Investment Firms Directive

Investment Firms Directive (IFD) - Guidelines on internal governance and remuneration

The European Banking Authority (EBA) published its final revised Guidelines on internal governance and final Guidelines on remuneration for investment firms under the IFD.

Introduction

The Investment Firms Directive (IFD) and Investment Firms Regulation (IFR), which put in place a new prudential framework for MiFID investment firms, sets out the following classes of firm:

• Class 1: Systemically important firms that are authorised to:
  • deal on own account; and/or
  • underwrite or place financial instruments on a firm commitment basis, and whose total assets exceed €30bn.
• Class 1 minus: Firms that are authorised to:
  • deal on own account; and/or
  • underwrite or place financial instruments on a firm commitment basis and whose total assets are between €15bn and €30bn.
• Class 2: Firms that are not systemically important which hold own funds at certain thresholds based on the higher of their permanent minimum requirement, fixed overhead requirement, or k-factor calculation.
• Class 3: Small and non-interconnected investment firms that do not meet certain thresholds and do not hold client assets will be classified as ‘Class 3’.

Remuneration

Until 26 June 2021, most investment firms were subject to the remuneration framework under the CRD, but under IFD/IFR they will fall into one of the following three regimes:

• Class 1 firms will remain subject to the CRR2/CRDV remuneration regime;
• Class 2 firms will be subject to the new IFR/IFD remuneration regime; and
• Class 3 firms will not be subject to the new IFR/IFD remuneration regime and will be subject to the high-level MiFID requirements, which aim to ensure responsible business conduct, fair treatment of clients and the appropriate management of conflicts of interest when conducting business.

In addition to applying sound remuneration policies to all staff, investment firms are required to apply specific requirements for the variable remuneration of staff whose professional activities have a material impact on the risk profile of the investment firms or the assets they manage (identified staff) under the IFD.

In this regard, the IFD contains a mandate for the EBA to develop guidelines on:

1). remuneration policies for all staff as part of a firm’s internal governance arrangements.
2). remuneration policies for identified staff; and
3). the implementation of waivers by Member States.

The Guidelines

The EBA’s guidelines, which will apply from 30 April 2022 are based on the previous, CRD-derived guidelines, and apply to Class 2 Firms. All investment firms must also comply with the national implementation of requirements under Directive 2014/65/EU (MiFID).

• Remuneration policies for all staff as part of a firm’s internal governance arrangements: The IFD requires that remuneration policies must be gender neutral and respect the principle of equal pay for male and female workers for equal work or work of equal value.
• Remuneration policies for identified staff: The main part of the guidelines focuses on the specific provisions that apply to investment firms’ remuneration policies for identified staff. In particular for identified staff, the alignment of the variable remuneration with the risk profile of the investment firms or the assets they manage is crucial.
• The implementation of waivers by Member States: The IFD allows the Member States to waive the requirement that a part of the variable remuneration of identified staff is paid out in instruments and is deferred. These waivers are based on thresholds provided by the IFD, but the Member States also have some discretion regarding their implementation.

The waivers are generally intended to apply to smaller investment firms, for whom the requirements would be too burdensome and in the case of staff with low levels of variable remuneration, even if they are employed by larger investment firms.

The guidelines are organised into six titles:

I. Remuneration policies
II. Structure of remuneration
III. Remuneration of specific functions
IV. Remuneration policy, award and pay-out of variable remuneration for identified staff
V. Investment firms that benefit from government intervention
VI. Competent authorities

Internal governance

The European Banking Authority (EBA) published its final revised Guidelines on internal governance for investment firms under the Investment Firms Directive (EU) 2019/2034 (IFD).

The IFD contains specific governance requirements for investment firms in parallel to and consistently with the ones already applicable under the CRD. These specific provisions apply to Class 2 investment firms. All investment firms must also comply with the governance requirements under MiFID.

Guidelines

The Guidelines:

• provide further details on how the IFD governance provisions should be applied by Class 2 investment firms, specifying the tasks, responsibilities and organisation of the management body, and the organisation of investment firms, including the need to create transparent structures that allow for supervision of all their activities; and
• specify requirements aimed at ensuring the sound management of risks across all three lines of defence and, in particular, set out detailed requirements for the second and third lines of defence.

Consultation paper on SREP – open for public comment

ESMA and EBA launched a public consultation on their Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). The EBA is also consulting on draft Regulatory Technical Standards (RTS) on the additional own funds requirements that could be determined by competent authorities for investment firms. Both are based on the Investment Firms Directive (IFD) and aim at consistent supervisory practices with regard to the review and evaluation of investment firms.

The consultation runs until 18 February 2022.