The new Regulation on prudential requirements for MiFID investment firms (IFR) and the accompanying Directive (IFD) have now been passed by the European Parliament and, subject to adoption by the European Council, will become law. 

IFR/IFD will introduce a bespoke prudential regime for most MiFID investment firms to replace the one that currently applies under the fourth Capital Requirements Directive and the Capital Requirements Regulation (CRD IV). 

This will mean higher regulatory capital requirements for firms, subject to some transitional phasing-in. It will also mean new, more onerous remuneration rules based on those applicable to banks, as well as a raft of internal governance and disclosure and reporting requirements. 

The rules are likely to be a significant step up for many firms, but the biggest impact is likely to be for adviser/arranger firms. These changes may result in a significant increase in their capital requirements and the application to them for the first time of both prudential consolidation and detailed remuneration rules. 

The new regime will also introduce a stricter framework for third-country firms seeking to rely on the equivalence provisions in the Markets in Financial Instruments Regulation (MiFIR). 


IFR/IFD applies to MiFID investment firms other than those which deal on own account and/or carry out the activities of underwriting or placing on a firm commitment basis and which by virtue of their size and/or interconnectedness in the financial system are considered to be of systemic importance.  Those firms will be subject to CRD IV instead. 

The majority of MiFID investment firms, including portfolio managers and, in all likelihood, many adviser/arrangers, will therefore be subject to IFR/IFD.  

Where a MiFID investment firm meets the requirements to be a 'small and non-interconnected investment firm' then IFR/IFD applies, but on a limited basis. 

Prudential groups and consolidation

All investment firms subject to IFR/IFD must comply with the regime's requirements relating to own funds composition, the calculation of capital requirements, concentration risk, liquidity requirements, disclosure and reporting on a solo (individual firm) basis. 

In general, a parent investment firm, parent investment holding company or parent mixed financial holding company in the EU shall also apply all of the above requirements on a consolidated basis.  For most firms, this does not represent a change to existing consolidation requirements, but it will be new for some, eg adviser/arrangers. 

By way of derogation to the full prudential consolidation requirement described above, supervisors will have the discretion to apply a simpler and lighter-touch group capital test in the case of group structures which they deem to be 'sufficiently simple' and in respect of which no significant risks to clients or to the market will arise from not applying consolidated supervision.

If full prudential consolidation under the IFR applies, then the IFD's requirements relating to internal governance, transparency, treatment of risks and remuneration will also be applied to firms which are subject to the full application of the regime on a solo and consolidated basis (except in relation to certain third-country subsidiaries where it would be unlawful to do this). 


The remuneration requirements apply in respect of staff, such as senior management and employees with comparable remuneration, whose professional activities have a material impact on the risk profile of the firm or the assets that it manages. 

The requirements relating to remuneration include:

  • A requirement to have a remuneration policy that is proportionate to the size, internal organisation and nature of the firm and the scope and complexity of its activities and which complies with a number of principles.  
  • A requirement to set — and publish — appropriate ratios of variable remuneration to fixed remuneration that may be paid to relevant staff, ensuring that the fixed component represents a 'sufficiently high proportion' of the total remuneration to enable the operation of a fully flexible policy on variable remuneration components. 
  • A requirement for any variable remuneration to comply with a number of requirements, including as to allocation and deferral as well as malus and clawback.
  • A requirement to establish an independent and gender balanced remuneration committee. 
  • A requirement to make certain disclosures regarding the remuneration policy and practices as well as providing remuneration information to supervisors.

Some of the above requirements will not apply to firms which meet certain criteria.

Quantitative capital requirements

Subject to transitional phasing-in, a firm will generally be required to have own funds at all times at least equal to the highest of its: 

  • fixed overheads requirement — at least one quarter of its fixed overheads for the preceding year;
  • permanent minimum requirement — for a portfolio manager or adviser/arranger (which does not hold client money) it is likely to be EUR 75,000 and, for a firm with a principal dealing permission, EUR 750,000; and
  • 'K-factor' requirement — a new, activities-based capital requirement based on an aggregation of three risk factors applicable to the firm.

In addition to the own funds requirements, firms will be required to hold an amount of liquid assets equal to at least one third of their fixed overheads requirement, which, in practice, will equate to one month's fixed overheads. 

Supervisors can also require firms to hold additional capital in certain circumstances such as where they consider that the firm is exposed to risks which are not adequately covered by the standard capital requirements. 

Disclosures and public reporting

Firms will also be subject to a wide range of disclosure and reporting requirements under IFR/IFD. These include (but are not limited to) the requirement to make public disclosures about their capital, capital requirements, risk management objectives and policies, internal governance arrangements and remuneration policies and practices. 

Public country-by-country reporting rules will also apply as well as a requirement to report certain regulatory capital information to supervisors and for larger firms to disclose certain voting information. 

Third country firms and equivalence assessments

IFR/IFD amends the rules on assessing third countries for equivalence in relation to the provision of cross-border services by third country firms under MiFIR to state that when carrying out any equivalence assessment in relation to a third country for those purposes, the Commission must take into account (amongst other factors):

whether firms in that jurisdiction are subject to prudential, organisational and business conduct requirements which are equivalent to those which apply in MiFIR, CRD IV and IFR/IFD; and 
whether firms in that third country are subject to effective supervision and enforcement to ensure compliance with those requirements. 

Application to AIFM and UCITS

The IFD also provides that own funds of an AIFM or UCITS management company can never be less than the IFR's fixed overheads requirement.

The full briefing can be read here.

Tim Lewis is a partner in and head of Travers Smith's Financial Services and Markets Department. 

Jane Tuckley is a partner in Travers Smith's Financial Services and Markets Department.  

Phil Bartram is a partner in Travers Smith’s Financial Services and Markets Department. 

Stephanie Biggs is a partner in Travers Smith’s Financial Services and Markets Department.