On Monday evening, the Economic and Monetary Affairs Committee of the European Parliament voted on a new framework for the supervision of investment firms in the EU („Ferber Report“). Largely unnoticed by the public, the Capital Markets Union and its joint regulation have taken a major step forward. Depending on the respective business model, the more than 6,000 companies registered in the EU with a MiFID licence are currently subject to no or only national regulatory requirements regarding capital, liquidity and reporting. The influence of investment firms has recently been increasing significantly compared to traditional banks. Certain activities have required the calculation of capital requirements in accordance with banking rules (CRR/CRD), even though investment firms hardly take any credit risks but are exposed to high operational risks.
The new framework divides investment firms into three classes. 20 large firms with a balance sheet total of more than €30 billion will have to fully apply the banking rules and will henceforth be supervised by the Single Supervision Mechanism (SSM) within the ECB. Supervisors can also subject firms with a balance sheet total of less than €30 billion to European SSM supervision if they carry out bank-like activities. For all other firms, the new framework applies, under which the required capital is measured on the basis of the actual risks of the business activities. The smallest firms may apply simplified rules, but are also subject to the new European prudential regime.
The Committee on Economic and Monetary Affairs (ECON) adopted the parliamentary position with a large majority of Christian Democrats, Social Democrats, euroskeptic Conservatives, Liberals and Greens. The report now awaits the Council of Member States, whose common negotiating position is still pending. Only then can the final trilogues between the EU institutions begin.
Sven Giegold, shadow rapporteur and financial and economic policy spokesperson of the Greens/EFA group, commented:
„The new rules for investment firms are a big step forward for a strong European financial markets regulation. In future, all investment firms registered in the EU will have to abide by European rules on capital, liquidity and reporting. The new uniform set of rules not only overcomes the patchwork of national legislation, but also aligns capital requirements with the actual risks of investment firms. Unfortunately, Parliament’s compromise falls short of the Commission proposals particularly with regard to liquidity requirements. Small firms benefit from simpler but not necessarily weaker requirements.
In response to Green amendments, Parliament has called for large investment firms such as Blackrock, State Street and Vanguard to make their investment policies more transparent to the public. This would be a first step towards regulating in a more European manner the ever-increasing power of large asset managers in the management of many EU corporates. They are now asked to make public in which companies they hold shares of more than 5% and how they vote at general meetings. Unfortunately, the right-wing conservatives blocked our proposal to also make public the meetings of investment firms with the management of the companies whose shares they hold.
Like the banking package, the compromises on the regulation of investment firms contain requirements for the consideration and disclosure of environmental, social and governance (ESG) risks. This will allow the financial markets to become a bit greener again and strengthen sustainable investment. Unfortunately, in the negotiations we were not able to prevail against the other groups to insert an upper limit for the variable remuneration (bonus cap) for all investment firms. After all, together with the Social Democrats and the Left, we managed to keep the extension of the rules on country-by-country tax transparency in the legal text (country-by-country-reporting).“
Link to the compromises adopted by the Committee on Economic and Monetary Affairs (ECON) on the regulation of investment firms in the EU:
Legislative proposals of the EU Commission:
Important Green successes:
- New requirements on transparency in investment policy for large investment firms’ holdings exceeding 5%
- Obligation for all larger investment firms to disclose environmental, social and governance (ESG) risks
- Mandate for the European Banking Authority (EBA) to make proposals on the consideration of environmental, social and governance (ESG) risks in capital add-ons („pillar 2“).
- Mandate for the European Commission to make proposals for the introduction of macroprudential measures for investment firms („review clause“).
- Require third country groups to designate an investment firm as the EU central hub (IPU, intermediate parent undertaking)
List of major Green amendments that did not find a majority in the Committee:
- Upper limit for variable remuneration of employees (bonus cap)
- Immediate requirements to take environmental, social and governance (ESG) risks into account when setting capital add-ons („pillar 2“) rather than waiting for proposals from the European Banking Authority (EBA)
- Further requirements on transparency in investment policy, in particular on the publication of meetings between investment firms and the management of undertakings from which they hold shares
- Requirement for companies from third countries to register with the European Banking Authority (EBA)