|Investment firm (MiFID definitions)|
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"Investment firm" under the Markets in Financial Instruments Directive (MiFID) means "any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis" (Article 4(1)).
The MiFID definition, therefore, covers all natural an legal persons who perform investment services and activities using financial instruments, as a regular occupation or business, and on a professional basis.
Where a person meets these criteria and is not otherwise exempt it will require authorisation as an investment firm.
In this context authorisation is a consequence rather than a part of the definition.
The MiFID lays down organisational, governance, consumer protection and market functioning regulations, as well as sets out the passporting process for those firms that provide one of the listed services in the MiFID,i.e.:
- investment advice to clients,
- management of client portfolios,
- execution of clients' orders on financial instruments,
- reception and transmission of orders on financial instruments,
- dealing with own account,
- market making,
- placing of financial instruments, and
- operating trading facilities.
ESMA considered that according to the Level 1 definition in MiFID II, undertakings which are not a legal persons may be licensed as an investment firm only if they fulfil the following conditions:
(a) their legal status ensures a level of protection for third parties' interest equivalent to that afforded by legal persons and
(b) they are subject to equivalent prudential supervision appropriate to their legal form.
The European Banking Authority (EBA) Report on Investment Firms, Response to the Commission's Call for Advice of December 2014, EBA/Op/2015/20 (p. 6) observes the European investment services landscape comprises various types of operators.
Also recitals to the Commission Delegated Regulation (EU) 2017/565 of 25.4.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive acknowledge investment firms vary widely in their size, their structure and the nature of their business.
The above EBA Report of December 2014 evidences a little more than 6 500 investment firms initially authorised and regulated by MiFID (in number, just over half of these are based in the UK. The United Kingdom, Germany and France are the main jurisdictions for over 70% of the investment firm population of the European Union).
The aforementioned Commission Delegated Regulation 2017/565 of 25.4.2016 has adapted a regulatory regime to diversity of investment firms while imposing certain fundamental regulatory requirements which are appropriate for all firms.
To ensure the uniform application of the various relevant provisions, it also establishes a harmonised set of organisational requirements and operating conditions for investment firms.
CRR investment firms
The prudential framework applied to investment firms depends on the firm's categorisation within the CRD IV framework. This categorisation is currently primarily determined by the investment services and activities it offers and undertakes, as set out in Annex I of the MiFID.
The term 'investment firm' is defined in the CRR by referring to the definition of the MiFID, albeit the legal definition excludes upfront a number of firms and credit institutions themselves.
This means that the CRR definition is a subset of those firms subject to the MiFID definition.
CRR investment firm is defined in subparagraph (2) of Article 4(1) of the CRR as a MiFID investment firm, excluding:
(i) credit institutions;
(ii) local firms; and
(iii) firms that do not hold client money and perform a combination of MiFID services (transmitting orders, executing orders, portfolio management, and investment advice).
Credit institutions are excluded from the CRR definition of 'investment firm' because, even though they may provide investment services, they already fall within the regular scope of the CRR as credit institutions.
The exclusion of local firms was based on the assumption that local firms were small and would pose a minimal risk to the financial system or not be subject to competition issues (EBA's Report on Investment Firms of December 2014, p. 13).
The said Report concludes that "current total population of non-bank firms conducting any sort of investment business is not straightforward when it comes to prudential coverage: it comprises firms that are exempt from the MiFID, MiFID firms that are exempt from the CRR, and MiFID firms that are subject to different types of requirements under the CRR".
The categorisation of investment firms in CRD IV has a direct influence on a firm's initial capital requirement, which remains the basic and most common prudential 'building block' for investment services providers; every investment firm should, by default, be subject to a EUR 730 000 requirement (Article 28 of the CRD), with this amount being reduced to EUR 125 000 (Article 29 of the CRD) if a firm neither deals on own account nor underwrites under firm commitment while still holding client money or securities (EBA's Report on Investment Firms of December 2014, p. 14).
The aforementioned EBA's Report of December 2014 (p. 15, 16) identifies at least 11 different prudential categories of investment firms within the CRR framework.
Table: Categorisation of MiFID investment firms within the CRD framework
The CRD IV framework makes a distinction between:
a) those firms that are included in the CRR definition of 'investment firm' (CRR investment firms, categories 5 to 11);
Table focuses solely on the combined provisions as set out in the MiFID and CRD IV. The table does not take into account national transpositions and options, which can apply to:
i) the number of different categories of investment firms;
ii) the definition of MiFID investment services and activities; and
iii) the minimum level of initial capital applicable to each of the categories.
"The MiFID was implemented by way of national transpositions. The application of provisions to some services might give rise to diverging applications at the national level of MiFID investment services and activities. Because of this, it appears that there are some variations with respect to the required level of initial capital requested for particular types of investment services or activities, leading to different (e.g. more granular or, in some cases, fewer) categorisations depending on the jurisdiction where the investment firm actually operates," the EBA's Report of December 2014 concludes.
This thread is followed in the Explanatory Memorandum to the Proposal for a Regulation of the European Parliament and of the Council amending Regulation (EU) No 575/2013 as regards the leverage ratio, the net stable funding ratio, requirements for own funds and eligible liabilities, counterparty credit risk, market risk, exposures to central counterparties, exposures to collective investment undertakings, large exposures, reporting and disclosure requirements and amending Regulation (EU) No 648/2012, 23.11.2016, COM(2016) 850 final 2016/0360 (COD) (p. 22, 23):
"The review under Article 508(3) on investment firms is now in its second phase. In a first report published in December 2015, EBA found that the bank-like rules under the CRR were not fit for purpose for the majority of investment firms with the exception of the more systemic ones that pose risks similar to those faced by credit institutions. At the request of the Commission, the EBA is conducting additional analytical work and a data-gathering exercise in order to articulate a more appropriate and proportionate capital treatment for investment firms which will cover all parameters of a possible new regime. EBA is expected to deliver their final input to the Commission in June 2017. The Commission intends to present legislative proposals setting-up a specific prudential framework for non-systemic investment firms by the end of 2017.
Pending the adoption of these proposals, it is considered appropriate to allow investment firms that are not systemic to apply the CRR in the version as it stood before the amendments come into force. Systemic investment firms will, for their part, be subject to the amended version of the CRR. This will ensure that systemic firms are treated appropriately while alleviating the regulatory burden for non-systemic firms who would otherwise have to temporarily apply a new set of rules designed for credit institutions and systemic investment firms during the period preceding the final adoption of the dedicated investment firms' prudential framework that will be proposed in 2017."
Authorisation process of investment firms
Criteria for the authorisation process of investment firms under MiFID II are stipulated uniformly across the European Union Member States in the Commission Delegated Regulation (EU) of 14.7.2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to regulatory technical standards on information and requirements for the authorisation of investment firms.
The said Regulation is structured in the following way:
- Articles 1 to 7 detail the information to be provided to the competent authorities by investment firms as part of the process for granting and refusing requests for authorisation;
- Articles 8 to 10 set out the requirements applicable to the management of investment firms and the requirements applicable to shareholders and members with qualifying holdings, as well as obstacles which may prevent effective exercise of the supervisory functions of the competent authority.
The above Regulation is largely based on the existing standards and forms contained in the CESR (ESMA's predecessor) Protocol on MiFID Notifications, hence the EU financial regulator does not expect the costs implied by these rules to be significant.
Status of investment firms under REMIT
|Last Updated on Sunday, 23 July 2017 14:12|