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The Directives
CRD IV
CRD IV mainly deals with capital requirements, largely following the rules and standards included in the global Basel II and Basel III frameworks. 2 The directive lays down rules concerning four aspects: access to the activity of credit institutions and investment firms, supervisory powers and tools, the prudential supervision process and publication requirements, Art. 1 CRDIV.
The background to the CRD IV is in the previous heavily amended provisions in the Directives 2006/48/EC and 2006/49/EC, many of which were applicable to both credit institutions and investment firms, rec. 1 CRD IV. The CRD IV combines these two elements while also complementing them with new requirements. Prudential requirements of the type found in the earlier directives are now provided for in the CRR, which together with the CRD IV forms a package, the core objective of which is the coordination of provisions, governance and the supervisory framework, rec. 2. Other requirements based on supervisory assessment and discretion are also a basic element in the directive, rec. 3.
CRD IV provides for amounts of initial capital for investment firms as well as a common framework for the monitoring of risks carried by such institutions, rec. 4 and Art. 12. This is an addition to what was included in the original MiFID, which only provided for coordination of rules. MiFID established a common market for financial instruments, but CRD IV is supposed to go further, to finally achieve such a market, rec.5. In order to achieve this, the directive stands on two legs: one in the field of regulatory and supervisory cooperation and convergence and the other on rules regarding the operation of the institutions, rec. 6. This includes a higher degree of transparency and information sharing, rec. 13. The principle of mutual recognition is to be safeguarded through assuring that it really is applied, that there are no obstacles for carrying out activities in several Member States, rec. 23.
BRRD
BRRD deals with the recovery and resolution of financial institutions and financia holding companies as well as their branches, Art. 1 BRRD.
The BRRD attempts to solve issues regarding unsound or failing credit institutions and investment firms. The ultimate objective is to avoid insolvency and, in case of insolvency, to minimise negative systemic effects, rec. 1. This involves securing access to funding « under equivalent conditions for all credit institutions that are otherwise solvent », rec. 2.
Authorities should have tools to intervene early on, thus minimising the negative impact on the financial system and the economy, rec 5. The tools are to be applied in case the institution is either « failing or likely to fail », rec. 6. The question whether a failure affects the financial system as a whole is of importance in the assessment regarding actions to be taken -‐ this is where discretionary assessment becomes relevant: there is naturally no need to act against contagion effects in other Member States if there are none, rec. 7.
Resolution action is to be taken only when it is necessitated by public interest, rec. 13. A core principle in the directive is that shareholders bear losses first and creditors thereafter, rec. 5.
MiFID 2
MiFID 2, which is a recast of the earlier Markets in Financial Instruments Directive 2004/39/EC partly replaced by the Markets in Financial Instruments Regulation 600/2014 (MiFIR), regulates the authorisation and operating conditions for investment firms, the provision of investment services or activities through branches, the authorisation and operation of regulated markets and of data reporting services providers and the supervision, cooperation and enforcement by competent authorities, Art. 2 MiFID 2.
The MiFID 2 aims to cover the full range of investor-‐oriented activities and to offer investors a high level of protection through harmonisation, rec. 3. Moreover, the directive is also supposed to « increase transparency, protect investors better, reinforce confidence, address unregulated areas, and ensure that supervisors are granted adequate powers to fulfil their tasks », rec. 4. Weaknesses in corporate governance arrangements are addressed through more detailed principles and minimum standards than those in the original MiFID, rec. 5. The form of directive has been chosen specifically to make it possible to « adjust the rules to any existing specificities of the particular market and legal system in each Member State », rec. 7.
The directive is intended to provide for a regime which includes all financial instruments irrespective of trading methods, the objective being to ensure high quality execution and to « uphold the integrity and overall efficiency of the financial system », also taking into account the emergence of new trading systems and thus avoiding regulatory loopholes that can be exploited by such systems, rec. 13. Commodity derivatives and other instruments that « are constituted and traded in such a manner as to give rise to regulatory issues comparable to traditional financial instruments », rec. 8, are also included in the directive. In order to avoid loopholes relating to commodity derivatives traded on an OTF and physically settled, a delegated act regarding the expression « must be physically settled » is to be provided for, rec. 10.
The Rules
Results to be achieved
The union dimension
A core objective and factor to relate to in the CRD IV, BRRD as well as in MiFID 2 is financial stability at the Union level.
