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As the Trialogue discussions on the text of the new EU prudential rules for investment firms proceeds, the European Commission is putting together a compromise text on the areas of disagreement. Bovill understands that the European Union may agree the new European capital and liquidity rules by the end of February. The new regime could come into force by Q3 2020.
Harpartap Singh, Head of Prudential and Managing Consultant at Bovill, said:
“It looks like Europe have got their act together quicker than thought. The existing prudential regime is tailored towards banks, and isn’t fit for purpose for asset managers and certain investment firms, as it forces them to address risks that aren’t risks for their sectors, such as taking haircuts on balance sheet assets.
“The upside is that the new rules should be far more appropriate for investment firms. However, the Trialogue creates uncertainty until the final versions are announced especially concerning issues such as large exposures, consolidation groups and the methods of calculating of risk factors. It could mean a big step up in terms of capital requirements and in terms of regulatory compliance. Firms will likely need to get geared up quickly – the rules will probably come into law within a month or two of them being written, and firms will have 18 months to comply after that. Software, procedures, and training will all likely need to change. This could be a big ask for small to mid-tier firms, which may find resourcing these changes more onerous.
“Even in the event of a disorderly Brexit, we believe it is likely that these rules will be applied in the UK, given the significant degree to which the FCA has been involved in the drafting process.”
