EUROPEAN COMMISSION Brussels,20.12.2017 COM(2017) 791 final 2017/0358(COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential supervision of investment firms and amending Directives 2013/36/EU and 2014/65/EU (Text with EEA relevance) {SWD(2017) 481 final}



EXPLANATORY MEMORANDUM 1. CONTEXT OF THE PROPOSAL • Reasons for and objectives of the proposal The EU needs stronger capital markets in order to promote investment, unlock new sources of financing for companies, offer households better opportunities and strengthen the Economic and Monetary Union. The Commission is committed to putting in place all the remaining building blocks in order to complete the Capital Markets Union (CMU) by 2019. Investment firms provide a range of services that give investors access to securities and derivatives markets (investment advice, portfolio management, brokerage, execution of orders etc.). Investment firms and the services they provide form a vital cog in a well-functioning CMU. They play an important role in facilitating savings and investment flows across the EU, with various services used to support effective capital allocation and risk management. There are investment firms in all Member States. According to information compiled by the European Banking Authority (EBA), there were 6 051 investment firms in the European Economic Area (EEA) at the end of 2015. These include firms providing a limited set of services to retail customers in the main through to those offering a number of services to a broad range of retail, professional and corporate clients. Based on information from the EBA, around 85 % of EEA investment firms limit their activities to: ·offering investment advice; ·receiving and transmitting orders; ·managing portfolios; and ·executing orders. Acting as an important hub for capital markets and investment activities, the UK has the largest number of EEA investment firms, with roughly half of them based there, followed by Germany, France, the Netherlands and Spain. Most EEA investment firms are small or medium-sized. The EBA estimates that some eight investment firms, largely concentrated in the UK, control around 80 % of the assets of all investment firms in the EEA. As one of the new priority actions to strengthen capital markets and build a CMU, the Commission therefore announced in its Mid-Term Review of the Capital Markets Union Action Plan that it would propose a more effective prudential and supervisory framework for investment firms, calibrated to the size and nature of investment firms, in order to boost competition and improve investors’ access to new opportunities and better ways of managing their risks. In view of the pivotal role played by UK investment firms in this area to date, the UK’s decision to withdraw from the EU further underlines the need to update the regulatory architecture in the EU in order to support this development. The proposals covering this Directive and the accompanying Regulation (‘the proposals’) were included in the 2017 Commission Work Programme as a REFIT exercise. They aim to ensure that investment firms are subject to capital, liquidity and other key prudential requirements and corresponding supervisory arrangements that are adapted to their business yet sufficiently robust to capture the risks of investment firms in a prudentially sound manner in order to protect the stability of the EU’s financial markets. The proposals are the outcome of a review mandated by Articles 493(2), 498(2), 508(2) and 508(3) of Regulation (EU) No 575/2013 (Capital Requirements Regulation, or CRR) which, together with Directive 2013/36/EU (Capital Requirements Directive IV, or CRD IV), constitute the current prudential framework for investment firms. When agreeing these texts, co-legislators decided that the framework for investment firms should be reviewed given that its rules are largely geared to credit institutions. Unlike credit institutions, investment firms do not take deposits or make loans. This means that they are a lot less exposed to credit risk and the risk of depositors withdrawing their money at short notice. Their services focus on financial instruments – unlike deposits, these are not payable at par but fluctuate according to market movements. They do however compete with credit institutions in providing investment services, which credit institutions can offer to their customers under their banking licence. Credit institutions and investment firms are therefore two qualitatively different institutions with different primary business models but with some overlap in the services they can provide. Investment firms have been subject to EU prudential rules alongside credit institutions since 1993, the year in which the first EU framework governing the activities of investment firms entered into force. Now replaced by the Markets in Financial Instruments Directive (MiFID) and, as of January 2018, by MiFID II / MiFIR, this framework sets out the conditions for authorisation and organisational and business conduct requirements under which investment services can be provided to investors as well as other requirements governing the orderly functioning of financial markets. The prudential framework for investment firms in the CRR/CRD IV works in conjunction with MiFID. Typically, prudential requirements on financial institutions are designed to (i) ensure that they have sufficient resources to remain financially viable and to carry out their services through economic cycles; or (ii) enable an orderly wind-down without causing undue economic harm to their customers or to the stability of the markets they operate in. As a result, they should aim to reflect the risks that different financial institutions face and pose, be proportionate to the likelihood of the risks occurring, and broadly strike a balance between ensuring the safety and soundness of different financial institutions and avoiding excessive costs which could hinder them from carrying out their business in a viable way. Systemic investment firms, a number of which are identified as global, or other systemically important institutions under Article 131 of CRD IV should still be subject to the CRR/CRD IV framework, including the amendments proposed by the Commission on 23 November 2016, in accordance with the revised approach for identifying them in the proposals. This is because these firms typically incur and underwrite risks on a significant scale throughout the single market. Their activities expose them to credit risk, which is mainly in the form of counterparty credit risk as well as market risk for positions they take on own account, whether for their clients or themselves. They therefore constitute a greater risk to financial stability given their size and interconnectedness. In light of these risks and in order to ensure a level playing field, such systemic investment firms should be treated as credit institutions.

As announced in the Commission Communication of September 2017 on the review of the European Supervisory Authorities (ESAs), this would also imply among other things that their operations in Member States participating in the Banking Union are subject to direct supervision by the ECB in the Single Supervisory Mechanism. At present, these firms are largely concentrated in the UK but are in the process of considering plans to relocate parts of their operations to the EU-27, notably to Member States participating in the Banking Union. While this covers only a small number of firms, they nevertheless represent a sizeable share of the total assets and business volume of all investment firms in the EU. For other investment firms, the fact that the current prudential framework focuses on credit institutions and the risks they face and pose rather than investment firms is more problematic. The services provided by these firms and the risks they can create are, to a large extent, not explicitly addressed by the existing rules. Of the eight investment services that investment firms are authorised to perform under MiFID, only (i) dealing on own account; and (ii) underwriting or placing instruments on a firm commitment basis have clear corresponding requirements under the CRR. For the other investment services (reception and transmission of orders, execution of orders, portfolio management, investment advice, placing instruments without a firm commitment basis, operation of a multilateral trading facility), such requirements are missing and result in approximate coverage of the risks involved. While limited in some cases, the risks inherent in these activities for the firm and, as a consequence, for the firm’s clients and the wider markets they operate in are therefore not captured in a targeted way. This gives rise to three main problems, which are assessed in the staff working document accompanying the proposals. First, while the framework caters to some extent to the different types of business profiles of investment firms in the form of exemptions, it is a source of considerable regulatory complexity for many firms in general. Second, its detailed requirements and exemptions constitute a crude and risk-insensitive proxy for the actual risks incurred and posed by investment firms, which differ from those of banks. Third, due to its inherent complexity and lack of risk sensitivity, its implementation by Member States gives rise to fragmentation in the overall regulatory landscape for investment firms, with scope for harmful regulatory arbitrage. This could threaten the integrity and functioning of the single market. The objectives of the proposals are to address the problems of the existing framework while facilitating the take-up and pursuit of business by investment firms where possible. Specifically, they set out a prudential framework that is better adapted to their business models. They consist of more appropriate and risk-sensitive requirements for investment firms, better targeting the risks they actually pose and incur across different types of business models. Finally, they constitute a more streamlined regulatory toolkit to enable prudential supervisors to carry out their oversight effectively. Finally, MiFID II and MiFIR were adopted in the wake of the financial crisis to cover securities markets, investment intermediaries and trading venues. The new framework reinforces and replaces the current MiFID I framework. In the context of the revision of the prudential framework for EU investment firms, the absence of a mandatory reporting requirement for third-country firms active in Member States through branches has been identified as a weakness. National competent authorities are unable to assess on a regular basis the volume of financial services activities carried out by branches of third-country firms on their territories. This proposal would therefore give competent authorities the appropriate tools to monitor these activities. As mandated by the Articles of the CRR, the review of the prudential framework for investment firms has been carried out in consultation with EBA, the European Securities and Markets Authority (ESMA) and the national competent authorities represented in these ESAs. Following a first call for advice by the Commission in December 2014, EBA published its first report on the current prudential framework for investment firms, calling for changes to the current approach for all but the largest and most systemic investment firms in December 2015. Following a second call for advice by the Commission in June 2016, EBA published a discussion paper for consultation focusing on a potential new prudential regime for the vast majority of investment firms in November 2016. Taking account of the feedback and the additional data it had gathered from investment firms together with national competent authorities, EBA published its final recommendations in September 2017. The proposals build on these recommendations in all key respects except for the identification of systemic investment firms, for the reasons explained in the accompanying staff working document and summarised under the section on ‘impact assessment’ below. • Consistency with existing policy provisions in the policy area This proposal complements the ongoing review of the CRR/CRD IV regime for credit institutions following the proposals adopted by the Commission on 23 November 2016, which allowed all non-systemic investment firms to opt out of its revised provisions. This option was introduced in recognition of the fact that these revised provisions were not designed with most investment firms in mind and they would have created further complexity in the existing rulebook. The review of the prudential regime for most investment firms also put forward in this proposal was already well underway at the time, and subjecting them to an even more complex regime for a brief period pending the application of the new regime was considered disproportionate. This proposal therefore creates a new regime for the majority of investment firms by carving them entirely out of the CRR/CRD IV framework and leaving only systemic investment firms within the scope of the latter, including its revised provisions, in accordance with the revised approach for identifying them in this proposal. The proposal is also consistent with MiFID and MiFID II / MiFIR. By setting prudential requirements that are tailored to the business and risks of investment firms, it clarifies when and why these requirements apply. As such, it overcomes some cases of arbitrary application of prudential requirements in the current framework, which arise because they are set first and foremost in relation to investment services listed in MiFID rather than the actual build-up of risks in the type and volumes of business conducted by investment firms. • Consistency with other EU policies Investment firms play an important role in facilitating investment flows across the EU. Accordingly, the review also forms part of the Commission initiatives to ensure a strong and fair single market with a well-functioning financial system and CMU in order to mobilise investments and boost growth and jobs. A more suitable prudential and supervisory framework with lower compliance costs for investment firms should help (i) improve the overall conditions for businesses; (ii) boost market entry and competition in the process; and (iii) improve investors’ access to new opportunities and better ways of managing their risks. The revised approach for identifying systemic investment firms that should remain under the CRR/CRD IV framework is also consistent with the objective of avoiding loopholes in the functioning of the Banking Union. Recent structural market developments indicate that third-country banking groups have increasingly complex structures in the EU, operating through entities that escape supervision by the ECB under the Single Supervisory Mechanism. As outlined in the Commission Communication of October 2017 on completing the Banking Union, ensuring that systemic investment firms remain in the CRR/CRD IV in accordance with the approach for identifying them in this proposal also brings them under the prudential supervision by banking supervisors and, for their operations in Member States participating in the Banking Union, under the prudential oversight of the ECB. 2. LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY • Legal basis The Treaty on the Functioning of the European Union confers on the European institutions the competence to lay down appropriate provisions by way of Directives to make it easier for persons to take up and pursue commercial activities across the EU (Article 53 TFEU). This extends to legislation dealing with the prudential supervision of providers of financial services, in this case investment firms. The provisions of this proposed Directive replace those in CRD IV, which are also based on Article 53 TFEU, as they relate to investment firms. • Subsidiarity The proposal revises and simplifies the existing EU rules that govern the prudential treatment of investment firms in order to (i) better accommodate and address risks in their business models; (ii) improve the level playing field among firms; and (iii) enhance supervisory convergence. To achieve this, a new EU framework should replace the existing one rather than devolve these choices to regulatory frameworks in the Member States. This is because investment firms authorised under MiFID today routinely provide their services to customers across EU borders. Separate and disjointed changes to the rules by Member States could introduce competitive distortions and discriminatory treatment, which would fragment the single market. This could increase cases of harmful regulatory arbitrage, with possible knock-on effects for financial stability and investor protection in other Member States in case of problems. It could also skew the range and type of investment services that are available in a given Member State, to the possible detriment of overall market efficiency and investor choice. The revised rules should avoid undue regulatory disparities and ensure a level playing field for all authorised firms across the single market. • Proportionality

