CP13/6 - CRD IV for Investment Firms - Financial Conduct Authority

CP13/6
CRD IV for Investment Firms
17. The most fundamental changes introduced by CRD IV are the improved quantity and quality
of capital that firms’ are required to hold and the liquidity requirements. The transitional
period for the liquidity coverage requirement does not start until 2015, and the Commission is
mandated to submit a proposal for a liquidity regime for investment firms by 2016. However,
liquidity reporting commences from 1 January 2014. The FCA has proposed to significantly limit
the number of firms required to submit CRD IV liquidity returns, and these firms are already
subject to the ILAS regime. Therefore, whilst there will be systems costs for the firms affected,
it is unlikely that the treasury cost during 2015 imposed by the liquidity coverage requirement
would exceed existing ILAS requirements.
18. The most significant system changes arise from the new reporting requirements. The circa
1,400 firms subject to the full CRD IV package will be required to submit regulatory information
to the FCA through COREP, as part of the EU project to harmonise reporting of financial and
regulatory information by credit institutions and investment firms.
Market failure analysis
19. The Commission in its impact assessment of the Directive and Regulation 12 , identified the
following problems that needed remedy:
• liquidity risk management practices “shown to be inadequate in fully grasping risks linked
to originate-to-distribute securitisation, use of complex financial instruments and reliance
on wholesale funding with short term maturity instruments”;
• inadequate levels of capital, and in particular, the fact that “the EU banking system entered
the crisis with capital of insufficient quality and quantity”;
• “shortcomings in current regulatory treatment of counterparty credit risk arising from
derivatives, repo and securities financing activities”;
• divergent sanctioning regimes for violations of CRD between Member States and “not
always appropriate to ensure effective enforcement”;
• poor corporate governance leading to instances of excessive risk taking.
20. It should be noted that the Commission’s CRD IV impact assessment was prepared largely in
relation to credit institutions whilst CRD IV will also apply many new prudential requirements
to investment firms under a directly binding Regulation. However, there is a requirement for
the Commission to review the appropriateness of the whole prudential regime for all CRD
investment firms by the end of 2015.
21. Broadly speaking, the regulatory reforms in CRD IV look to address the market failures revealed
by the financial crisis. Information asymmetries and systemic externalities exacerbated the
financial crisis and the ensuing economic downturn. The provisions of the Directive and the
Regulation seek to address such failures through increasing the level and quality of capital,
improving governance of firms, strengthening liquidity standards and expanding disclosure
requirements. Such provisions are particularly aimed at the banking sector where these market
failures are most acute and significant.
12 http://ec.europa.eu/internal_market/bank/regcapital/new_proposals_en.htm
64 July 2013
Financial Conduct Authority