11 January 2023 – need2know

The new supervisory framework, which will come into force on 1 February 2023, takes better account of the specific risks and business models of investment firms than before. Therefore, smaller (non-systemically relevant) investment firms will be subject to simpler and more risk-sensitive supervisory rules and no longer have to comply with the complex requirements that apply to banks.

On 20 December 2017, the European Commission presented a legislative package for a (new) uniform supervisory framework for investment firms as part of a European Capital Markets Union. The Commission based its proposals for amendments to the existing supervisory regime for investment firms on recommendations from the European supervisory authorities EBA and ESMA.

The Commission’s legislative package includes:

• the directly applicable Regulation (EU) 2019/2033 on prudential requirements for investment firms (“IFR“); and
• the transposing Directive (EU) 2019/2034 on the supervision of investment firms (Investment Firm Directive “IFD“)

With the new Austrian Investment Firms Act (Wertpapierfirmengesetz, “WPFG”), the Austrian legislator is now (slightly delayed) following up on the obligation and transposing the IFD into Austrian law.

Background to the change

In Austria, investment firms were generally subject to the prudential supervision regime of the Capital Requirements Regulation (EU) 575/2013 (“CRR”) and the Austrian Banking Act (“BWG”), which, however, were in principle issued for banks and did not sufficiently take into account the characteristics and special risks of investment firms. The intention of uniform supervisory regulations for banks and investment firms was due to the fact that both institutions were competing in providing certain investment services and, as a result, the same protection for clients and a level playing field should be ensured.

However, as the vast majority of investment firms in the EU are small to medium-sized entities, they face disproportionate burdens and excessive costs due to increasingly specific and thus complex capital, liquidity and risk management requirements. As a result of the revision of the supervisory framework, smaller investment firms will no longer be subject to the rules originally intended for banks, while large systemically important investment firms with a similar risk profile to banks will continue to be regulated as such.

What does the new Securities Companies Act regulate?

In order to achieve the regulatory objective and to be able to better take into account the nature, scope and complexity of the activities of investment firms, the European legislator has provided in the IFR a categorisation of different risk classes of investment firms, each of which is subject to more risk-sensitive regulations. The Austrian WPFG, on the other hand, regulates, among other things, the initial capital provisions, competences and measures of the supervisory authority (FMA), remuneration policy, governance and sanctions. The IFR and the WPFG are addressed to all investment firms licensed under the WAG 2018. Consequently, the Austrian legislator has not extended the WPFG to investment services companies and, consequently, it does not apply to these companies.

The key points of the legislative package are:

• Investment firm categories
• Capital and liquidity requirements
• Supervisory competences
• Reporting requirements
• Regulations on ICAAP/ILAAP, SREP, governance and remuneration policy

Investment firm categories

The new supervisory framework divides investment firms into three classes:

• Class 1: Systemically important investment firms (systemic)
  Investment firms that conduct bank-like business and have assets (consolidated) of at least EUR 30 billion require a licence as a credit institution and continue to be subject to the supervisory regime of the CRR and the BWG. Investment firms with assets of at least EUR 15 billion are also subject to the supervisory regime of the CRR and the BWG without having to obtain a licence as a credit institution. For balance sheet totals between EUR 5 billion and EUR 15 billion, the FMA may require the application of the CRR and the BWG.

• Class 2: Non-systemically relevant investment firms (non systemic)
  If an investment firm exceeds the thresholds of class 3 (see below) or does not fall into the category of class 1, it is deemed to be class 2 with immediate effect and is subject to the new tailored prudential regime of the IFR and the WPFG, which sets proportionate capital requirements.

• Class 3: Small and non-interconnected investment firms (non systemic)
  Small and non-interconnected investment firms may not hold client funds and may not exceed certain thresholds (e.g. assets under management below EUR 1.2 billion or total annual gross revenues below EUR 30 million). Here, the IFR and the WPFG apply with partial exceptions (simplified supervisory regime). This category mainly operates in Austria.