As a REFIT exercise, the key objective is to render the new framework more suitable, relevant and proportionate compared to the existing framework for investment firms. Accordingly, this proposal strikes a balance between ensuring that the requirements are at once: ·comprehensive and robust enough to capture the risks of investment firms in a prudentially sound manner; and ·flexible enough to cater to the various types of business models without impeding their ability to operate in a commercially viable way. The proposal is mindful of ensuring that the costs of the regime in terms of both capital requirements and associated compliance and administrative costs, which are generated by the need to manage the staff and systems in order to run the new requirements as well as report on compliance to supervisors, are kept to the minimum to achieve this balance. As outlined in the accompanying staff working document, these associated costs are expected to decrease on an ongoing basis, with some new one-off costs at the outset. In terms of capital, an overarching policy choice that has underpinned work on the review and impacts the above is the objective of ensuring that, on aggregate, EU-wide capital requirements on investment firms do not increase too much. This translates into different distribution effects for some types of firms. These are alleviated by the provisions of the proposal so that the biggest impacts are phased in and capped. • Choice of instrument A Directive is chosen since its provisions replace those in CRD IV relating to investment firms. This ensures that its provisions can be transposed by Member States in accordance with relevant national administrative arrangements consistent with existing practice. 3. RESULTS OF EX-POST ASSESSMENTS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS • Ex-post assessment of existing legislation The assessment of the existing CRR/CRD IV framework, which is based on the analysis carried out by the EBA and ESMA in their 2015 report in particular and on the parallel work and analysis of the Commission services, is summarised in the accompanying staff working document. It concludes that the existing rules, which are based on international regulatory standards for large banking groups and targeted at the risks of banks, only partially achieve their aims in terms of (i) ensuring sufficient capital for the risks of most investment firms; (ii) keeping compliance costs in check; (iii) securing a level playing field across the EU; and (iv) ensuring effective prudential oversight. Many of its provisions are considered ineffective and inefficient in this regard. The exception is large and systemic investment firms whose size, risk profile and interconnectedness with other participants in financial markets make them ‘bank-like’ in character. For the rest, the status quo was assessed to create (i) excessive complexity and disproportionate compliance burdens especially for many small and medium-sized firms; (ii) poorly tailored and risk-insensitive prudential metrics and requirements for accurately capturing the risks of investment firms; and (iii) cases of diverging national implementation of the rules and a fragmented regulatory landscape across the EU. • Stakeholder consultations Stakeholders were consulted at several points during the review. In terms of the main milestones, following a first call for advice by the Commission in December 2014, EBA published a report on the current prudential framework for investment firms together with proposals for changes in December 2015. This constitutes a comprehensive and publicly available analysis of the status quo, with data on numbers and types of investment firms in Member States. This analysis helped extend the review to stakeholders who may not be directly impacted by the rules and encouraged them to join in the subsequent discussion. On 4 November 2016, EBA published a discussion paper for consultation focusing on a potential new prudential regime for investment firms. The paper was open for comments for 3 months. EBA published its draft recommendations on 3 July 2017, inviting comments from stakeholders. Its work was also supported by a detailed data-gathering exercise involving investment firms. This was carried out by national competent authorities on behalf of EBA in two stages in 2016 and 2017. Given the detailed public consultation and data collection undertaken by EBA, the Commission considered it unnecessary to run a general public consultation in parallel. The Commission services instead consulted stakeholders in a targeted fashion to gather further views on the main elements of the review. This included: ·a roundtable with industry stakeholders (investment firms, investors, law firms, consultants) on 27 January 2017 on EBA draft proposals for a future regime; ·a workshop on the costs of the current regime on 30 May 2017; and ·a workshop on EBA’s draft final recommendations on 17 July 2017. The review was discussed with Member States in the Financial Services Committee in March and October 2017 and in the Experts Group on Banking, Payments and Insurance in June and September 2017. Stakeholder input received on the Commission’s inception impact assessment published in March 2017 was also taken into account. Finally, the Commission also considered input received previously in the wide-ranging call for evidence on the efficiency, consistency and coherence of the overall EU regulatory framework for financial services, in which several respondents pointed to various issues relevant for the review.

