We agree with the view that a less complex prudential regime seems appropriate to address the specific risks that investment firms, not considered ‘systemic and bank-like’, pose to investors and to other market participants.
It appears acceptable to the principle whereby companies that are more exposed to risk to customers, markets or balance sheets, should hold more capital.
“Very small and ‘non-interconnected’” or Class 3 investment firms warrant a different prudential treatment. The prudential regime that better meets the objective of proportionality could be based mainly on fixed overhead requirements (FOR) and initial capital; such a prudential regime fulfils the objective of setting aside sufficient capital for ensuring safe and sound management of risks. These firms should also be subject to simplified reporting obligations.
In our view the activities listed from a) to e), holding client money or securities belonging to clients, the ancillary service of safekeeping and administration (B1), dealing on own account (A3), underwriting or placing with a firm commitment (A6) and the granting of credits or loans to an investor (B2), reflect higher risk and preclude an investment firm from applying the simpler capital treatment.
Conversely, being member in a wider financial group should not be considered a criteria for investment firms classification, taking into account the application of consolidated supervision and capital requirements.
Operating in more than one Member State, given the level playing field granted by Mifid Directive, should not be a valid criteria to apply a more severe prudential regime and additional capital requirements.
Furthermore, when an investment firm makes use of tied agents could increase the risk. Nevertheless tied agents could be compared to employees and therefore addressed as an expense in calculating FOR requirement. Therefore, any additional control risks associated with the use of tied agents should be captured through other requirements.
We also highlight that Italian domestic legislation provides that investments firms marketing their service outside their headquarter are obliged to make use of tied agents. In this context even very small investment firm use a few number of tied agents to provide their service to customers.
As far as quantitative criteria of classification are concerned, we disagree on the threshold of 2 million euro for turnover/income. It should be a too strict measure for the majority of investment firms. Referring to the EU SME definition of “Small”, as reported in the footnote 12 (at page 15 of the Discussion Paper), we would welcome a threshold of 10 million.
Risk to Customer (RiC) - Asset under Advice
We consider that the size of Asset under Advice could capture the risk of unsuitable advice where the service is provided on an on-going basis.
In order to determine the relevant k-factor, in our view two elements are to be take into account. Firstly it is necessary to distinguish the service provided to retail customers from the advice to professional or institutional customers. Both of them expose the investment firm to legal and reputational risk but, according to Mifid Directive, at very different degree. Secondly, if an investment firms provides advice service without holding the money of the customer, the asset under advice is not always an objective measure. For example, when institutional customers are involved, the total Asset under Advice could be larger than the effective recommended portfolio. In addition the investment advice service, even with a large portfolio, could be more “generic” with fixed remuneration. In this case the investment firms are not exposed to risk related to Asset under Advice.