Response to discussion on a new prudential regime for investment firms

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Question 2: What are your views on the principles for the proposed prudential regime for investment firms?

We adopt and endorse BIPAR's response to this discussion paper in relation to each of the questions set out below.
We generally agree with the principles laid out by EBA in the discussion paper, with the following exceptions:
- Page 12, point b: the failure of investment firms may indeed impact on customers but this very much depends on the type of services that are provided. The failure of investment firms that provide “know-how”-type services (advice, transmission of orders, …) has little to no impact on clients. The deposits are with a different firm.
In case of failure of a “know-how” providing firm, the client can very easily choose a new adviser.
We therefore ask to measure the actual risk for clients in relation with the capital requirements. This would mean that if there is no - or a very limited - risk for the client, the capital requirements would be minimal.

- The calculation of the capital requirements should be clearly differentiated depending on the risk involved. An investment firm which does not provide credits to clients should therefore in no case have to calculate the „credit-risk “. The high costs related to calculating a risk provide a burden and a relevant cost factor to investment firms.

Question 3: What are your views on the identification and prudential treatment of very small and non-interconnected investment firms (‘Class 3’)? If, for example, such class was subject to fixed overheads requirements only, what advantages and drawbacks would have introducing such a Class 3? Conversely, what advantages and drawbacks could merging Class 3 with other investment firms under one single prudential regime with ‘built-in’ proportionality have?

We generally agree with the considerations regarding the identification of very small investment firms with the following exceptions:
- If quantitative criteria for Class 3 investment firms are considered (p 15, paragraph 21), these should be in the limits of a medium-sized firm, therefore allowing a turnover of 50 million Euro.
- To balance Class 3 firms to use tied agents, it would be sensible to include the investment turnover generated through the tied agents to be included in the total turnover for Class 3 firms.

Question 4: What are your views on the criteria discussed above for identifying ‘Class 3’ investment firms?

We can agree with the points “a” to “g” listed in question 4 as reasons not to be a Class 3 firm but we do not agree with the last three points: being a member of a wider group, using a MiFID passport and using tied agents.
- Being a member of a wider group should not generally preclude a firm from being considered a Class 3 firm. It is unclear what kind of risks are thought to be mitigated by this limitation. A firm with more sources of income or a firm within a group is usually financially better equipped to withstand problems in the financial area. A regulation that pushes firms to stand alone (without a group with diversified fields of income) will most likely weaken stability.

- Using a MiFID Passport or using tied agents should not preclude a firm from being a Class 3 firm. Article 3 of MiFID (and MiFID II) foresees national regimes and equivalent rules to certain MiFID rules for certain firms providing advice and handling clients’ orders. These “opt-out” firms do not need a full licence. Pass-porting is not allowed for them.

Every firm with a full licence however, should indeed be allowed to use the MiFID Passport. There is no reason why it would make a difference whether a firm provides services in France or Germany or in Austria and Hungary. If the passport would be used as a ground for exclusion of the Class 3 status, this would also possibly benefit larger Member States and discriminate against smaller Member States. We therefore agree with the reasoning of EBA in paragraph 19 (p 14 of the consultation paper) and do not believe that having a passport should preclude a firm from being a Class 3 firm.

We believe that using tied agents should also not exclude from being a Class 3 firm. We understand and agree that certain quantitative criteria should be in place to provide a balanced approach, regardless if tied agents or employees are used. We propose to include the investment turnover generated through tied agents in the total turnover for Class 3 firms. This would lead to a balanced approach.

Question 5: Do you have any comments on the approach focusing on risk to customers (RtC), risk to markets (RtM) and risk to firm (RtF)?

Some of the “Risk to Customers” identified in the paper could be tackled in a way that is more useful to clients. Especially those risks that come from “unsuitable advice” could be corrected with indemnity insurance. We therefore propose that investment firms should in some cases be able to “cover” the “Risk to Customers” ratio with insurance that tackles the risk for clients.

Question 6: What are your views on the initial K-factors identified? For example, should there be separate K-factors for client money and financial instruments belonging to clients? And should there be an RtM for securitisation risk-retentions? Do you have any suggestions for additional K-factors that can be both easily observable and risk sensitive?

It should be clear that one-time advice is not relevant for the section “Assets under advice” (see page 19, point b).

In case legislation for the K-factor “Assets under advice” is developed, the following must be considered:
« Assets under advice » means that an investment firm advised a client once and then gives advice periodically. The money in this case is held by a third firm with the relevant license. The information on the current amount of the deposit at any given time will not be in the hands of the investment firm. Investment firms should not have to calculate their capital requirements with information that may only be provided by a third party.

Question 7: Is the proposed risk to firm ‘up-lift’ measure an appropriate way to address the indirect impact of the exposure risk a firm poses to customers and markets? If not, what alternative approach to addressing risk to firm (RtF) would you suggest?

We do not agree with the idea of the „up-lift“ factor. The relevant factors of exposure are measured in the K-factors. Why would these factors increase, depending on the firm’s situation? Investment firms - as any companies - will increase liquidity if they see a relevant need. There is no need to impose this regulation to investment firms which do not hold client money.

Question 8: What are your views on the ‘built-in’ approach to delivering simpler, proportionate capital requirements for Class 3 investment firms, (compared to having a separate regime for such firms)?

See response to Q 17

Question 9: Should a fixed overhead requirement (FOR) remain part of the capital regime? If so, how could it be improved?

We believe that the “Fixed Overhead Requirement” is not an ideal solution but there does not seem to be an alternative at the moment.

Question 17: What are your views on the definition of initial capital and the potential for simplification? To what extent should the definition of initial capital be aligned with that of regulatory capital used for meeting capital requirements?

First of all, we would like to remind that there is no analogous requirement for initial capital (see Article 15 of MiFID II) for opt-out firms under Article 3 of MiFID II.

Turning to the current discussion paper, we strongly disagree with the considered increases in minimum initial capital (p 38). These increases are very significant.
50.000 € is already an important amount for initial capital.
It is even unclear why firms that only provide “know-how” services (financial advice and so on) need a minimum capital requirement at all.

We believe that the argument of an inflation-based increase (see page 38, paragraph 105) is not correct. At the time of CAD, investment advice was not a service under MiFID and the minimum requirement was not in place.

Initial capital is a barrier for new investment firms. We disagree with the proposal to set a non-relevant minimum level of capital requirement for know-how-only services like advice.

We therefore ask EBA to reconsider these possible changes for Class 3 firms.

We do not agree with the consideration in point 110 to delete the option of using insurance instead of initial capital for MiFID firms that only receive/transmit orders and advice. This choice should be kept, especially as in these cases there is limited risk to the client and that a PI cover is often the better solution for the client than a capital requirement.

We also do not agree with the consideration in point 111 to delete the possibility of reduced initial capital for investment firms that are also insurance intermediaries and which have IMD/IDD PI cover. As long as this PI cover covers both activities, the same reasoning as mentioned above can be applied, meaning that no or reduced capital requirements would be appropriate.

Question 34: What are your views on having a separate prudential regime for investment firms? Alternatively, should the CRR be amended instead to take into account a higher degree of proportionality? Which type of investment firms, if any, apart from systemic and bank-like investment firms, would be better suited under a simplified CRR regime?

We can agree with the concept of new, separate rules. However, as there are no concrete data yet that would help us to identify the concrete relevance, we cannot give a final review on this proposal in our response to this discussion paper.

We hope that there will be another possibility to provide input once a more concrete proposal is brought forward by EBA.

Name of organisation

Association of Professional Financial Advisers