Capital and liquidity requirements

Irrespective of the category of the investment firm, the initial capital – and thus at the same time the permanent minimum capital – has to be at least as follows according to the new WPFG for the following types of business

• EUR 750,000, provided that the type of the business includes trading for own account and underwriting the issue of financial instruments with a firm underwriting commitment.
• EUR 75,000, provided that the investment firm does not hold client money or financial instruments for clients and the type of business includes the acceptance and transmission of orders, execution of orders for the account of clients, investment advice, portfolio management and placement of financial instruments without a firm underwriting obligation.
• EUR 150,000, for the operation of an MTF or OTF.

In addition, Class 2 and 3 investment firms must hold a certain minimum amount of own funds, which is the higher of the permanent minimum capital requirement and the FOR (fixed overhead requirement, fixe Gemeinkosten). The permanent minimum capital requirement is at least the amount of the initial capital and the FOR is 25% of the fixed overhead costs of the previous year. For class 2 investment firms, the higher value may also result from the sum of the applicable K-factors (capital requirements depending on certain risks).

Furthermore, class 2 investment firms still have to hold liquid assets of at least 1/3 of the fixed overhead costs (i.e. 1/12 of the fixed overhead costs of the previous year). Class 3 investment firms may be exempted from the liquidity requirement by the competent supervisory authority

Reporting requirements

The reporting framework is also adapted to the size of the investment firm. The following information must be reported to the FMA on a regular basis:

• The amount and composition of own funds,
• Own funds requirements,
• Calculation of own funds requirements,
• Scope of activity,
• Concentration risk and
• Liquidity requirement, unless they are exempt.

Class 2 investment firms have to report this information quarterly, while Class 3 investment firms have to submit an annual report, i.e. report annually.

Regulations on ICAAP/ILAAP, SREP, governance and remuneration policy

As class 1 investment firms must continue to comply with the regulations of the BWG, class 2 investment firms must – in a reduced form – have effective regulations, strategies and procedures with which they can continuously assess and maintain at a sufficiently high level the amount, types and distribution of internal capital and liquid assets they deem appropriate to hedge risks. Class 3 investment firms are generally exempt from this requirement, but they may be required by the FMA to comply with these rules to an appropriate extent.

For this purpose, the FMA must review the regulations and strategies for compliance with the IFR and the WPFG, taking into account the risk profile and the business model of the investment firm. If necessary, to require changes in the areas of internal corporate governance and control as well as risk management procedures and, if applicable, to prescribe additional capital and liquidity requirements. In the case of class 3 investment firms, the FMA must decide on a case-by-case basis whether such a review is necessary.

Differences between investment firms and credit institutions become apparent with regard to remuneration policy. Compared to the provisions for banks, the WPFG, for example, does not provide for a maximum value for the ratio between the fixed and the variable component of remuneration, but stipulates that class 2 investment firms can set an appropriate ratio themselves. An internal remuneration policy should generally ensure that certain principles of remuneration policy are taken into account for staff whose activities have a material impact on the risk profile of the investment firm. In addition, class 2 investment firms shall have robust governance arrangements, such as a clear organisational structure and well-defined responsibilities, and a gender-neutral remuneration policy.

In principle, the provisions on remuneration policy and governance do not apply to class 3 investment firms due to the lack of risk to financial market stability. However, the FMA may impose appropriate obligations.

Sanctions

In the event of violations of the IFR or the WPFG, the investment firm concerned as a legal entity may be subject to fines of up to 10% of its total annual net turnover or up to twice the benefit derived from the violation or up to EUR 5 million in the case of individuals as responsible persons.

Necessary adaptations in the BWG and WAG 2018

The provisions of the BWG and WAG 2018 will also be adapted to ensure consistency with the new IFR and the WPFG. It is worth mentioning that the investment services catalogue in the WAG 2018 is extended to all MiFID II investment services. This means that in the future a licence as an investment firm will be sufficient for the performance of all investment services – also for those for which a banking licence was previously necessary. This step is justified by the abolition of competitive disadvantages compared to EU competitors.

Author:
Philipp Gschwandtner

If you have any questions, please contact:
Ingo Braun
Christoph Nauer
Philipp Gschwandtner
or your regular contact at bpv Huegel.

Practice group:
Finance & Regulatory

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Note: This article is intended as general information and provides a brief overview of a complex topic. For this reason, this article is not exhaustive and is no replacement for individual legal advice. If you have any questions, do not hesitate to contact us. We look forward helping you.

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