Response to discussion on a new prudential regime for investment firms
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1. If the failure of an investment firm is going to have an impact on customers, this very much depends on the type of services that are provided: the failure of an investment firm that provide “know-how” type service (information and advice) has very little if no impact on the customer as the assets are deposited with a third party.
In the case of the failure of a “know-how” providing firm, the customer may just select another firm.
Only one known actual risk for the customer may justify a minimum capital requirement. It means that if there is no or a very limited risk for the customer, the capital requirement must be minimal.
2. The capital requirement must depend on the risk involved: an investment firm which does not provide a credit facility to customers does not need to calculate a non-existent “credit risk”; the high cost related to calculating a potential risk creates an unnecessary burden and a subsequent additional cost to the investment firm and its customers.
1. In the case of quantitative criteria € 50,000,000 turnover
2. The turnover realised by tied agents should be included in the total calculation
Generally, one should not confuse small firms with large multinational institutions.
Advisers should be separated from investment firms: the key issue is the customers’ assets/holding.
An adviser provides advice, he/she does not manage money.
However, in some Member States, collecting a cheque for an investment firm requires best execution" licensing, a stamp machine to record the time between collection and investment. As an adviser does not have the power to influence the execution process, nor even the postal or any other transmission process, this is a perfect example of overregulation."
An amount of € 50,000 is a fair amount as initial capital; a firm providing only “know-how” services does not need a minimum capital requirement unless the ultimate goal is to prevent small firms from operating in a world with consolidation at any cost (unemployment etc).
Similarly, an insurance guarantee should suffice for firms that only receive/transmit orders and advice; there is very limited risk for the customer; professional indemnity insurance offers protection and is often better security for a customer than a minimum capital requirement.
We find the possibility of removing reduced initial capital for investment firms that are also insurance intermediaries and which have IMD/IDD PI cover is discriminatory. As long as this PI cover covers both activities, the same reasoning as mentioned above can apply, meaning that no capital requirement would be appropriate.
Guidelines are enough to supervise.
Question 1: What are your views on the application of the same criteria, as provided for G-SIIs and O-SIIs, for the identification of ‘systemic and bank-like’ investment firms? What are your views on both qualitative and quantitative indicators or thresholds for ‘bank-like’ activities, being underwriting on a firm commitment basis and proprietary trading at a very large scale? What aspects in the identification of ‘systemic and bank-like’ investment firms could be improved?
N/AQuestion 2: What are your views on the principles for the proposed prudential regime for investment firms?
We generally agree with the principles laid out by EBA in the discussion paper however:1. If the failure of an investment firm is going to have an impact on customers, this very much depends on the type of services that are provided: the failure of an investment firm that provide “know-how” type service (information and advice) has very little if no impact on the customer as the assets are deposited with a third party.
In the case of the failure of a “know-how” providing firm, the customer may just select another firm.
Only one known actual risk for the customer may justify a minimum capital requirement. It means that if there is no or a very limited risk for the customer, the capital requirement must be minimal.
2. The capital requirement must depend on the risk involved: an investment firm which does not provide a credit facility to customers does not need to calculate a non-existent “credit risk”; the high cost related to calculating a potential risk creates an unnecessary burden and a subsequent additional cost to the investment firm and its customers.
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 subject to:1. In the case of quantitative criteria € 50,000,000 turnover
2. The turnover realised by tied agents should be included in the total calculation
Generally, one should not confuse small firms with large multinational institutions.
Question 4: What are your views on the criteria discussed above for identifying ‘Class 3’ investment firms?
We agree on all points except points “i” and “j” as they are irrelevant in our opinion, with a potential risk to customers.Advisers should be separated from investment firms: the key issue is the customers’ assets/holding.
An adviser provides advice, he/she does not manage money.
However, in some Member States, collecting a cheque for an investment firm requires best execution" licensing, a stamp machine to record the time between collection and investment. As an adviser does not have the power to influence the execution process, nor even the postal or any other transmission process, this is a perfect example of overregulation."
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)?
As a matter of example, “unsuitable advice” could be covered by appropriate professional indemnity insurance.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?
N/AQuestion 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?
N/AQuestion 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)?
N/AQuestion 9: Should a fixed overhead requirement (FOR) remain part of the capital regime? If so, how could it be improved?
N/AQuestion 10: What are your views on the appropriate capital requirements required for larger firms that trade financial instruments (including derivatives)?