Investment firms represent various business models, and their views tend to focus on aspects of the proposals specific to them. This complicates cross-cutting comparisons of the relative weight of stakeholder positions. However, in general the large majority of stakeholders welcome a tailored prudential framework more suited to their business models. They stress that their systemic relevance is limited and that capital requirements should focus on ensuring they can be wound down in an orderly way. In terms of specific requirements that apply to their particular business model, investment firms that conduct agency-only services and do not enter into transactions in financial instruments using their own balance sheet generally criticise proposals for linking capital requirements to the size of the client portfolios they manage in a linear way. While many firms that trade on own account agree that the existing framework for capturing market risk has some merit in light of the risks they incur and pose, other trading firms note that it exaggerates risks in the methods and products they trade in. These views have been taken into account in the calibration of the proposed new risk metrics (K-factors — see below) and the possibility to phase in and cap higher requirements. • Collection and use of expertise The review was carried out based on comprehensive advice provided by EBA in consultation with ESMA, as required by the relevant Articles in CRR, which constitute the legal basis for the review (notably Article 508(2) and (3)). The main public outputs of the EBA were as follows: ·the December 2015 report setting out a comprehensive assessment of the status quo and initial recommendations for changes; ·the November 2016 discussion paper published for consultation on the contours of a possible new regime; and ·the September 2017 final report with detailed recommendations. The precise calibration of the recommendations for new capital requirements was supported by a detailed data-gathering exercise involving investment firms. This was carried out by national competent authorities on behalf of EBA in two stages in 2016 and 2017. The Commission was involved throughout and was able to benefit from the discussions assessing the advantages and disadvantages of the detailed policy recommendations as they unfolded. • Impact assessment According to the Better Regulation Toolbox (tool #9), no Commission impact assessment is necessary whenever an EU agency has been mandated to carry out policy design work and related analysis, to the extent that the Commission proposal does not deviate much from the agency’s recommendations and the Commission services consider its assessment to be of sufficient quality. While the Regulatory Scrutiny Board examined a draft impact assessment for this initiative, a staff working document was deemed more appropriate given that the specific mandate of the review is based on the advice of the ESAs and their stakeholder consultation and technical work. The objective of the staff working document accompanying the proposals is therefore to explain the advice given by the ESAs, including the results of their analysis and consultation, while providing the Commission services’ views on its conclusions, with a view to guiding the Commission’s decision-making. On capital requirements, EBA assesses that its advice would increase these on aggregate for all non-systemic EU investment firms by 10 % compared to Pillar 1 requirements today, and decrease them by 16 % compared to total requirements applied as a result of Pillar 2 add-ons. The way in which these impacts would be distributed among investment firms depends on their size, which investment services they provide and how the new capital requirements will apply to them. As detailed in the Staff Working Document accompanying the proposals, including its Annex II, the 10% aggregate increase in Pillar 1 requirements is the sum of considerably lower requirements for some and increases in excess of 10% for others. On available own funds, EBA finds that only a few firms would fail to have sufficient capital to comfortably meet the new requirements – this involves just a small number of investment advisors, trading firms and multiservice firms. However, for firms in this group whose increases would be over twice their current requirements, a cap could be granted for a number of years. The accompanying staff working document concludes that, overall, EBA’s recommendations are considered to be an appropriate and proportionate means of achieving the review’s objectives in an effective and efficient manner compared to the status quo. More generally, EBA’s advice is a clear positive step towards a prudential framework for investment firms that can both ensure that they operate on a sound financial basis while not hindering their commercial prospects. As such, it should support the review’s aims in a balanced fashion. On the one hand, it should help ensure that the risks of investment firms for customers and markets are addressed in a more targeted way both in their ongoing operations and in case they need to be wound down. On the other, it should help ensure that they can fully perform their role in facilitating investment flows across the EU, which is consistent with the aims of the CMU to mobilise savings and investments in order to boost growth and jobs. It only diverges with EBA’s recommendations on the identification of systemic investment firms. Rather than postpone this so it is clarified via criteria to be developed in technical rules implementing the proposals as EBA recommends, it is considered more appropriate to set this out in the proposals themselves in order to ensure a regulatory level playing field between credit institutions and systemic investment firms. On this point, the proposals go beyond EBA’s advice in its opinion on the review of investment firms. However, the proposals thereby deliver on EBA's opinion on issues related to the UK’s decision to leave the EU. • Regulatory fitness and simplification As outlined in the accompanying staff working document, simplification of the prudential rules for the vast majority of investment firms is expected to considerably reduce their administrative and compliance burdens. Various redundant regulatory and reporting requirements could be removed, allowing capital dedicated to regulatory purposes to switch to more productive uses. The proposals, by setting capital and other prudential requirements, including remuneration and governance, that are proportionate to investment firms alleviate for the first time the significant costs that firms incur as a result of the bank-centric requirements of the current regime. This would put an end to the complicated task of matching and reconciling business data to an ill-fitted regulatory framework and reporting regime. Investment firms that are SMEs are expected to be among the main beneficiaries. A more proportionate and appropriate prudential framework for them should help improve the conditions for conducting business, and barriers to entry should decrease. For example, streamlining the onerous reporting framework should reduce administrative burdens and compliance costs for SMEs, including innovative firms seeking to grow through digital means. Similarly, by exempting small and non-interconnected investment firms from the current governance and remuneration rules as laid down under the current CRD IV/CRR, the proposals would reduce administrative and compliance costs for these enterprises. Some one-off costs of transitioning to the new regime are to be expected as firms need to overhaul risk management systems, update compliance departments and revise contracts with law firms and other service providers that are currently used to facilitate compliance. However, the compliance cost savings should support the CMU’s aims in general by helping investment firms play their role in mobilising savings from investors towards productive uses. In terms of compliance costs, firms are set to save tens of thousands to hundreds of thousands of euros depending on the type and size of firm. How these reductions in compliance costs relate and compare to changes in capital requirements for different types of firms is not known at this stage, but should feature in the future monitoring and evaluation of the framework. • Fundamental rights This proposal strengthens the exercise of the right of various investment firms to conduct their business unencumbered by rules designed primarily for other types of participants in financial markets. The legislative measures in the proposals setting out rules for remuneration in investment firms observe the principles recognised by the Charter of Fundamental Rights of the European Union, notably the freedom to conduct a business and the right of collective bargaining and action. 4. BUDGETARY IMPLICATIONS

The proposal will not have implications for the EU budget. 5. OTHER ELEMENTS • Implementation plans and monitoring, evaluation and reporting arrangements The envisaged changes by the proposals should be evaluated in order to determine the degree to which the following objectives have been met: ·a simpler categorisation of investment firms in a manner that captures their different risk profiles; ·a set of prudential rules, notably on capital, liquidity, remuneration and governance requirements, that are appropriate, proportionate and sensitive to the specific risks that investment firms are exposed to and that ensure that capital is assigned to where it is needed; ·a framework that corresponds to the risks inherent in the nature and range of activities undertaken by investment firms in a direct and discernible way and thereby supports taking up the business; and ·a streamlined supervisory toolkit to enable the full and accurate oversight of business practices and the associated risks. To this end, some of the following information could be gathered as part of a future review in order to serve as indicators in evaluating the impact of the proposed changes: (i) compliance costs in terms of staff, legal advice and regulatory reporting; (ii) levels of capital requirements; (iii) other new costs e.g. from liquidity rules; (iv) evolution in the numbers of firms between the different categories; (v) changes in recourse to Pillar 2 add-ons by competent authorities; (vi) cases and impact of failure of investment firms under the new regime; and (vii) evolution of the size of investment firms in terms of assets and client order volumes. • Detailed explanation of the specific provisions of the proposal Subject matter and scope The proposal sets out requirements for the appointment of prudential supervisory authorities, the initial capital of investment firms, the supervisory powers and tools for the prudential supervision of investment firms by the competent authorities, and the publication requirements for competent authorities in the field of prudential regulation and supervision. The Directive applies to all investment firms covered by MIFID II, which is set to apply as of January 2018. Appointment and powers of supervisory authorities The proposal requires Member States to appoint an authority to exercise the powers for prudential supervision under this Directive, transferring the applicable provisions from CRD IV to this Directive. Member States can either bestow these onto an existing authority in the shape of the function and powers granted under CRD IV or vest them in a new authority. Initial capital Levels of initial capital, based on the services and activities that investment firms are authorised to provide in accordance with MIFID, are revised and harmonised across the EU from the levels stipulated in CRD IV to take into account inflation since these levels were set. Transitional arrangements are provided to allow smaller firms in particular to attain the new amounts of initial capital where necessary. Home/host powers Competences in accordance with CRD IV are conferred upon home and host authorities for the prudential supervision of investment firms. Relevant cooperation arrangements between authorities should be established. Exchange of information and professional secrecy Provisions for the exchange of information between competent authorities on prudential supervision and professional secrecy are introduced based on CRD IV and complementing MiFID II.

Penalties In line with CRD IV, Member States are required to establish administrative penalties and other administrative measures which are effective, proportionate and dissuasive in order to sanction violations under the provisions of this Directive and [Regulation (EU) No ----/--]. Internal capital adequacy and supervisory review and evaluation Simplified requirements based on those in CRD IV are introduced for investment firms and competent authorities to assess the adequacy of arrangements and procedures in order to ensure that firms comply with the provisions of this Directive and [Regulation (EU) No ----/--]. Competent authorities should have powers to review and evaluate the prudential situation of investment firms and, where necessary, to exercise powers to require changes in areas such as internal governance and controls, risk management processes and procedures and, where necessary, set additional requirements, including in particular capital and liquidity requirements. Governance and remuneration In line with the assessment by the EBA in its Advice and the evaluation of this EBA assessment carried out by the Commission services in the accompanying staff working document, the rules on corporate governance and remuneration are revised in order to ensure the orderly functioning of investment firms and to prevent excessive risk-taking by their staff. At the same time, these rules aim to reflect the differences in risks posed by credit institutions and investment firms. It is not considered proportionate to apply the requirements of this Directive to governance arrangements, remuneration policies and practices of small and non-interconnected investment firms. The proposal aims to ensure the consistency of remuneration and governance rules across the different pieces of legislation, including CRD IV, Directive 2009/65/EC (UCITS) and 2011/61/EU (AIFMD). While the proposal does not set a specific limit on the ratio between variable and fixed components of variable remuneration, it requires that investment firms set appropriate ratios themselves. This takes into account the potential impact that setting a single ratio could have on the cost flexibility and profitability of some investment firms. The findings of Commission Report COM(2016) 510 revealed that the deferral and pay-out in instruments requirements are generally not efficient in the case of small and non-complex investment firms and for staff with low levels of variable remuneration. The Commission therefore proposes to set a threshold at firm and staff levels below which investment firms and/or staff members will benefit from the derogations from the application of the rules on the deferral and pay-out in instruments. Third countries Agreements with third countries may be concluded by the Union regarding the means of supervising compliance with the group capital test. Administrative cooperation arrangements with third countries supervisory authorities may be concluded by the Member States and EBA to facilitate the exchange of information. Systemic investment firms The proposal for a Regulation accompanying this proposal for a Directive contains a provision that would change the definition of credit institutions to include undertakings whose business includes dealing on own account or underwriting or placing financial instruments on a firm commitment basis, where the total value of the assets of the undertaking is EUR 30 billion or more. This proposal for a directive contains complementary provisions on the process for seeking authorisation as a credit institution. 2017/0358 (COD) Proposal for a DIRECTIVE OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL on the prudential supervision of investment firms and amending Directives 2013/36/EU and 2014/65/EU (Text with EEA relevance) THE EUROPEAN PARLIAMENT AND THE COUNCIL OF THE EUROPEAN UNION,

