Response to discussion on the potential review of the investment firms’ prudential framework
Q1: What would be the operational constraints of potentially removing the threshold?
NA
Q2: Would you suggest any further element to be considered regarding the thresholds used for the categorisation of Class 3 investment firms?
NA
Q3: Do you have any views on the possible ways forward discussed above regarding the transition of investment firms between Class 2 and Class 3 should be introduced?
NA
Q4: Should the minimum level of the own funds requirements be different depending on the activities performed by investment firms or on firms’ business model? If yes, which elements should be considered in setting such minimum?
NA
Q5: Is it necessary to differentiate the deductibles by activity or by business model for the purpose of calculating the FOR? If yes, which items should then be considered and for what reasons?
NA
Q6: Are expenses related to tied agents material for the calculation of the FOR to the extent to require a dedicated treatment for their calculation? If yes, are the considerations provided above sufficient to cover all the relevant aspects?
NA
Q7: Should the FOR be calculated distinguishing the costs related to non-MiFID activities, which criteria should be considered? What kind of advantages or disadvantages would this have in practice?
NA
Q8: Should expenses related to fluctuation of exchange rates be included in the list of deductions for the calculation of the FOR? If yes, which criteria should be considered in addition to the ones suggested above?
NA
Q9: Should the concept of ‘ongoing advice’ be further specified for the purpose of calculating the K-AUM? If yes, which elements should be taken into account in distinguishing a recurring provision of investment advice from a one-off or non-recurring one?
NA
Q10: Does the K-DTF provide a proper level of capital requirements for the provision of the services Trading on own account and execution of order on behalf of clients on account of the investment firm? If not, what elements of the calculation of the K-DTF present most challenges?
NA
Q11: Would you have any examples where the calculation of the K-DTF based on comparable activities or portfolios results in very different or counterintuitive outcomes? If yes, how could the calculation of the K-DTF be improved?
NA
Q12: What are the elements of the current methodology for the calculation of the K-ASA that raise most concerns? Taking into account the need to avoid complexifying excessively the methodology, how could the calculation of the K-ASA be improved to assess those elements?
NA
Q13: Clients’ asset protection may be implemented differently in different Member States. Should this aspect be considered in the calculation of the K-ASA? If so, how should that be taken into account in the calculation?
NA
Q14: Should crypto-assets be included into K-factor calculation, either as a new K-factor or as part of K-NPR?
NA
Q15: In the context of addressing operational risk for investment firm trading on own account, is there any further element to be considered to ensure that the requirements are proportionate to their trading activities?
NA
Q16: The discussion paper envisages the possibility to rely on alternative methodologies with respect to the K-DTF. If the respondents suggest an alternative approach, how would this refer to the two activities addressed under the K-DTF (trading on own account and execution on own account on behalf of the clients)?
NA
Q17: When addressing other activities an investment firm may perform, which elements, on top of the discussed ones, should be also taken in consideration?
NA
Q18: Investment firms performing MiFID activities 3 and 6 (trading on own account and underwriting on a firm commitment basis) are more exposed to unexpected liquidity needs because of market volatility. What would be the best way to measure and include liquidity needs arising from these activities as a liquidity requirement?
NA
Q19: Investment firms performing the activities of providing loans and credit to clients as an ancillary service in a non-negligeable scale would be more exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
NA
Q20: Investment firms, providing any of the MiFID services, but exposed to substantial exchange foreign exchange risk may be exposed to liquidity risks. What would be the best way to measure such risk in order to take them into account for the purposes of the liquidity requirements?
NA
Q21: Are there scenarios where the dependency on service providers, especially in third countries, if disrupted, may lead to unexpected liquidity needs? What type of services such providers perform?
NA
Q22: Are there scenarios where the dependency on liquidity providers, especially in third countries, would lead to unexpected liquidity needs? Could you provide some examples?
NA
Q23: What other elements should be considered in removing the possibility of the exemption in Article 43 of the IFR?
NA
Q24: Do you have any views on the possible ways forward discussed above concerning the provision of MiFID ancillary services by UCITS management companies and AIFMs?
The Swedish Investment Fund Association (SIFA) believes it is imperative that a limitation of fund management companies possibility to manage individual portfolios is not introduced.
