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

CRD IV for Investment Firms
CP13/6
22. Problems of informational asymmetry (including principal-agent problems) also exist within
investment firms, and the provisions of CRD IV will help remedy such problems.
23. Asymmetry of information and poor disclosure practices may currently be leading to a variety
of problems in the markets. For example:
• There may be divergences of interests between principals and agents in some of the
investment markets considered by this CBA. Such principal-agent problems may be brought
about by imperfect information and could lead to instances of consumer detriment. These
problems may be particularly acute at times of crisis, when the principals’ and agents’
interests could become most misaligned as firms seek to minimise adverse impacts
potentially at their clients’ expense;
• It may be currently difficult to understand firms’ risk profiles, making it difficult for investors
to accurately value and select firms; and
• A lack of transparency may reduce corporate governance standards as clients and potential
investors are unable to hold management to account.
24. The financial crisis demonstrated the complex and interlinked nature of financial markets.
Although the new capital standards are aimed primarily at reducing risks from systemically
important institutions, these measures will also reduce the risk of failure of an investment firm,
thus reducing the negative externalities associated with such occurrences.
Cost analysis
25. The implementation of CRD IV is likely to have a substantial impact on the regulatory costs
of systemically important institutions; comparably, the costs for FCA regulated firms will not
be as substantial. However the relative cost for small firms could be significant. These costs
break down into (1) compliance costs to firms (capital and non-capital compliance costs), (2)
indirect costs arising from changes to firms’ behaviour and its impact on the markets; (3) wider
macroeconomic impacts; and (4) direct costs to the FCA.
Compliance costs to firms
26. The large majority of non-capital compliance costs to firms arise from the new supervisory
framework for Common Reporting (COREP) and Financial Reporting (FINREP). These new
reporting obligations will allow regulators to better assess the firms’ risks and compare them by
uniforming formats, frequencies and dates of prudential reporting and increasing the quantity
and level of detail of information. COREP costs arise from Regulation which we are obliged
to implement. Although we do not have a legal obligation to estimate the impact of such
Regulation, we are including our estimates of the costs in this CBA for reference, since they are
the most significant (non-capital) costs associated with CRD IV.
Financial Conduct Authority July 2013
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