EBA and ESMA consult on framework for the supervisory review and evaluation process of investment firms

The European Banking Authority (EBA) and the European Securities and Markets Authority (ESMA) launched today a public consultation on their Guidelines on common procedures and methodologies for the supervisory review and evaluation process (SREP). The EBA is also consulting on draft Regulatory Technical Standards (RTS) on the additional own funds requirements that could be determined by competent authorities for investment firms. Both regulatory products are based on the Investment Firms Directive (IFD) and aim at consistent supervisory practices with regard to the review and evaluation of investment firms. The consultations run until 18 February 2022.

The Investment Firms Regulation (IFR) and Directive (IFD) introduced a dedicated prudential framework for investment firms which reflects specific risks faced and posed to others by investment firms. This framework specifies the structure of own funds requirements for those investment firms, which are not considered systemic and are not treated as credit institutions.

The draft joint SREP Guidelines set out the process and criteria for the assessment of the main SREP elements such as:

1. business model;
2. governance arrangements and firm-wide controls;
3. risks to capital and capital adequacy; and
4. liquidity risk and liquidity adequacy.

As part of this assessment, a scoring system is introduced to facilitate the comparability across firms. In addition, the proposed joint Guidelines provide clarifications on the monitoring of key indicators, on the application of SREP in the cross-border context, and on the use of supervisory measures.

While the proposed structure of SREP and the scoring system is similar to those used for credit institutions, the guidance provided is proportionate to the nature, size and activities of investment firms, and in addition, the criteria for the assessment of risks follow the requirements of IFR and IFD.

For the determination of additional own funds requirements for risks not covered or not sufficiently covered by Pillar 1 requirements, the joint SREP Guidelines refer to the draft RTS on the additional own funds requirements also published for consultation today by EBA. These RTS set out more detailed guidance on the measurement of risks to capital, including specific indicative metrics to be used for the assessment of materiality and determination of capital considered adequate to cover specific risks.

Consultation process

Comments to the two consultations can be sent to the EBA by clicking on the "send your comments" button on the respective consultation pages. Please note that the deadline for the submission of comments is 18 February 2022.

A public hearing will take place via conference call on 18 January 2022 from 11:00 to 12:30. All contributions received will be published following the end of the consultation, unless requested otherwise.

Legal basis, background and next steps

These draft Guidelines have been developed jointly with ESMA on the basis of Article 45(2) of Directive (EU) 2019/2034, which mandates these Authorities to further specify the common procedures and methodologies for the SREP.

The draft RTS have been developed in consultation with ESMA on the basis of Article 40(6) of Directive (EU) 2019/2034, which mandates the EBA to specify how the risks and elements of risks are to be measured.

Once the Guidelines and the RTS will enter into force, they will apply to competent authorities across the EU.