Having regard to the Treaty on the Functioning of the European Union, and in particular Article 53(1) thereof, Having regard to the proposal from the European Commission, Having regard to the opinion of the European Central Bank, Having regard to the opinion of the European Economic and Social Committee, After transmission of the draft legislative act to the national parliaments, Acting in accordance with the ordinary legislative procedure, Whereas: (1)Robust prudential supervision is an integral part of the regulatory conditions in which financial institutions may provide services within the Union. Investment firms are, together with credit institutions, subject to Directive 2013/36/EU of the European Parliament and of the Council and to Regulation (EU) No 575/2013 of the European Parliament and of the Council as regards their prudential treatment and supervision, while their authorisation and other organisational and conduct requirements are set out in Directive 2004/39/EC of the European Parliament and of the Council. (2)The existing prudential regimes under Regulation (EU) No 575/2013 and Directive 2013/36/EU are largely based on successive iterations of the international regulatory standards set for large banking groups by the Basel Committee on Banking Supervision and only partially address the specific risks inherent to the diverse activities of investment firms. The specific vulnerabilities and risks inherent to investment firms should therefore be further addressed by means of appropriate and proportionate prudential arrangements at Union level. (3)Sound prudential supervision should ensure that investment firms are managed in an orderly way and in the best interests of their clients. They should take into account the potential for investment firms and their clients to engage in excessive risk-taking and the different degrees of risk assumed and posed by investment firms. Equally, such prudential supervision should aim to avoid undue administrative burden on investment firms. (4)Many of the requirements that stem from Regulation (EU) No 575/2013 and Directive 2013/36/EU framework are designed to address common risks faced by credit institutions. Accordingly, the existing requirements are largely calibrated to preserve the lending capacity of credit institutions through economic cycles and to protect depositors and taxpayers from possible failure, and are not designed to address the different risk-profiles of investment firms. Investment firms do not have large portfolios of retail and corporate loans and do not take deposits. The likelihood that their failure can have detrimental impacts for overall financial stability is lower than in the case of credit institutions. The risks faced and posed by investment firms are thus substantially different to the risks faced and posed by credit institutions and such difference should be clearly reflected in the prudential framework of the Union. (5)Differences in the application of the existing framework in different Member States threaten the level playing-field for investment firms within the Union. Those differences stem from the overall complexity of the application of the framework to different investment firms based on the services they provide, where some national authorities adjust or streamline such application in national law or practice. Given that the existing prudential framework does not address all the risks faced and posed by some types of investment firms, large capital add-ons have been applied to certain investment firms in some Member States. Uniform provisions addressing those risks should be established in order to ensure harmonised prudential supervision of investment firms across the Union. (6)A specific prudential regime is therefore required for investment firms which are not systemic by virtue of their size and interconnectedness with other financial and economic actors. Systemic investment firms should, however, remain subject to the existing prudential framework under Directive 2013/36/EU and Regulation (EU) No 575/2013. Those investment firms are a subset of investment firms to which the framework laid down in Directive 2013/36/EU and Regulation (EU) No 575/2013 currently applies and which do not benefit from dedicated exemptions from any of its principle requirements. The largest and most interconnected firms have business model and risk profiles that are similar to those of significant credit institutions. They provide “bank-like” services and underwrite risks at significant scale. Furthermore, systemic investment firms are large enough to, and have business models and risk-profiles which represent a threat for the stable and orderly functioning of financial markets on par with large credit institutions. Therefore it is appropriate that those investment firms remain subject to the provisions set out in the Directive 2013/36/EU and Regulation (EU) No 575/2013. (7)There may be Member States in which the authorities competent for the prudential supervision of investment firms are different from the authorities that are competent for the supervision of market conduct. It is therefore necessary to create a mechanism of cooperation and exchange of information between those authorities. (8)To foster the harmonisation of supervisory standards and practices within the Union, the European Banking Authority (EBA) should, in close cooperation with the European Securities and Markets Authority (ESMA), retain primary competence for the coordination and convergence of supervisory practices in the area of prudential supervision over investment firms within the European System for Financial Supervision (ESFS). (9)The required level of initial capital of an investment firm should be based on the services and activities which that investment firm is authorised to provide, and respectively perform, according to Directive 2004/39/EC. The possibility for Member States to lower the required level of initial capital in specific situations, as provided for in Directive 2013/36/EU, on the one hand, and the situation of uneven implementation of that Directive, on the other hand, have led to a situation where the required level of initial capital diverges across the Union. To end that fragmentation, the required level of initial capital should be harmonised. (10)While investment firms are removed from the scope of Directive 2013/36/EU and Regulation (EU) No 575/2013, certain concepts used in the context of Directive 2013/36/EU and respectively, Regulation (EU) No 575/2013, shall maintain their well-established meaning. To enable and ease a consistent reading of such concepts when used, in acts of Union law, in relation to investment firms, references in such Union acts to the initial capital of investment firms, to the supervisory powers of competent authorities for investment firms, to the internal capital adequacy assessment process of the investment firms, to the supervisory review and evaluation process of competent authorities for investment firms, to governance and remuneration provisions applicable to investment firms shall be construed as referring to the corresponding provisions in this Directive. As far as references to the amount of initial capital are concerned, the following correlation shall apply. Levels of initial capital set by Article 8 of this Directive should, as of the date of application of this Directive, be construed to replace references to levels of initial capital set by Directive 2013/36/EU as follows: the initial capital of investment firms referred to in Article 28 of Directive 2013/36/EU should be construed to refer to Article 8(1); the initial capital of investment firms referred to in Articles 29 or 31 of Directive 2013/36/EU should be construed to refer to Article 8(2) or (3), depending on the type of investment services and activities of an investment firm; the initial capital referred to in Article 30 of Directive 2013/36/EU should be construed to refer to Article 8(1). (11)The proper functioning of the internal market requires that the responsibility for supervising the financial soundness of an investment firm, and in particular its solvency, lies with the competent authority of its home Member State. To achieve an effective supervision of investment firms also in other Member States where they provide services or have a branch, close cooperation with the competent authorities of these Member States should be ensured.