The general requirement in Article 7 of the CRD IV for competent authorities to take into account the financial stability of the whole Union when exercising their duties is to its nature a standard component in union legislation, intended to ensure that measures do not interfere with the functioning of or with competition on the common market. This is a key factor to be taken into account, since a decision made by a competent authority in one Member State may promote financial stability in that Member State, but do so at the expense of other Member States and the whole of the Union.
Although financial stability may be seen as an end result, it is nevertheless unspecified, as is underlined in recital 50. There is no explicit requirement to achieve any specific result, but any decision a competent authority takes or any measure it takes may of course be questioned on the basis of its effects on the particular aspect of financial stability in the whole union. Although the requirement, typical of a directive, gives the competent authority room for discretion and the freedom to assess the potential effects based on its own judgement and the information available, in practice, this binds the authority to the objective to the extent that it has to show that the union dimension has been duly taken into account.
The union dimension is present throughout the directive. The union aspect is included on a general level in Article 155, which states that competent authorities should consider the potential impact of their decisions on the stability of the financial system in all other Member States. According to Article 156 on liquidity supervision, measures resulting from the implementation of host Member States’ monetary policies should not be discriminatory or restrictive as regards credit institutions authorised in other Member States. Also in a more unspecific fashion, Article 157 requires that competent authorities in different Member States collaborate closely and supply each other with relevant information. Article 158(2) lays down that the authorities shall do « everything within their power to reach a joint decision on the designation of a branch as being significant ». While this is based on assessment, the process itself is regulated in further detail in the following paragraphs as well as in Article 159 on on-‐the-‐spot checks.
In more specific terms, the union dimension also comes through in Art. 153, which lays down rules for the cooperation between home and host Member States as regards measures to be taken in relation to activities carried out in the host Member State. Firstly, a requirement for host Member States to require credit institutions to remedy their non-‐compliance is laid down in paragraph 1 and secondly, a requirement to inform the home Member State in case of the credit institutions failure to take necessary steps is laid down in paragraph 2. The measures taken should then be « appropriate », paragraph 3, but are not specified any further. The same also applies for paragraph 4, which requires the competent authorities of the home Member State to take measures to prevent or to punish further breaches.
Article 75(2) requires Member States to ensure that bodies implementing complaint and redress procedures actively cooperate with their counterparts in other Member States.
In the BRRD, the union dimension has a slightly different, more concrete function as group resolution plans are to be drawn up in cooperation with the resolution authorities concerned, rec. 18 and 34, Art. 12 and 17(7). Consequently, the requirement is not applied within one competent authority but -‐ in cases where this is relevant because of cross-‐border activities that the group is involved in -‐ by several authorities. As the core objective here is to make the resolution of the entities concerned possible, the Union dimension is bound to be present in the decision making instead of just being an aspect to be taken into account -‐ regarding resolution plans, there is no real option to the Union perspective in such a process.
Specific results within entities and the financial system
Some rules in the CRD IV, BRRD and MiFID 2 refer to specific results within the financial system or its entities. One objective in CRD IV is to ensure effective oversight by the management body of the institution, promoting a sound risk culture and enabling competent authorities to monitor the adequacy of internal governance arrangements, rec. 54. This is to be achieved through introducing principles and standards which are to be applied taking into account the nature, scale and complexity of the institution’s activities, see same recital.
Table of contents :
1. Introduction
1.1 On the method used
2. The directives
2.1 CRD
2.2. BRRD
2.3 MiFID
3. The Rules
3.1. Results to be achieved
3.1.1 The Union Dimension
3.1.2 Specific Results within Entities and the Financial System
3.2 Basic Requirements and Discretionary Assessment
3.3 Explicit Rules
4. Rules and Discretion
4.1 Rules and Discretion in CRD
4.2 Rules and Discretion in BRRD
4.3 Rules and Discretion in MiFID 2
5. Problems in Implementation
5.1 Problems in Implementation CRD
5.2 Problems in Implementation – RRD
5.3 Problems in Implementation -‐ MiFID 2
6. Technical Standards
6.1 Technical Standards to CRD
6.2 Technical Standards to BRRD
6.3 Technical Standards to MiFID
7. Guidelines
8. Conclusions on Regulatory Structure
8.1 The Regulatory Structure of CRD
8.2 The Regulatory Structure of BRRD
8.3 The Regulatory Structure of MiFID 2
9. Final Conclusions
10. Bibliography