This is just good common sense.Question 11: Do you think the K-factor approach is appropriate for any investment firms that may be systemic but are not ‘bank-like’?
N/AQuestion 12: Does the definition of capital in the CRR appropriately cater for all the cases of investment firms that are not joint stock companies (such as partnerships, LLPs and sole-traders)?
The legal status of an investment firm does not affect the accounts – reserves and provision; so irrelevant in our opinion.Question 13: Are the cases described above a real concern for the investment firms? How can those aspects be addressed while properly safeguarding applicable objectives of the permanence principle?
N/AQuestion 14: What are your views on whether or not simplification in the range of items that qualify as regulatory capital and how the different ‘tiers’ of capital operate for investment firms would be appropriate? If so, how could this be achieved?
N/AQuestion 15: In the context of deductions and prudential filters, in which areas is it possible to simplify the current CRR approach, whilst maintaining the same level of quality in the capital definition?
N/AQuestion 16: What are your views overall on the options for the best way forward for the definition and quality of capital for investment firms?
N/AQuestion 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?
We disagree with any minimum share capital increase as much as we would welcome simplification of the rules.An amount of € 50,000 is a fair amount as initial capital; a firm providing only “know-how” services does not need a minimum capital requirement unless the ultimate goal is to prevent small firms from operating in a world with consolidation at any cost (unemployment etc).
Similarly, an insurance guarantee should suffice for firms that only receive/transmit orders and advice; there is very limited risk for the customer; professional indemnity insurance offers protection and is often better security for a customer than a minimum capital requirement.
We find the possibility of removing reduced initial capital for investment firms that are also insurance intermediaries and which have IMD/IDD PI cover is discriminatory. As long as this PI cover covers both activities, the same reasoning as mentioned above can apply, meaning that no capital requirement would be appropriate.
Question 18: What aspects should be taken into account when requiring different levels of initial capital for different firms? Is there any undesirable consequence or incentive that should be considered?
N/AQuestion 19: What are your views on whether there is a need to have a separate concept of eligible capital, or whether there is potential for simplification through aligning this concept with the definition of regulatory capital used for meeting capital requirements?
N/AQuestion 20: Do you see any common stress scenario for liquidity as necessary for investment firms? If so, how could that stress be defined?
N/AQuestion 21: What is your view on whether holding an amount of liquid assets set by reference to a percentage of the amount of obligations reflected in regulatory capital requirements such as the FOR would provide an appropriate basis and floor for liquidity requirements for ‘non-systemic’ investment firms? More specifically, could you provide any evidence or counter-examples where holding an amount of liquid assets equivalent to a percentage of the FOR may not provide an appropriate basis for a liquidity regime for very small and ‘non-interconnected’ investment firms?
N/AQuestion 22: What types of items do you think should count as liquid assets to meet any regulatory liquidity requirements, and why? (Please refer to Annex 4 for some considerations in determining what may be a liquid asset).
N/AQuestion 23: Could you provide your views on the need to support a minimum liquidity standard for investment firms with the ability for competent authorities to apply “supplementary” qualitative requirements to individual firms, where justified by the risk of the firm’s business?
The final say should be with the customer and not with the regulator.Question 24: Do you have any comment on the need for additional operational requirements for liquidity risk management, which would be applied according to the individual nature, scale and complexity of the investment firm’s business?
Strict monitoring of customer’s instructions and regular review of such instructions.Question 25: What are your views on the relevance of large exposures risk to investment firms? Do you consider that a basic reporting scheme for identifying concentration risk would be appropriate for some investment firms, including Class 3 firms?
It may be highly counterproductive, affecting the firm’s strategy and philosophy; such disclosure should be restricted to customers and regulators only and not for communication to the public at large.Question 26: What are your views on the proposed approach to addressing group risk within investment firm-only groups? Do you have any other suggested treatments that could be applied, and if so, why?
N/AQuestion 27: In the case of an investment firm which is a subsidiary of a banking consolidation group, do you see any difficulty in the implementation of the proposed capital requirements on an individual firm basis? If so, do you have any suggestion on how to address any such difficulties?
N/AQuestion 28: What other aspects should the competent authorities take into account when addressing the additional prudential measures on an individual firm basis under the prudential regime for investment firms?
To avoid doing what has been done over the last few years and keep to the essentials and the principles: it will assist the customer to obtain the best deal and also to get the appropriate redress in the event something goes wrong. An excess of rules creates legal uncertainty for the industry and for the public.Guidelines are enough to supervise.