On 26 February, the European Parliament and EU Member States agreed simplified rules for investment firms. The revised legislation should ensure a level playing field between the largest investment firms and the largest banks, which will now follow the same rules. It also puts into place more proportionate rules for smaller investment firms.

Strengthening capital markets

Investment firms and the services they provide play a vital role in the on-going development of the EU’s capital markets union. Alongside banks, EU capital markets rely on thousands of investment firms. These firms offer investment advice and portfolio management, as well as executing orders for clients, trading in financial instruments and helping companies raise funds on capital markets. In this way, they help promote investment across the EU. According to the European Banking Authority, there are about 6,000 investment firms in the European Economic Area. Most are relatively small, but a small number hold a significant proportion of all assets. 

Until now, investment firms have been subject to the same capital, liquidity and risk management rules as banks, with various exemptions. This has led to a complex system that does not fully take into account the different business profiles and risks posed by investment firms. For instance, unlike banks, investment firms do not accept deposits, nor do they provide loans on a significant scale. This means that they are considerably less exposed to the risk of depositors withdrawing their money at short notice and of borrowers failing to pay them back.

Revised rules

The legislation divides investment firms into three categories:

• Large investment firms in the EU that carry out specific activities on a large scale and pose similar risks as banks will remain subject to the same rules as banks. In addition, those considered to be the most systemically important will be required to obtain authorisation as credit institutions. This means that they will be subject to the same rules and supervision as banks, including by the Single Supervisory Mechanism for those established in the euro area;
• Smaller, less risky firms in the EU will benefit from a fully revised rulebook, with simpler, more flexible prudential requirements that are better tailored to their business models;
• In terms of supervisory powers and rules, while the new rules largely build on existing principles, they will bring more proportionality throughout the prudential supervision in particular for small investment firms;  
• Providers based in non-EU countries will benefit from clearer, more robust equivalence rules when offering their services to EU companies and clients. For countries where the providers and types of investment services offered in the EU would be especially important, additional safeguards and reporting rules would apply. The role of the European Securities and Markets Authority in monitoring the activities of such firms will also be enhanced.

The aim of the new legislation is to facilitate the business activities of investment firms, boost competition and provide greater certainty. Notably for small and less risky firms, the new rules should lower compliance costs, because prudential rules will be simpler and better suited to the firms’ business models.

Read more on rules for investment firms