On 20 December 2017, before MiFID II has even entered into force, the European Commission published a staff working document and legislative proposal addressed to the European Parliament and the Council for a new Directive and new Regulation on prudential requirements for MiFID investment firms.

The Commission's proposed legislative package follows closely the earlier recommendations of the European Banking Authority (EBA) contained in its final report published on 29 September 2017. For a summary of the proposals in general terms, please refer to our earlier briefing note on the EBA's report. In this latest briefing, we highlight some of the most significant aspects of the proposals, including where the Commission has gone beyond the scope of the EBA's previous advice.

PROCESS AND TIMING

The new legislative package will need to be agreed between the European Parliament and the Council before it can enter into force. Subject to the vagaries of that process, this means that the relevant legislation might not be passed before the next European Parliament elections in May or June 2019. If it has not been passed by then, the legislative process will need to begin again and therefore will be subject to further delays. With the fairest wind, the legislation might come into force at some point during 2020.

SUMMARY

  • Commission proposals largely follow advice contained in EBA's final report in September 2017
  • Timeline for application of new regime still uncertain, but potentially from 2020
  • Criteria for classification as Class 1 firm now clarified – in practice, only likely to be relevant to groups containing large investment banks
  • Most asset managers likely to be Class 2 firms, as that category includes any firm that holds or controls client money
  • Class 2 firms will be subject to remuneration rules, but without bonus cap
  • Some firms entirely exempt from most onerous pay rules, but any whose balance sheet is EUR 100m+ will have to change the way they pay staff
  • EBA's proposed liquidity requirements will apply to Class 2 and Class 3 firms
  • Requirements for third country equivalence assessments under MiFIR updated to include "detailed and granular" assessment of whether third country has equivalent prudential rules

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