Today, in accordance with the UCITS Directive and AIFMD, fund management companies may provide management of portfolios of investments, including those owned by pensions funds (individual portfolio management). There is no indication in the legal texts that the management of such portfolios is in any way restricted. On the contrary, the wording only states that management companies “may provide” such services, with no reference to “ancillary” or “non-core” services (Article 6[3] of the UCITS Directive and Article 6[4] of AIFMD). When it comes to investment advice and safe-keeping of fund units, those services are listed as “non-core services”, which indicate that they should be seen as ancillary, however, not necessarily as a limitation of the amount of provided services. In practice, fund management companies today manage individual portfolios without any limitations as to the amount of such services. There is no evidence that the combined provision of services of collective and individual portfolio management has given rise to any problems. On the contrary, the combined service is requested by clients and provides for economies of scale and cost-efficiency which will benefit the clients.
Nevertheless, if the two options (point 212 in the Discussion Paper) were to be considered, SIFA believes that limiting the amount of provided individual portfolio management would distort competition and give rise to unnecessary administrative burdens to the detriment of clients. SIFA believes this option is not feasible without large negative effects to the market.
Limiting the amount of provided individual portfolio management would mean that larger mandates from e.g. pension funds cannot be accepted by fund management companies, despite obvious synergy effects with the management company's collective portfolio management. It would ultimately be to the detriment of investors if such economies of scale were reduced.
It would distort competition if fund management companies were not able to provide individual portfolio management on equal terms with investment firms that perform the same service. It would ultimately make it impossible to provide management on an individual basis to clients which request such services. Since there are no alternative licences or company forms that allow both individual and collective portfolio management within the same unit, a management company that wishes to continue providing individual portfolio management would be forced to set up a separate investment firm. This would make the service more expensive to clients while creating an excessive administrative burden to fund managers. Authorisation to manage individual portfolios provides an opportunity to meet the needs of clients and retain clients even in cases where the fund management company is not part of a group with an investment firm.
When it comes to capital requirements they should, as a starting point, be the same for companies providing the same services. Notably, capital requirements for fund management companies and investment firms are very similar. The initial capital requirements are higher for fund management companies than for investment firms that provide similar services. Fund management companies should hold additional capital depending on the size of the collective portfolios and should as a minimum requirement hold capital of 25 % of fixed overheads. As far as SIFA has experienced, the capital requirement for a fund management company often ends up at the minimum requirement of 25% of fixed overheads. Additional capital requirements in relation to assets under management would in practice have little effect but increase the complexity of the regulation.
If the inclusion of a capital requirement relating to the management of individual portfolios should nevertheless be considered, it should be constructed as simple as possible in order to not increase the regulatory burden. For example, the assets managed in individual portfolios could be added to those of the collective portfolios (i.e. a capital requirements equal to 0.02 % of the assets exceeding EUR 250 million subject to a limit of EUR 10 million).
Regardless of the method chosen, it is important that portfolios managed under delegation received from other institutions that are subject to capital requirements based on the assets are deducted from the assets under management. One example is portfolios managed on behalf of an insurance company. Capital requirements for the same capital both at the firm delegating the management and the firm managing the assets under a delegation agreement, would make it financially impossible to delegate such management.
Q25: Are differences in the regulatory regimes between MICAR and IFR/IFD a concern to market participants regarding a level playing field between CASPs and Investment firms providing crypto-asset related services? In particular, are there concerns on the capital and liquidity requirement regimes?
NA
Q26: Sections 5.2, 5.4 as well as this Section 9.1 all touch upon how crypto-assets (exposures and services) may influence the IFD and the IFR. Is there any other related element that should be considered in the review of the investment firms’ prudential framework?
NA
Q27: Is the different scope of application of remuneration requirements a concern for firms regarding the level playing field between different investment firms (class 1 minus and class 2), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
It is a serious concern that the requirements are not the same. It is important that the derogations introduced for investment firms are also introduced for fund managers. The different scope has led to an uneven playing field.
Due to the ambiguities of the remuneration requirements for UCITS management companies and AIFMs, competition is distorted not only between fund management companies and other financial institutions, but also between fund management companies established in different Member States. While some Member States have introduced different types of derogations for fund managers with reference to the principle of proportionality, others perceive that the rules do not allow such derogations. In Sweden, the supervisory authority has communicated that, in light of the absence of explicit derogations in the UCITS Directive and AIFMD and what has previously been communicated by the Commission, it is not possible to introduce derogations equivalent to those that apply to investment firms, even if such derogations would be desirable (Letter from Finansinspektionen to the Ministry of Finance on the need to revise the remuneration requirements in the UCITS Directive and the AIFMD, 2021-06-01, FI dnr 21-14621).