(12)For informational and supervisory purposes, and in particular to ensure the stability of the financial system, competent authorities of host Member States should be able to carry out, on a case-by-case basis, on-the-spot checks, inspect the activities of branches of investment firms on their territory and require information about the activities of those branches. Supervisory measures for those branches should however remain the responsibility of the home Member State. (13)To protect commercially sensitive information, competent authorities should be bound by rules of professional secrecy when conducting their supervisory tasks and when exchanging confidential information. (14)To strengthen the prudential supervision of investment firms and the protection of clients of investment firms, auditors should report promptly to the competent authorities those facts which can have a serious effect on the financial situation of an investment firm or its administrative and accounting organisation. (15)The processing of personal data for the purposes of this Directive should be carried out in accordance with Regulation (EU) No 2016/679 of the European Parliament and of the Council, and with Regulation (EU) No 45/2001 of the European Parliament and of the Council. In particular, where this Directive allows for exchanges of personal data with third countries, the relevant provisions of Chapter V of Regulation (EU) No 2016/679 and Article 9 of Regulation (EU) No 45/2001 should apply. (16)To safeguard compliance with the obligations laid down in this Directive and [Regulation (EU) ---/----[IFR], Member States should provide for administrative penalties and other administrative measures which are effective, proportionate and dissuasive. In order to ensure that administrative penalties have a dissuasive effect they should be published except in certain well-defined circumstances. To enable clients and investors to make an informed decision about their investment options, those clients and investors should have access to information on administrative penalties and measures imposed on investment firms. (17)To detect breaches of national provisions transposing this Directive and breaches of [Regulation (EU)---/----[IFR], Member States should have the necessary investigatory powers and should establish effective mechanisms to report potential or actual breaches. (18)Investment firms should have internal capital which is adequate in quantity, quality and distribution to cover the specific risks to which they are or may be exposed. Competent authorities should ensure that investment firms have the adequate strategies and processes in place to asses and maintain the adequacy of their internal capital. (19)Supervisory review and evaluation powers should continue to remain an important regulatory tool allowing competent authorities to assess qualitative elements, including internal governance and controls, risk management processes and procedures and, where needed, to set additional requirements, including in particular in relation to capital and liquidity requirements. (20)To align remuneration with the risk profile of investment firms and to guarantee a level-playing field, investment firms should be subject to clear principles on corporate governance arrangements and rules on remuneration that take into account the differences between credit institutions and investment firms. Small and non-interconnected investment firms should however be exempted from those rules because the provisions on remuneration and corporate governance under Directive 2014/65/EU are sufficiently comprehensive for those types of firms. (21)Similarly, Commission report COM(2016) 510 demonstrated that the requirements on deferral and pay-out in instruments laid down in Directive 2013/36/EU are not appropriate for small and non-complex investment firms or for staff with low levels of variable remuneration. Clear, consistent and harmonised criteria for identifying investment firms and individuals exempted from those requirements are necessary to ensure supervisory convergence, and to guarantee a level-playing field. At the same time, it is however appropriate to offer some flexibility to competent authorities to adopt a stricter approach where they consider that necessary. (22)It is also appropriate to offer some flexibility to investment firms in the way they use non-cash instruments when paying variable remuneration, as long as such instruments are effective in achieving the objective of aligning the interest of staff with the interest of various stakeholders, such as shareholders and creditors, and contribute to the alignment of variable remuneration with the risk profile of the investment firm. (23)The revenues of investment firms in the form of fees, commissions and other revenues in relation to the provision of different investment services are highly volatile. Limiting the variable component of remuneration to a portion of the fixed component of remuneration would affect the firm’s ability to reduce remuneration at times of reduced revenues and could lead to an increase of the firm's fixed cost base, leading in turn to risks for the firm’s ability to withstand times of economic downturn or reduced revenues. To avoid those risks, a single maximum ratio between the variable and the fixed elements of remuneration should not be imposed on non-systemic investment firms. Instead, those investment firms should set appropriate ratios themselves. (24)In response to the growing public demand for tax transparency and to promote investment firms' corporate responsibility, it is appropriate to require that investment firms disclose certain information, including information on profits made, taxes paid and any public subsidies received. (25)To address risks at investment firm only group level, the prudential consolidation method required by the Regulation (EU) No 575/2013 should in the case of investment firm only groups be replaced by a group capital test. The determination of the group supervisor, however, should be based on the same principles that apply in the case of supervision on a consolidated basis. To ensure proper cooperation, core elements of coordination measures, and in particular information requirements in emergency situations or cooperation and coordination arrangements should be similar to the core elements of coordination applicable in the context of the single rulebook for credit institutions. (26)On the one hand, the Commission should be able to submit recommendations to the Council for the negotiation of agreements between the Union and third countries for the practical exercise of supervision of compliance with the group capital test for investment firms, the parent undertakings of which are established in third countries, and for investment firms operating in third countries the parent undertakings of which are established in the Union. On the other hand, Member States and EBA should also be able to set-up administrative arrangements with third countries to perform their supervisory tasks. (27)To ensure legal certainty and avoid overlaps between the current prudential framework applicable to both credit institutions and investment firms and this Directive, Regulation (EU) No 575/2013 and Directive 2013/36/EU are amended in order to remove investment firms from their scope. However, investment firms which are part of a banking group should remain subject to those provisions in Regulation (EU) No 575/2013 and Directive 2013/36/EU which are relevant for the banking group, such as the provisions on the intermediate EU parent undertaking referred to in [Article 21b] of Directive 2013/36/EU and to the rules on prudential consolidation set out in Chapter 2 of Title 2 of Part One of Regulation (EU) No 575/2013. (28)It is necessary to specify the steps that undertakings need to take to verify whether they fall under the definition of a credit institution as set out in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 and therefore need to obtain authorisation as a credit institution. Because certain investment firms already carry out the activities referred to in points (3) and (6) of Section A of Annex I to Directive 2014/65/EU, it is also necessary to ensure clarity about the continuity of any authorisation granted for those activities. (29)To ensure effective supervision, it is important that undertakings meeting the conditions set out in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 apply for an authorisation as a credit institution. Competent authorities should therefore have the possibility to apply sanctions to undertakings that do not apply for that authorisation. (30)The amendment to the definition of ‘credit institution’ in Regulation (EU) No 575/2013 by Regulation [Regulation (EU)---/----[IFR]] may as of its entry into force capture investment firms that are already operating on the basis of an authorisation issued in accordance with Directive 2014/65/EU. Those undertakings should be allowed to continue operating under their authorisation as investment firms until the authorisation of a credit institution is granted. Those investment firms should submit an application for authorisation as a credit institution at the latest when the average of their monthly total assets exceed any of the thresholds set out in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 over a period of twelve consecutive months. Where an investment firm exceeds any of the thresholds set out in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 as of the date of entry into force of this Directive, the average of their monthly total assets should be calculated taking into account the twelve consecutive months preceding that date. Those investment firms should apply for authorisation as a credit institution within one year and one day after the entry into force of this Directive. (31)The amendment to the definition of ‘credit institution’ in Regulation (EU) No 575/2013 Regulation [Regulation (EU)---/----[IFR]] may also affect undertakings which have already applied for authorisation as investment firms under Directive 2014/65/EU and for which the application is still pending. Such applications should be transferred to the competent authorities under Directive 2013/36/EU and be treated in accordance with the authorisation provisions set out in that Directive if the envisaged total assets of the undertaking meet any of the thresholds set out in Article 4(1)(1)(b) of Regulation (EU) No 575/2013.

(32)Undertakings referred to in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 should also be subject to all the requirements for access to the activity of credit institutions laid down in Title III of Directive 2013/36/EU, including the provisions on the withdrawal of authorisation in accordance with Article 18 of that Directive. Article 18 of that Directive should however be amended to ensure that competent authorities may also withdraw the authorisation granted to a credit institution where that credit institution uses its authorisation exclusively to engage in the activities referred to in Article 4(1)(1)(b) of Regulation (EU) No 575/2013 and has for a period of 5 consecutive years average total assets below the thresholds set out in that Article 4(1)(1)(b). (33)Pursuant to Article 39 of Directive 2014/65/EU, third-country firms providing financial services in the EU are subject to national regimes which may require the establishment of a branch in a Member State. To facilitate the regular monitoring and assessment of activities carried out by third-country firms through branches in the Union, competent authorities should be informed about the scale and scope of the services and activities carried out through branches on their territory. (34)EBA, in cooperation with ESMA, has issued a report based on thorough background analysis, data collection and consultation for a bespoke prudential regime for all non-systemic investment firms which serves as the basis for the revised prudential framework for investment firms. (35)To ensure the harmonised application of this Directive, EBA should be charged with drafting technical standards to specify the information which home and host authorities should exchange in the context of supervision, to set out how investment firms should assess the size of their activities for the purposes of internal governance requirements and notably to assess whether they constitute a small and non-interconnected firm. Technical standards should also specify which staff members have a material impact for the risk-profile of firms for the purposes of remuneration provisions, and specify the additional Tier 1 and Tier 2 instruments which qualify as variable remuneration. Finally, technical standards should specify the elements for the assessment of the scope of application of requirements on internal governance, transparency, treatment of risks and remuneration, the application of additional capital requirements by competent authorities, and the functioning of supervisory colleges. (36)To ensure the uniform application of this Directive and to take account of developments in financial markets, the power to adopt acts in accordance with Article 290 of the Treaty on the Functioning of the European Union should be delegated to the Commission in respect of the further specification of the definitions in this Directive, of the internal capital and risk assessments of investment firms, and of the supervisory review and evaluation powers of competent authorities. It is of particular importance that the Commission carry out appropriate consultations during its preparatory work, including at expert level, and that those consultations be conducted in accordance with the principles laid down in the Interinstitutional Agreement on Better Law-Making of 13 April 2016. In particular, to ensure equal participation in the preparation of delegated acts, the European Parliament and the Council receive all documents at the same time as Member States' experts, and their experts systematically have access to meetings of Commission expert groups dealing with the preparation of delegated acts. (37)To ensure uniform conditions for the implementation of this Directive, and in particular with regard to the adoption of the draft implementing technical standards drafted by EBA regarding information exchange requirements between competent authorities, and in order to take account of developments in the economic and monetary field with regard to levels of initial capital requirements for investment firms, implementing powers should be conferred on the Commission. Those powers should be exercised in accordance with Regulation (EU) No 182/2011 of the European Parliament and of the Council. (38)Since the objectives of this Directive, namely to set up an effective and proportionate prudential framework to ensure that investment firms authorised to operate within the Union operate on a sound financial basis and are managed in an orderly way including in the best interests of their clients, cannot be sufficiently achieved by the Member States, but, by reason of their scale and effects, would be better achieved at Union level, the Union may adopt measures, in accordance with the principle of subsidiarity as set out in Article 5 of the Treaty on European Union. In accordance with the principle of proportionality as set out in that Article, this Directive does not go beyond what is necessary in order to achieve those objectives. (39)In accordance with the Joint Political Declaration of 28 September 2011 of Member States and the Commission on explanatory documents, Member States have undertaken to accompany, in justified cases, the notification of their transposition measures with one or more documents explaining the relationship between the components of a directive and the corresponding parts of national transposition instruments. With regard to this Directive, the legislator considers the transmission of such documents to be justified. HAVE ADOPTED THIS DIRECTIVE: TITLE I SUBJECT MATTER, SCOPE AND DEFINITIONS Article 1 Subject matter This Directive lays down rules concerning: (a)the initial capital of investment firms; (b)supervisory powers and tools for the prudential supervision of investment firms by competent authorities; (c)the prudential supervision of investment firms by competent authorities in a manner that is consistent with the rules set out in [Regulation (EU) ---/----[IFR]; (d)publication requirements for competent authorities in the field of prudential supervision of investment firms.

