4.1 General considerations

This title specifies the criteria for the assessment of the business model and strategy of the investment firm. Competent authorities should apply this assessment to an investment firm at the same level as the overall SREP assessment, but can also apply it for a specific activity, at business-line level, or on a thematic basis.

Without undermining the responsibility of the investment firm’s management body for running and organising the business, or indicating preferences for specific business models, competent authorities should conduct business model analysis (BMA) to assess business and strategic risks and determine:

• a. the viability of the investment firm’s current business model on the basis of its ability to generate acceptable returns over the following 12 months; and
• b. the sustainability of the investment firm’s strategy over a forward-looking period of at least 3 years.

Competent authorities should use the outcome of the BMA to support the assessment of all other elements of the SREP. Competent authorities may assess specific aspects of the BMA, in particular the quantitative assessment of the business model, as part of the assessment of other SREP elements.

Competent authorities should also use the BMA to support the identification of the investment firm’s key vulnerabilities, which are most likely to have a material impact on the investment firm or lead to its failure in the future.

In addition, competent authorities should use the BMA to assess prudential implications of ML/TF risks known to them, linked to the business model of the investment firm. In this respect, competent authorities should use the input received from AML/CFT supervisors, in particular their assessments of ML/TF risks and any findings relating to material weaknesses in an investment firm’s AML/CFT controls, to complement their findings from ongoing supervision, and evaluate whether they give rise to prudential concerns related to ML/TF risks. Where the assessment indicates the business model of the investment firm gives rise to prudential concerns related to ML/TF risks, competent authorities should share the outcome of the prudential assessment of the business model with the AML/CFT supervisors.

Competent authorities should undertake the following steps as part of the BMA in a proportionate manner, i.e. adjusting the level of detail of the analysis to the specific situation of the investment firm, the perceived risk, as well as the scale and complexity of its activities:

• a. preliminary assessment;
• b. identification of the areas of focus;
• c. assessment of the business environment;
• d. quantitative analysis of the current business model;
• e. qualitative analysis of the current business model;
• f. analysis of the forward-looking strategy (including planned changes to the business model);
• g. assessment of business model viability over the following 12 months;
• h. assessment of sustainability of the strategy;
• i. identification of key vulnerabilities to which the investment firm’s business model and strategy expose it or may expose it; and
• j. summarising of the findings and scoring.

For category 3 investment firms, where the scale and complexity of an investment firm’s activities are lower, competent authorities may perform the BMA and assign the relevant score in a simplified manner. In these cases, they should at least assess the viability of the business model and sustainability of the investment firms’ strategy, taking into account its business environment, and they should identify the key vulnerabilities. For class 3 investment firms, competent authorities should decide on a case-by-case basis whether and in which form to perform the BMA, at least forming a comprehensive view on how such investment firms generate returns and identifying the vulnerabilities they are exposed to that may affect their ability to generate such returns.

To conduct the BMA, competent authorities may use the following sources of quantitative and qualitative information, if available:

• a. where sufficiently reliable, investment firm’s strategic plan(s) with current-year and forward-looking forecasts, and underlying economic assumptions;
• b. financial reporting (including profit and loss (P&L), balance sheet disclosures);
• c. regulatory reporting;
• d. internal reporting (management information, capital planning, liquidity reporting, internal risk reports);
• e. where applicable, recovery and resolution plans;
• f. third-party reports including audit reports, reports by equity/credit analysts; and
• g. other relevant studies/surveys including from the International Monetary Fund (IMF), macro-prudential authorities and institutions, and European institutions.