Hence Swedish fund management companies may not benefit from any derogations to the provisions on variable remuneration, but are obliged to apply the provisions on deferral and pay out in instruments regardless of the size of the remuneration and the size of the company. As has already been established for investments firms, such application is not proportionate. It is associated with disproportionate costs to apply these rules to smaller amounts of variable remuneration.
This means that fund management companies have to bear costs that other financial institutions do not have, which creates an unlevel-playing-field. In many cases the administrative burden has led to the removal of variable remuneration. This, of course, has a negative effect on the ability to recruit and retain staff. To compensate, the fixed salaries have to be raised, which is problematic from a competition point of view but also to the clients. When fund management companies have to refrain from variable remuneration, there is no longer the link between remuneration and result that many investors find desirable. It also, in general, increases the fixed overheads, which is a disadvantage.
The different provisions also cause problems when fund management companies delegate management to an investment firm. The ESMA guidelines on sound remuneration policies under the UCITS Directive and AIFMD state that the provisions must not be circumvented in the event of delegation and that this must be ensured through agreements. The fund management company must therefore require the investment firm to comply with the stricter requirements that apply to the fund management company, which creates an obstacle to delegation.
Consequently, it is urgent that the provisions on remuneration policies applicable to fund management companies be revised to achieve a level-playing-field with investment firms.
Q28: Are the different provisions on remuneration policies, related to governance requirements and the different approach to identify the staff to whom they apply a concern for firms regarding the level playing field between different investment firms (class 1 minus under CRD or class 2 under IFD), UCITS management companies and AIFMs, e.g. in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for the application of the requirements?
SIFA has no evidence that those provisions give rise to an unlevel playing field.
Q29: Are the different provisions, criteria and thresholds regarding the application of derogations to the provisions on variable remuneration, and that they apply to all investment firms equally without consideration of their specific business model, a concern to firms regarding the level playing field between different investment firms (class 1 minus under CRD and class 2 under IFD), UCITS management companies and AIFMs, e.g., in terms of the application of the remuneration provisions, the ability to recruit and retain talent or with regard to the costs for applying the deferral and pay out in instruments requirements? Please provide a reasoning for your position and if possible, quantify the impact on costs and numbers of identified staff to whom remuneration provisions regarding deferral and pay out in instruments need to be applied.
As stated in our answer to Q 27 it is important that the same explicit derogations to the deferral and pay out in instruments requirements as in the IFD are introduced in the UCITS Directive and the AIFMD.
This would provide legal certainty to fund managers, reduce unproportionate costs for smaller companies and lower remunerations, and ensure a level-playing-field.
In Sweden applying the deferral and pay out in instruments requirements are, due to legal uncertainty, mandatory to all remuneration to identified staff, regardless of how small the remuneration is. Administrative costs consist of IT systems, human resources and consulting, which are estimated at between €100,000 and €500,000 as one-off costs, and between €50,000 and €200,000 in annual costs. The fact that smaller fund management companies must bear theses costs that other financial institutions do not have creates an unlevel-playing-field.
In many cases smaller companies will not be able to take those costs but will have to remove the variable remuneration. This will have a negative effect on their ability to recruit and retain staff compared to other financial institutions that may benefit from derogations. A raise of the fixed salaries to compensate is also problematic from a competition point of view since it will increase fixed overheads. It is often not desirable to clients that the link between remuneration and result is removed, why the removal of variable remuneration in itself could be a competitive disadvantage for fund managers.
Q30: Are the different provisions regarding the oversight on remuneration policies, disclosure and transparency a concern for firms regarding the level playing field between different investment firm, UCITS management companies and AIFMs, e.g., with regard to the costs for the application of the requirements or the need to align these underlying provisions? Please provide a reasoning for your position.
SIFA has no evidence that those provisions give rise to an unlevel playing field.
Q31: What would be costs or benefits of extending existing reporting requirement to financial information? Which other elements should be considered before introducing such requirement?
NA
Q32: Should there be the need to introduce prudential requirement for firms active in commodity markets and that are not currently subject to prudential requirements? How could the existing framework for investment firms be adapted for those cases? If a different prudential framework needs to be developed, what are the main elements that should be considered?
NA