Article 2 Scope 1.This Directive shall apply to investment firms authorised and supervised under Directive 2014/65/EU of the European Parliament and of the Council. Article 3 Definitions 1. For the purposes of this Directive, the following definitions shall apply: (1)‘ancillary services undertaking’ means ancillary services undertaking as defined in Article 4(1)(18) of Regulation (EU) No 575/2013; (2)‘authorisation’ means authorisation of an investment firm in accordance with Title II of Directive 2014/65/EU; (3)‘branch’ means branch as defined in Article 4(1)(30) of Directive 2014/65/EU; (4)‘close links’ means close links as defined in Article 4(1)(35) of Directive 2014/65/EU; (5)‘competent authority’ means a public authority or body of a Member State that is officially recognised and empowered by national law to supervise investment firms in accordance with this Directive, as part of the supervisory system in operation in that Member State; (6)‘commodity dealers’ means commodity dealers as defined in Article 4(1)(145) of Regulation (EU) No 575/2013; (7)‘control’ means the relationship between a parent undertaking and a subsidiary, as described in Article 22 of Directive 2013/34/EU of the European Parliament and of the Council, or in the accounting standards to which an investment firm is subject under Regulation (EC) No 1606/2002, or a similar relationship between any natural or legal person and an undertaking; (8)‘compliance with the group capital test’ means compliance with the requirements of Article 7 of [Regulation (EU) No ---/----[IFR] by the parent undertaking in an investment firm group; (9)‘credit institution’ means credit institution as defined in Article 4(1)(1) of Regulation (EU) No 575/2013; (10)‘derivatives’ means derivatives as defined in Article 2(1)(29) of Regulation (EU) No 600/2014; (11)‘financial institution’ means a financial institution as defined in Article 4(1)(13) of [Regulation (EU) No ---/----[IFR]; (12)‘group’ means group as defined in Article 2(11) of Directive 2013/34/EU; (13)‘group supervisor’ means a competent authority responsible for the supervision of compliance with the group capital test of Union parent investment firms and investment firms controlled by Union parent investment holding companies or Union parent mixed financial holding companies;

(14)‘home Member State’ means home Member State as defined in Article 4(1)(55)(a) of Directive 2014/65/EU; (15)‘host Member State’ means host Member State as defined in Article 4(1)(56) of Directive 2014/65/EU; (16)‘initial capital’ means the capital which is required for the purposes of authorisation as an investment firm; (17)‘investment firm’ means investment firm as defined in Article 4(1)(1) of Directive 2014/65/EU; (18)‘investment firm group’ means investment firm group as defined in Article 4(1)(23) of [Regulation (EU) ---/----[IFR]; (19)‘investment holding company’ means investment holding company as defined in Article 4(1)(21) of [Regulation (EU) ---/----[IFR]; (20)‘investment services and activities’ means investment services and activities as defined in Article 4(1)(2) of Directive 2014/65/EU; (21)‘management body’ means a management body as defined in Article 4(1)(36) of Directive 2014/65/EU; (22)‘management body in its supervisory function’ means the management body acting in its role of overseeing and monitoring management decision-making; (23)‘mixed financial holding company’ means mixed financial holding company as defined in Article 2(15) of Directive 2002/87/EC of the European Parliament and of the Council; (24)‘senior management’ means senior management as defined in Article 4(1)(37) Directive 2014/65/EU; (25)‘parent undertaking’ means a parent undertaking as defined in Article 4(1)(32) of Directive 2014/65/EU; (26)‘subsidiary’ means subsidiary as defined in Article 4(1)(33) of Directive 2014/65/EU; (27)‘systemic risk’ means systemic risk as defined in Article 3(1)(10) of Directive 2013/36/EU; (28)‘Union parent investment firm’ means a Union parent investment firm as defined in Article 4(1)(49) of [Regulation (EU) No ---/----[IFR]; (29)‘Union parent investment holding company’ means a Union parent investment holding company as defined in Article 4(1)(50) of [Regulation (EU) No ---/----[IFR]; (30)‘Union parent mixed financial holding company’ means a Union parent mixed financial holding company as defined in Article 4(1)(51) of [Regulation (EU) No ---/----[IFR]; 2.The Commission shall be empowered to adopt delegated acts in accordance with Article 54 in order to clarify: (a)the definitions set out in paragraph 1 to ensure uniform application of this Directive; (b)the definitions set out in paragraph 1 to take account, in the application of this Directive, of developments on financial markets.

TITLE II COMPETENT AUTHORITIES Article 4 Designation and powers of the competent authorities 1.Member States shall designate one or more competent authorities that carry out the functions and duties provided for in this Directive. The Member States shall inform the Commission and EBA of that designation, and where there is more than one competent authority, of the functions and duties of each competent authority. 2.Member States shall ensure that the competent authorities supervise the activities of investment firms, and, where applicable, of investment holding companies and mixed financial holding companies, to assess compliance with the requirements of this Directive and of [Regulation (EU) ---/----[IFR]. 3.Member States shall ensure that the competent authorities have the necessary powers, including the power to conduct on-the-spot checks in accordance with Article 12, to obtain the information needed to assess the compliance of investment firms and, where applicable, of investment holding companies and mixed financial holding companies, with the requirements of this Directive and of [Regulation (EU) ---/----[IFR], and to investigate possible breaches of those requirements. 4.Member States shall ensure that the competent authorities have the expertise, resources, operational capacity, powers and independence necessary to carry out the functions relating to the prudential supervision, investigations and penalties set out in this Directive. 5.Member States shall require investment firms to provide their competent authorities with all the information necessary for the assessment of the compliance of investment firms with the national rules transposing this Directive and compliance with [Regulation (EU) ---/----[IFR]. Internal control mechanisms and administrative and accounting procedures of the investment firms shall enable the competent authorities to check their compliance with those rules at all times. 6.Member States shall ensure that investment firms register all their transactions and document systems and processes which are subject to this Directive and [Regulation (EU) ---/----[IFR] in such a manner that the competent authorities are able to assess compliance with the national rules transposing this Directive and compliance with [Regulation (EU) ---/----[IFR] at all times. Article 5

Cooperation within a Member State 1.Competent authorities shall cooperate closely with the public authorities or bodies responsible in their Member State for the supervision of credit institutions and financial institutions. Member States shall require that those competent authorities and those public authorities or bodies exchange any information which is essential or relevant to the exercise of their functions and duties. 2.Competent authorities that are different from those designated in accordance with Article 67 of Directive 2014/65/EU shall establish a mechanism for cooperation with those authorities and for the exchange of all information that is relevant for the exercise of their respective functions and duties. Article 6 Cooperation within the European System of Financial Supervision In the exercise of their duties, competent authorities shall take into account the convergence of supervisory tools and supervisory practices in the application of the legal provisions adopted pursuant to this Directive and to [Regulation (EU) ---/----[IFR]. Member States shall ensure that: (a)competent authorities, as parties to the ESFS, cooperate with trust and full mutual respect, in particular when ensuring the flow of appropriate and reliable information between them and other parties to the ESFS;

(b)competent authorities participate in the activities of EBA, and, where appropriate, in the colleges of supervisors referred to in Article 44 and in Article 116 of Directive 2013/36/EU; (c)competent authorities make every effort to comply with the guidelines and recommendations issued by EBA pursuant to Article 16 of Regulation (EU) No 1093/2010 of the European Parliament and of the Council and to respond to the warnings and recommendations issued by the European Systemic Risk Board (ESRB) pursuant to Article 16 of Regulation (EU) No 1092/2010 of the European Parliament and of the Council; (d)competent authorities cooperate closely with the ESRB; (e)tasks and powers conferred on the competent authorities do not inhibit the performance of the duties of those competent authorities as members of EBA or of the ESRB, or under this Directive and under [Regulation (EU) ---/----[IFR]. Article 7

Union dimension of supervision Competent authorities in each Member State shall, in the exercise of their general duties, duly consider the potential impact of their decisions on the stability of the financial system in the other Member States concerned and, in particular, in emergency situations, based on the information available at the relevant time. TITLE III

INITIAL CAPITAL Article 8

Initial capital 1.The initial capital of an investment firm required pursuant to Article 15 of Directive 2014/65/EU for the authorisation to provide the investment services or perform the investment activities listed in points (3), (6), (8) or (9) of Section A of Annex I to Directive 2014/65/EU shall be EUR 750 000. 2.The initial capital of an investment firm required pursuant to Article 15 of Directive 2014/65/EU for the authorisation to provide the investment services or perform the investment activities listed in points (1), (2), (4), (5) or (7) of Section A of Annex I to Directive 2014/65/EU and which is not permitted to hold client money or securities belonging to its clients shall be EUR 75 000. 3.The initial capital of an investment firm required pursuant to Article 15 of Directive 2014/65/EU for investment firms other than those referred to in paragraphs 1 and 2 shall be EUR 150 000. 4.The Commission shall update, by means of implementing acts, the amount of initial capital referred to in paragraphs 1 to 3 of this Article to take account of developments in the economic and monetary field. Those implementing acts shall be adopted in accordance with the examination procedure referred to in Article 56(2). Article 9

