementary requirements. As of the CAD 2006 and the CRD 2006, both regimes were drafted by the European legislators as a single regulatory framework.

224. The CAD 2006 and CRD 2006, while sometimes referred to collectively just as ‘CRD’, contained two separate regulatory regimes: one for credit institutions and one for investment firms and trading book activities of credit institutions.7 The CAD 2006 contains multiple cross-references to the CRD 2006, mainly for the definition of capital and certain governance requirements. The actual capital requirements in both regimes are different and focus on different financial risks. As of 1 January 2014 the CAD and the CRD 2006 have been integrated into the CRD 2013 and the CRR.8 The integration of the CAD into the CRD 2013 and the CRR, although having the advantage of creating a “single rulebook” within all 28 member states of the European Union, has also diminished the (possible) distinctions in supervisory regimes between credit institutions and investment firms. Although the merging of the regimes for investment firms and credit institutions into a single regulation and directive should not, from the perspective of legal technique, result in diminished regime distinction, in practice the distinctions between the two regimes were reduced.

225. While the CRR still contains several carve-outs9 of specific requirements for investment firms, the starting point of the CRR is that any investment firm should apply the full CRR in a similar way to a credit institution.10 The carve- outs help to address certain problems some investment firms would face when applying the full CRR, but these carve-outs only address specific sub-sets of investment firms or only address the level of application of the CRR requirements. These carve-outs can, therefore, be seen as highlighting the consequences of merging the two regimes as it became necessary to exempt investment firms from the application of certain, more banking-oriented, requirements. The specific rationale for the harmonization of both the credit institution regime and the investment firm regime was not made explicit by the European legislators. However, given the timing of the introduction of the CRD 2013 and the CRR, in the middle of the financial crisis, it seems possible that the attention of the European legislators was predominantly focused on credit institutions and not on investment firms.