On 10 July 2020 the Ministry of Finance published the draft implementing Act (in Dutch only) on Directive (EU) 2019/2034 (Investment Firms Directive, IFD) for consultation. The implementing Act serves to transpose IFD into national law and contains provisions on the execution of the directly applicable Regulation (EU) 2019/2033 (IFR) as well. The rules laid down in IFD/IFR introduce important changes to the existing regulatory framework for investment firms and will apply as of 26 June 2021. Market parties can submit a response to the consultation document until 7 August 2020.

Scope IFD/IFR

IFD and IFR contain a new prudential regulatory framework for investment firms authorized and supervised under MiFID II. This new framework should address specific vulnerabilities and risks inherent to those investment firms in a more appropriate way than the current prudential framework under CRD IV/CRR.

To achieve more bespoke requirements for different types of investment firms, IFD/IFR introduces a new classification system for investment firms. This classification system contains many nuances (which will not be discussed here), but one can roughly distinct between the following three classes of investment firms:

• Class 1: systemically important and larger investment firms, which will be treated as credit institutions within the meaning of CRR.
• Class 2: large and interconnected investment firms that do not fall in Class 1 or Class 3.
• Class 3: smaller and non-interconnected investment firms that meet specific cumulative criteria laid down in Article 12 IFR (for example: zero client money held (CMH) and zero custody assets (ASA), assets under management (AUM) of less than EUR 1.2 billion and daily client orders handled (COH) of less than EUR 100 million (cash trades) or less than EUR 1 billion (derivatives)).

Class 1 firms will remain subject to the regime as laid down in CRD IV/CRR. Class 2 and Class 3 firms will fall under the scope of the prudential regime as laid down in IFD/IFR. The majority of the Dutch investment firms will fall in Class 3.

Capital requirements

In short, under the new regime Class 2 investment firms will be required to have own funds of at least the higher of their (i) permanent minimum requirement, (ii) fixed overheads requirement, and (iii) K-factor requirement (which is risk based). Class 3 investment firms will only be required to have own funds of at least the higher of their (i) permanent minimum requirements and (ii) fixed overheads requirement. The amounts introduced by IFD/IFR for the permanent minimum requirements are somewhat higher than the current amounts.

In addition, IFD/IFR includes a liquid assets requirement, which amounts to at least one third of the investment firms’ fixed overheads requirement, as well as additional rules on internal governance (including remuneration rules).

Governance, remuneration rules and member state options

IFD introduces several new governance requirements for Class 2 investment firms. These concern specific remuneration rules, but also (for example) rules on transparency, the treatment of risks and the role of the management body in risk management.

Although IFD itself does not provide a set bonus cap for investment firms, the current proposals show that the Dutch legislator will hold on to the 20% bonus cap as a main rule. This specific bonus cap and all existing remuneration rules laid down in the Dutch Financial Supervision Act (DFSA) will continue to apply to all persons working under the responsibility of the investment firm. The new requirements from IFD for ‘identified staff’ of Class 2 investment firms will be further specified in a regulation from the supervisor (such as the current Regeling beheerst beloningsbeleid) instead of in the DFSA itself.

IFD contains a few member state options, which relate to the exemption to certain remuneration rules in light of proportionality. Pursuant to IFD the rules on deferred payment of variable remuneration and payment in non-cash instruments do not need to be applied by firms and/or in relation to variable remuneration that stay(s) below certain quantitative thresholds (Article 32 (4) IFD). The explanatory notes to the implementing Act show that the Dutch legislator will not use the member state option to raise the proportionality threshold for balance sheet size from EUR 100 million to EUR 300 million (Article 32 (5) IFD). The Dutch legislator will however use the member state option to further limit the aforementioned proportionality regime to variable remuneration amounts of EUR 50,000 or 10% – instead of 25% – of the annual fixed remuneration (Article 32 (7) IFD).

For further reading on IFD/IFR, please refer to ‘Het nieuwe prudentiële raamwerk voor beleggingsondernemingen’ by Bart Bierman (co-author) in Tijdschrift voor Ondernemingsrecht (in Dutch only). For further reading on the remuneration rules under IFD/IFR, please refer to the Finnius blog ‘New remuneration rules under IFD/IFR and the impact for Dutch investment firms’ by Eleonore Sijmons.