Composition of initial capital The initial capital of an investment firm shall consist of one or more of the items referred to in Article 9 of [Regulation (EU) ---/----[IFR]. TITLE IV

PRUDENTIAL SUPERVISION

CHAPTER 1

Principles of prudential supervision Section 1

Competences and duties of home and host member states Article 10

Competences of the competent authorities of the home Member State The prudential supervision of an investment firm shall be the responsibility of the competent authorities of the home Member State, without prejudice to those provisions of this Directive which give responsibility to the competent authorities of the host Member State. Article 11

Cooperation between competent authorities of different Member States 1.Competent authorities of different Member States shall cooperate closely for the purposes of their duties pursuant to this Directive and [Regulation (EU) ---/----[IFR], in particular by exchanging information about investment firms without delay, including on the following: (a)information about the management and ownership structure of the investment firm; (b)information about compliance with capital requirements by the investment firm; (c)information about concentration risk and liquidity of the investment firm; (d)information about the administrative and accounting procedures and internal control mechanisms of the investment firm; (e) any other relevant factors that may influence the risk posed by the investment firm. 2.The competent authorities of the home Member State shall immediately provide the competent authorities of the host Member State with any information and findings about any potential problems and risks posed by an investment firm to the protection of clients or the stability of the financial system in the host Member State which they have identified when supervising the activities of an investment firm. 3.The competent authorities of the home Member State shall act upon information provided by the competent authorities of the host Member State by taking all measures necessary to avert or remedy potential problems and risks as referred to in paragraph 2. Upon request, the competent authorities of the home Member State shall explain to the competent authorities of the host Member State how they have taken into account the information and findings provided by the competent authorities of the host Member State. 4.Where, following the communication of the information and findings referred to in paragraph 2, the competent authorities of the host Member State consider that the competent authorities of the home Member State have not taken the necessary measures referred to in paragraph 3, the competent authorities of the host Member State may, after having informed the competent authorities of the home Member State and EBA, take appropriate measures to protect clients to whom services are provided and to protect the stability of the financial system. 5.Competent authorities of the home Member State that disagree with the measures of the competent authorities of the host Member State may refer the matter to EBA, which shall act in accordance with the procedure laid down in Article 19 of Regulation (EU) No 1093/2010. Where EBA acts in accordance with that Article, it shall adopt its decision within one month. 6.EBA, in consultation with ESMA, shall develop draft regulatory technical standards to specify requirements for the type and nature of the information referred to in paragraphs 1 and 2 of this Article. Power is delegated to the Commission to adopt the regulatory technical standards referred to in the first subparagraph in accordance with Articles 10 to 14 of Regulation (EU) No 1093/2010. 7.EBA, in consultation with ESMA, shall develop draft implementing technical standards to establish standard forms, templates and procedures for the information sharing requirements which are likely to facilitate the supervision of investment firms. Power is conferred on the Commission to adopt the implementing technical standards referred to in the first subparagraph in accordance with Article 15 of Regulation (EU) No 1093/2010.

8.EBA shall submit the draft technical standards referred to in paragraphs 6 and 7 to the Commission by [nine months from the date of entry into force of this Directive]. Article 12

On-the-spot checking and inspection of branches established in another Member State 1.Host Member States shall provide that, where an investment firm authorised in another Member State carries out its activities through a branch, the competent authorities of the home Member State may, after having informed the competent authorities of the host Member State, carry out on-the-spot checks of the information referred to in Article 11(1) and inspect that branch. 2.The competent authorities of the host Member State shall, for supervisory purposes and where they consider it relevant for reasons of stability of the financial system in the host Member State, have the power to carry out, on a case-by-case basis, on-the-spot checks and inspections of the activities carried out by branches of investment firms on their territory and require information from a branch about its activities. Before carrying out those checks and inspections, the competent authorities of the host Member State shall consult the competent authorities of the home Member State. After the completion of those checks and inspections, the competent authorities of the host Member State shall communicate to the competent authorities of the home Member State the information that is relevant for the risk assessment of the investment firm concerned.



Section 2 Professional secrecy and duty to report Article 13

Professional secrecy and exchange of confidential information 1.Member States shall ensure that competent authorities and all persons associated with those authorities, including the persons referred to in Article 76(1) of Directive 2014/65/EU, are bound by the obligation of professional secrecy for the purposes of this Directive and [Regulation (EU) ---/----[IFR]. Confidential information which such authorities and persons receive in the course of their duties may be disclosed only in summary or aggregate form provided that individual investment firms or persons cannot be identified, without prejudice to cases covered by criminal law. Where the investment firm has been declared bankrupt or is being compulsorily wound up, confidential information which does not concern third parties may be disclosed in civil or commercial proceedings if necessary for carrying out those proceedings. 2.Competent authorities shall only use the confidential information collected, exchanged or transmitted pursuant to this Directive and [Regulation (EU) ---/----[IFR] for the purpose of carrying out their duties, and in particular for the following purposes: (a)the monitoring of the prudential rules set out in this Directive and in [Regulation (EU) ---/----[IFR]; (b)to impose sanctions; (c)in administrative appeals against decisions of the competent authorities; (d)in court proceedings initiated under Article 21.

3.Natural and legal persons or bodies, other than competent authorities, receiving confidential information pursuant to this Directive and [Regulation (EU) ---/----[IFR] shall only use that information for the purposes for which the competent authority expressly provides or in accordance with national law. 4.Competent authorities may exchange confidential information for the purposes of paragraph 2, may expressly state how that information is to be treated and may expressly restrict any further transmission of that information. 5.The obligation referred to in paragraph 1 shall not prevent competent authorities from transmitting confidential information to the European Commission when that information is necessary for the exercise of the powers of the Commission. 6.Competent authorities may provide EBA, ESMA, the ESRB, central banks of the Member States, the ESCB and the ECB in their capacity as monetary authorities, and, where appropriate, public authorities responsible for overseeing payment and settlement systems, confidential information where that information is necessary for the performance of their tasks. Article 14

Administrative arrangements with third countries for the exchange of information Member States, and EBA in accordance with Article 33 of Regulation (EU) No 1093/2010, may, for the purposes of performing their supervisory tasks pursuant to this Directive or [Regulation (EU) ---/----[IFR], conclude administrative arrangements with the supervisory authorities of third countries to exchange information, including in relation to the following: (a)the supervision of financial institutions and financial markets; (b)the liquidation and bankruptcy of investment firms and similar procedures; (c)oversight of the bodies involved in the liquidation and bankruptcy of investment firms and similar procedures; (d)the carrying out of statutory audits of financial institutions or institutions which administer compensation schemes; (e)oversight of persons charged with carrying out statutory audits of the accounts of financial institutions ; (f)oversight of persons active on emission allowance markets for the purpose of ensuring a consolidated overview of financial and spot markets; (g)oversight of persons active on agricultural commodity derivatives markets for the purpose of ensuring a consolidated overview of financial and spot markets. Those arrangements shall contain professional secrecy provisions that are equivalent to those laid down in Article 13 of this Directive. Article 15

Duties of persons responsible for the control of annual and consolidated accounts Member States shall provide that any person authorised in accordance with Directive 2006/43/EC and performing in an investment firm the tasks described in Article 73 of Directive 2009/65/EC or Article 34 of Directive 2013/34/EU or any other statutory task, has a duty to report promptly to the competent authorities any fact or decision concerning that investment firm, or concerning an undertaking that has close links with that investment firm which: (a)constitutes a material breach of the laws, regulations or administrative provisions laid down pursuant to this Directive; (b)may affect the continuous functioning of the investment firm; or

(c)may lead to a refusal to certify the accounts or can lead to the expression of reservations. Section 3

Penalties, investigatory powers and right of appeal Article 16

Administrative penalties and other administrative measures 1.Member States shall lay down rules on administrative penalties and other administrative measures in respect of breaches of national provisions transposing this Directive and of [Regulation (EU)---/----[IFR], including where the following occurs: (a)an investment firm fails to have in place internal governance arrangements as set out in Article 24; (b)an investment firm fails to report to the competent authorities, in breach of Article 52(1)(b) of [Regulation (EU) ---/----IFR], information on compliance with the obligation to meet capital requirements as set out in Article 11 of that Regulation, or provides incomplete or inaccurate information; (c)an investment firm fails to report to the competent authorities, in breach of Article 34 of [Regulation (EU) ---/----], information about concentration risk or provides incomplete or inaccurate information; (d)an investment firm incurs a concentration risk in excess of the limits set out in Article 36 of [Regulation (EU) ---/----[IFR], without prejudice to Articles 37 and 38 of that Regulation; (e)an investment firm repeatedly or persistently fails to hold liquid assets in breach of Article 42 of [Regulation (EU) ---/----[IFR], without prejudice to Article 43 of that Regulation; (f)an investment firm fails to disclose information, or provides incomplete or inaccurate information, in breach of the provisions set out in Part Six of [Regulation (EU) ---/----[IFR]; (g)an investment firm makes payments to holders of instruments included in the own funds of the investment firm where Articles 28, 52 or 63 of Regulation (EU) No 575/2013 prohibit such payments to holders of instruments included in own funds; (h)an investment firm is found liable for a serious breach of national provisions adopted pursuant to Directive (EU) 2015/849; (i)an investment firm allows one or more persons not complying with Article 91 of Directive 2013/36/EU to become or remain a member of the management body. Member States that do not lay down rules on administrative penalties for breaches which are subject to national criminal law shall communicate to the Commission the relevant criminal law provisions. The administrative penalties and other administrative measures shall be effective, proportionate and dissuasive. 2. The administrative penalties and other administrative measures referred to in the first subparagraph of paragraph 1 shall include the following: (a)a public statement which identifies the natural or legal person, investment firm, investment holding company or mixed financial holding company responsible and the nature of the breach; (b)an order requiring the natural or legal person responsible to cease the conduct and to desist from repeating that conduct;

