These rules once passed by the EU Council and the EU Parliament, will provide the European Commission with the means to assess firms which operate like banks and impose and subject them to a stricter regulations. This has implications for London based financial institutions which have clients in the Eurozone.
In a deal reached late on Tuesday, lawmakers and European Union governments, have agreed to tighter supervision of investment firms that offer “bank-like” services operating or offering their services in the EU. This includes firms which provide proprietary trading and underwriting of financial instruments.
The deal, will boost the European Commission’s powers in overseeing foreign financial firms operating in the EU, and provide Brussels more clout over London-based financial firms after Brexit.
The development assumes significance since it essentially overhauls and imposes stricter liquidity and capital requirements to large EU investment firms, and tightens an initial proposal put forward by the European Commission in December 2017.
“The agreement further strengthens the equivalence regime that would apply to third country investment firms,” said the EU in a statement, while adding more powers would be given to the Commission to assess whether foreign rules are compatible with EU regulations.
Incidentally, more than 6,000 European investment firms, including U.S. giants JPMorgan and Goldman Sachs, have their EU headquarters in Britain. Many have however started setting up continental subsidiaries to ensure that they can continue to serve clients in the EU post Brexit.
Subject to their approval by the EU Council and the European Parliament, these new rules will enable the European Commission to assess whether foreign investment firms operate as banks and in which case they would be subject to stricter regulations – especially if they are deemed “of systemic importance”.
The agreement “levels the playing field between the largest investment firms and the largest banks; they will follow the same rules,” said Jyrki Katainen, vice president of the European Commission for investment and growth.
Under the reform, EU legislators also agreed to halve a threshold for the automatic application of the strictest capital and liquidity rules for EU-based firms, which the Commission had initially proposed would only apply to financial companies with assets above 30 billion euros.
As a result, investment firms with assets of 15 billion euros ($17 billion) or more would automatically be subject to the same requirements as large banks, while firms with assets between 5 and 15 billion euros could face lighter requirements unless their activities are seen to pose risks to financial stability, said a statement from the EU.