Financial Services Regulation and Compliance - Investment Firms Dec 2021
CBI publishes "Dear CEO" Letter addressed to MiFID authorised firms and credit institutions offering MiFID investment services
On 1 December 2021, the CBI published a "Dear CEO" letter (the letter) addressed to MiFID authorised investment firms and credit institutions offering MiFID investment services (the firms). The letter details the CBI's findings from its review of compliance with MiFID II suitability requirements. The review was conducted as part of a Common Supervisory Action coordinated by ESMA. While the CBI identified evidence of positive practices, it also identified further actions required by firms including the following:
- firms need to take a more client focused approach, for example, by ensuring a personalised approach recognising all aspects of a client’s situation and circumstances
- firms need to improve their assessment of clients’ knowledge and experience, financial situation and investment objectives
- firms need to ensure suitability reports are sufficiently detailed and personalised to clients’ objectives and individual circumstances
There is particular concern about the quality of oversight in circumstances where a client insists on proceeding with the transaction at their own initiative against suitability advice.
In addition, the CBI is requiring all Irish authorised MiFID firms and credit institutions, who provide portfolio management and advisory services to retail clients, to conduct a thorough review of their individual sales practices and suitability arrangements. The review must be documented and include details of actions taken to address findings in the ESMA public statement and the letter. The review should be completed, and an action plan discussed and approved by the board of each firm, by end of Q1 2022.
EBA publishes consultation papers on RTS and guidelines on liquidity requirements for investment firms
On 10 December 2021, the EBA published consultation papers on guidelines relating to liquidity requirements under the Investment Firms Directive (IFD) and the Investment Firms Regulation (IFR).
The draft RTS have been developed in accordance with Article 42(6) of the IFD, which mandates the EBA to specify how liquidity risk and elements of liquidity risk are to be measured for the purpose of specific liquidity requirements.
The draft RTS on specific liquidity measurement sets out liquidity risk elements that may raise major concern for investment firms and that competent authorities will be required to consider when setting specific liquidity requirements as a result of an investment firm’s supervisory review and evaluation process (SREP). The draft RTS specify that those elements shall be considered under normal and severe, but plausible, conditions. In addition, to ensure proportionality, competent authorities should assess only a smaller set of elements for small and non-interconnected investment firms.
The guidelines which have been developed in accordance with the mandate set out in Article 43(4) of IFR, specify the criteria under which competent authorities may exempt small and non-interconnected investment firms from liquidity requirements.
The guidelines propose to address the following three main elements:
- a set of investment services and activities provided by investment firms which are eligible for the exemption
- criteria for the exemption
- a guidance on the process for competent authorities when granting the exemption
As small and non-interconnected investment firms do not hold client assets, liquidity requirements for these firms do not intend to cover risks of potential losses of client assets. The guidelines, on this basis, specify that the exemption should be based on the assessment of financial resources needs for an orderly wind down of an investment firm.
The deadline for the submission of comments is 10 March 2022. The EBA intends to publish the final guidelines by mid-2022, with the guidelines applying two months following publication.
EBA publishes the methodology for investment firms to be reclassified as credit institutions
On 20 December 2021, the EBA published two final draft regulatory technical standards (RTS) regarding the reclassification of investment firms as credit institutions.
The identification of large investment firms, which will be reclassified as credit institutions and, therefore, subject to the application of the Capital Requirements Regulation (CRR) and Capital Requirements Directive (CRD), depends on the size of the investment firms and the groups which they belong to.
The first RTS provides a methodological framework for determining the need for reclassification of an investment firm as a credit institution, which is neutral to geographical limitations. This is to ensure a proportionate and consistent calculation of the level of total assets to be compared to the €30bn threshold. The second RTS provides supervisors with necessary information to enable the monitoring of these thresholds.
ESMA issues Guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation
On 7 December 2021, the European Securities and Markets Authority (ESMA) issued guidelines on methodology, oversight function and record keeping under the Benchmarks Regulation.
The objective of these guidelines is to establish consistent, efficient and effective supervisory practices within the European System of Financial Supervision (ESFS). They will also ensure the common and uniform application of the requirements related to material changes to the methodology and the use of an alternative methodology in exceptional circumstances and the oversight function. Additionally, the guidelines seek to ensure the harmonised application of the record-keeping requirements related to the use of an alternative methodology for all benchmark administrators.
In relation to non-significant benchmarks, these guidelines amend the existing guidelines in line with new guidelines introduced for administrators of critical and significant benchmarks, with regard to the oversight function and the use of an alternative methodology in exceptional circumstances.
The guidelines are set to apply from 31 May 2022.
For more information on these topics please contact any member of A&L Goodbody's Asset Management & Investment Funds team.
Date published: 18 January 2022