(c)a temporary ban for members of the investment firm's management body or for any other natural persons to exercise functions in investment firms; (d)in case of a legal person, administrative pecuniary penalties of up to 10% of the total annual net turnover, including the gross income consisting of interest receivable and similar income, income from shares and other variable or fixed-yield securities, and commissions or fees of the undertaking in the preceding business year; (e)in the case of a legal person, administrative pecuniary penalties of up to twice the amount of the profits gained or losses avoided due to the breach where those profits or losses can be determined; (f)in case of a natural person, administrative pecuniary penalties of up to EUR 5 000 000, or in the Member States whose currency is not the euro, the corresponding value in the national currency on [date of entry into force of this Directive]. Where an undertaking referred to in point (d) is a subsidiary, the relevant gross income shall be the gross income resulting from the consolidated account of the ultimate parent undertaking in the preceding business year. Member States shall ensure that where an investment firm is in breach of national provisions transposing this Directive or in breach of [Regulation (EU) ---/----[IFR], penalties may be applied to the members of the management body and to other natural persons who under national law are responsible for the breach. 3.Member States shall ensure that when determining the type of administrative penalties or administrative measures referred to in paragraph 1 and the level of administrative pecuniary penalties, competent authorities shall take into account all relevant circumstances, including, where appropriate: (a)the gravity and the duration of the breach; (b)the degree of responsibility of the natural or legal persons responsible for the breach; (c)the financial strength of the natural or legal persons responsible for the breach, including the total turnover of legal persons or the annual income of natural persons; (d)the importance of profits gained or losses avoided by the legal persons responsible for the breach; (e)any losses incurred by third parties as a result of the breach; (f)the level of cooperation with the relevant competent authorities; (g)previous breaches by the natural or legal persons responsible for the breach; (h)any potential systemic consequences of the breach. Article 17

Investigatory powers Member States shall ensure that competent authorities have all information gathering and investigatory powers that are necessary for the exercise of their functions, including: (a)the power to require information from the following natural or legal persons: (i)investment firms established in the Member State concerned;

(ii)investment holding companies established in the Member State concerned; (iii)mixed financial holding companies established in the Member State concerned; (iv)mixed--activity holding companies established in the Member State concerned; (v)persons belonging to the entities referred to in points (i) to (iv); (vi)third parties to whom the entities referred to in points (i) to (iv) have outsourced operational functions or activities. (b)the power to conduct all necessary investigations on any person referred to in point (a) that is established or located in the Member State concerned, including the right: (i)to require the submission of documents by the persons referred to in point (a); (ii)to examine the books and records of the persons referred to in point (a) and to make copies or extracts from those books and records; (iii)to obtain written or oral explanations from the persons referred to in point (a) or from their representatives or staff; (iv)to interview any other person who consents to be interviewed for the purposes of collecting information on the subject matter of an investigation; (c)the power to conduct all necessary inspections at the business premises of the legal persons referred to in point (a) and any other undertakings included in the supervision of compliance with the group capital test, where the competent authority is the group supervisor, subject to the prior notification of other competent authorities concerned. Article 18

Publication of administrative penalties and measures 1.Member States shall ensure that competent authorities publish on their official website any administrative penalties and measures imposed in accordance with Article 16 and which has not been appealed or can no longer be appealed, without undue delay. That publication shall include information on the type and nature of the breach and the identity of the natural or legal person on whom the penalty is imposed or against whom the measure is taken. The information shall only be published after that person has been informed of those penalties or measures and to the extent the publication is necessary and proportionate. 2.Where Member States permit the publication of administrative penalties or measures imposed in accordance with Article 16 against which there has been an appeal, competent authorities shall also publish on their official website information on the appeal status and on the outcome of the appeal. 3.Competent authorities shall publish the administrative penalties or measures imposed in accordance with Article 16 on an anonymous basis in any of the following cases: (a)the penalty has been imposed on a natural person and publication of that person’s personal data is found to be disproportionate; (b)the publication would jeopardise an ongoing criminal investigation or the stability of financial markets; (c)the publication would cause disproportionate damage to the investment firms or natural persons involved.

4.Competent authorities shall ensure that information published pursuant to this Article remains on their official website for at least five years. Personal data may only be retained on the official website of the competent authority where permitted by the applicable data protection rules. Article 19

Reporting penalties to EBA Competent authorities shall inform EBA of administrative penalties and measures imposed pursuant to Article 16, of any appeal against those penalties and measures and of the outcome thereof. EBA shall maintain a central database of administrative penalties and measures communicated to it solely for the purpose of exchanging information between competent authorities. That database shall be accessible to competent authorities only and it shall be updated regularly. EBA shall maintain a website with links to each competent authority's publication of administrative penalties and measures in accordance with Article 16 and shall state the period for which each Member State publishes administrative penalties and measures. Article 20

Reporting of breaches 1.Member States shall ensure that competent authorities establish effective and reliable mechanisms to report potential or actual breaches of national provisions transposing this Directive and of [Regulation (EU) ---/----[IFR], including the following: (a)specific procedures for the treatment of reports on breaches; (b)appropriate protection against retaliation, discrimination or other types of unfair treatment by the investment firm for employees of investment firms who report breaches committed within the investment firm; (c)protection of personal data concerning both the person who reports the breach and the natural person who is allegedly responsible for that breach, in accordance with Regulation (EU) No 2016/679; (d)clear rules that ensure that confidentiality is guaranteed in all cases in relation to the person who reports the breaches committed within the investment firm, unless disclosure is required by national law in the context of further investigations or subsequent judicial proceedings. 2.Member States shall require investment firms to have in place appropriate procedures for their employees to report breaches internally through a specific and independent channel. Those procedures may be provided for by social partners provided that those procedures offer the same protection as the protection referred to in points (b), (c) and (d) of paragraph 1. Article 21

Right of appeal Member States shall ensure that decisions and measures taken pursuant to [Regulation (EU) ---/----[IFR] or pursuant to laws, regulations and administrative provisions adopted in accordance with this Directive are subject to a right of appeal. CHAPTER 2

Review process Section 1

Internal capital adequacy assessment process Article 22

Internal Capital

1.Investment firms shall have in place sound, effective and comprehensive strategies and processes to assess and maintain on an ongoing basis the amounts, types and distribution of internal capital that they consider adequate to cover the nature and level of risks to which they are or might be exposed. 2.The strategies and processes referred to in paragraph 1 shall be subject to regular internal review to ensure that they remain comprehensive and proportionate to the nature, scale and complexity of the activities of the investment firm concerned. Section 2 Internal governance, transparency, treatment of risks and remuneration Article 23

Assessment for the purposes of the application of this Section 1.For the purposes of this Section, Member States shall ensure that investment firms assess, on an annual basis, and in accordance with points (a) and (b), whether they meet the conditions set out in Article 12(1) of [Regulation (EU) ---/----[IFR]: (a)an investment firm shall determine whether, based on the figures from the two-year period immediately preceding a given financial year, it satisfies the conditions set out in points (c) to (g) of Article 12(1) of [Regulation (EU) ---/----[IFR]; (b)an investment firm shall determine whether, based on the figures from that same period, it exceeds on average the limits laid down in points (a), (b), (h) and (i) of Article 12 (1) of [Regulation (EU) ---/----[IFR]. 2.This Section shall not apply where, on the basis of the assessment referred to in paragraph 1, an investment firm determines that it meets all of the conditions set out in Article 12(1) of [Regulation (EU) ---/----[IFR]. 3.An investment firm that, on the basis of the assessment referred to in paragraph 1, determines that it does not meet all of the conditions set out in that Article 12(1) of [Regulation (EU) ---/----[IFR], it shall comply with this Section as of the financial year following the financial year in which that assessment took place. 4.Member States shall ensure that this Section is applied to investment firms on an individual basis and at group level. Member States shall ensure that investment firms subject to this Section implement the requirements of this Section in their subsidiaries that are financial institutions as defined in Article 4(13) of [Regulation (EU) ---/----[IFR], including those established in third countries, unless the parent undertaking in the Union can demonstrate to the competent authorities that the application of this Section is unlawful under the laws of the third country where those subsidiaries are established. 5.Competent authorities may set a shorter period than the two years referred in paragraph 1 of this Article where both of the following conditions ar