[author: Aoife Casey]

On November 9, 2017, the European Banking Authority (“EBA“) published an own-initiative opinion (EBA/Op/2017/13) addressed to the European Parliament, the Council of the EU and the European Commission on nonbank financial intermediaries and regulatory perimeter issues under the Capital Requirements Directive IV (2013/36/EU) (“CRD IV Directive“) and the Capital Requirements Regulation (Regulation 575/2013) (“CRR“).

Publication of the opinion is part of the EBA’s work to regularly monitor credit intermediation activities outside the traditional banking system. This work takes account of other developments, including the emergence of FinTech. The opinion is based on the results of a detailed assessment across the EU of the prudential treatment of “other financial intermediaries” (“OFIs“). (OFIs are entities carrying out credit intermediation activities that are not credit institutions or other specified types of financial entity.) The results of the assessment are set out in a report, which the EBA has published alongside the opinion.

In terms of the overall scope of the CRD IV Directive and the CRR, the EBA observes that Article 2(5) of the CRD IV Directive (which lists entities excluded from the scope) remains valid and requires minor updating. Also, Article 9(2) of the CRD IV Directive (which sets out other exclusions) appears to continue to have relevance in member states, so any amendment should be substantiated by a prior and thorough impact assessment. 

The EBA explains that the terms “financial institution” and “ancillary services undertaking” in the CRR are crucial for the purposes of establishing the scope of prudential consolidation. It observes that these terms are prone to inconsistent interpretation across the EU. This leads to potential divergences in the application of the consolidation rules in Article 18 of the CRR. This is highlighted in the EBA’s November 2017 consultation paper on draft regulatory technical standards (RTS) on methods of consolidation. The EBA urges the EU institutions to consider further possible amendments to these terms to ensure the consistent treatment of prudential risks and to promote a level playing field.

The EBA observes that Annex I to the CRD IV Directive, which lists the activities subject to mutual recognition, has been largely unchanged for 30 years. It considers that the Annex would benefit from an update to clarify certain terms and align it with recent EU sectoral measures to ensure that the list of services remains fit for purpose.

The EBA observes that a wide range of OFIs perform credit intermediation activities outside an individual prudential framework specified in EU law. The prudential treatment of OFIs varies significantly between member states. Although it has not made any specific recommendations at this stage on the scope of individual prudential regulation under EU law, the EBA notes the need to continue its monitoring work (including its work with the European Systemic Risk Board (ESRB) as part of the annual shadow banking monitoring exercises).
The latest opinion follows up the analysis set out in the EBA’s November 2014 opinion and reports on the perimeter of credit institutions.

The EBA advises that its findings are relevant to consideration of the legislative proposals to amend the CRD IV Directive and the CRR (that is, the CRD V Directive and the CRR II Regulation), which the Commission published in November 2016.