New agreement heralds tighter controls for financial firms operating in the EU

The European Commission is to gain greater powers to oversee the activities of foreign financial firms operating in the European Union – including London-based firms post-Brexit – following an agreement reached late on Tuesday between EU governments and lawmakers.

The deal, which still requires a final rubber stamp from the European Parliament and the EU Council, confirms an agreement reached by EU states back in January and covers all investment firms that offer ‘bank-like’ services.

The European Commission says the agreement provides “more proportionate and effective prudential rules for investment firms (IFR) which will help to improve investment flows across the EU and delivering better protection for investors”.

A key element of the EU's Capital Markets Union (CMU), the revised legislation introduces stricter rules on capital, liquidity and other risk management requirements. The Commission says it should also help ensure a level-playing field between large and systemic financial institutions, with investment firms which carry out bank-like activities and pose similar risks as banks, subject to the same rules and supervision as banks. Simpler and less risky firms, it says, will benefit from a fully revised rulebook more tailored to their business models. As part of the new framework, equivalence rules for the provision of investment services by third-country firms will also be strengthened and clarified.

Commission Vice-President Valdis Dombrovskis, responsible for the Euro and Social Dialogue, also in charge of Financial Stability, Financial Services and Capital Markets Union, says: “Today's agreement will help investment firms facilitate capital flows across the EU, while giving EU investors access to more choice and improved services. The EU is delivering a Capital Markets Union Agenda that puts proportionality at its heart, while never compromising on stability.”

Vice-President Jyrki Katainen, responsible for Jobs, Growth, Investment and Competitiveness, says: "This agreement is an important step in our strategy to build strong capital markets in the EU (the Capital Markets Union). It levels the playing field between the largest investment firms and the largest banks; they will follow the same rules, and puts in place a more proportionate prudential regime for the smaller ones. This is a major achievement which will deliver a suitable rulebook for EU investment firms and for the provision of services to EU clients by firms which are outside the Union.”

The investment firms review divides investment firms into three categories:

• Large firms will remain under the scope of the existing prudential rules, and the most systemic ones will now be brought under the same supervisory regime as significant credit institutions;

• All other firms will be placed in two groups in a revised rulebook, taking their specific risks into account. The smallest firms will benefit from simpler and more streamlined requirements.

• Targeted changes are also introduced under which providers based in non-EU countries can offer their services to EU companies and clients.

A European Commission statement says: “The revised legislation will simplify compliance for Europe's investment firms, supporting them in mediating investment flows between savers and economic actors. This should help channel savings towards capital markets and benefit investment and growth in the EU. The rules will also help European supervisors carry out oversight of the activities and risks posed by investment firms. Finally, it will ensure that EU clients can continue to benefit from the investment options and services provided by firms based in countries outside the EU, with suitable safeguards to protect investors and financial stability within the Union.”


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