Investment Firms Regulation (IFR) and Directive (IFD): An Overview

This regime includes Regulation (EU) 2019/2033, the Investment Firms Regulation (IFR) and Directive (EU) 2019/2034, the Investment Firms Directive (IFD). The goal of these regulations is to enhance market fairness and transparency within the EU while ensuring non-complex firms, which pose minimal risk, are not unduly burdened.

Below, we provide an overview of what investment firms can expect from these regulatory changes. Further details on each category will be explored in subsequent publications as we dive deeper into the specifics of IFR/IFD.

1. Classification of Investment Firms

Investment firms are classified into three distinct categories based on their size, complexity and market risk:

• Class 1 firms: Systematically important firms that deal on their own account and remain subject to the CRR.
• Class 2 firms: Firms that are too small for Class 1 but larger and more interconnected than Class 3 firms, subject to the IFR.
• Class 3 firms: Small and non-interconnected firms, also subject to the IFR.

2. Own Funds Requirements

Investment firms are required to maintain a certain level of own funds to meet prudential standards, based on the following components:

• Fixed Overheads Requirement (FOR): One quarter of their fixed overheads from the preceding year.
• Permanent Minimum Capital Requirements (PMCR): €750,000, €150,000, or €75,000, depending on investment services and activities.
• K-factor Requirements: These are broken down into three types of risk:
  • Risk-to-Client (RTC)
  • Risk-to-Market (RTM)
  • Risk-to-Firm (RTF)

3. Liquidity Requirements

Class 2 and Class 3 firms must hold liquid assets equivalent to at least one-third of their calculated Fixed Overheads Requirement (FOR). While certain derogations may apply, the Central Bank is unlikely to fully grant these due to the increased flexibility they provide. Requests for derogations are evaluated on a case-by-case basis.

4. Prudential Consolidation

There are three types of entities that can serve as the consolidating or union parent undertaking under IFR/IFD:

• Union parent investment firm.
• Union parent investment holding.
• Union parent mixed financial holding.

These consolidating entities must include four types of undertakings in their consolidation:

• Investment firms.
• Financial institutions.
• Ancillary services undertakings.
• Tied agents within the investment firm.

5. Disclosure and Reporting Requirements

Firms other than small and non-interconnected investment firms must disclose various types of information, including:

• Risk management objectives and policies.
• Internal governance arrangements.
• Own funds.
• Own funds requirements.
• Remuneration policy and practices.
• Investment policy.
• Environmental, social and governance (ESG) risks.

Small and non-interconnected investment firms issuing Additional Tier 1 instruments must disclose their risk management, own funds and own funds requirements.

Investment firms other than small and non-interconnected ones must submit the following templates under IFR/IFD:

• Own funds.
• Own funds requirements.
• Capital ratios.
• Fixed overheads requirements.
• Level of activity (for small and non-interconnected firms).
• Total K-factor requirement calculations.
• Concentration risk.
• Liquidity requirements.

Small and non-interconnected firms must report their own funds, level of activity and variations in their own funds requirements, capital ratios and fixed overheads calculation.

6. Remuneration Policies:

• Investment firms should design and implement remuneration policies for key staff categories, such as senior management and risk takers, according to the following principles:
• Policies should be proportionate to the firm’s size and complexity, gender-neutral and aligned with sound risk management.
• The remuneration structure should promote long-term business strategies and avoid conflicts of interest.
• The management body should play a central role in overseeing these policies.
• Policies must clearly distinguish between fixed and variable remuneration, with the fixed component making up a significant portion.
•  Firms must establish remuneration committees (for certain firms) and apply risk adjustments to remuneration packages.

How Can We Help?

Our Prudential Risk experts understand that regulatory compliance is a critical driver for the strategic priorities of financial institutions. We specialise in helping clients within the financial services sector navigate the complex web of regulations. By working closely with clients, we identify their regulatory responsibilities and develop tailored strategies to ensure full compliance.