The European Commission wants to overhaul rules for money managers, placing more supervision on larger, more systemically important firms.
Proposals by the commission would "make life simpler for smaller investment firms, while bringing the largest, systemic ones under the same regime as European banks," said a news release.
Investment firms and the services they provide "are vital to a well-functioning capital markets union," an initiative that aims to unify capital markets across the 28 member states of the European Union. "Alongside banks, EU capital markets rely on several thousands of small and large investment firms which give advice to clients, help companies to tap capital markets, manage assets and provide market liquidity, thereby facilitating investments across the EU."
The majority of money management firms in the EU would no longer be subject to rules that were originally designed for banks, reducing administrative burden, boosting competition and increasing investment flows, said the commission. Existing requirements are covered by the Capital Requirements Regulation and the Capital Requirements Directive.
The commission proposes keeping the largest, systemic and most risky investment firms under the prudential regime of the two sets of requirements with more stringent rules, with these firms supervised as "significant credit institutions," said a fact sheet on the commission's website. "This is in line with developments in other jurisdictions across the world."
These firms, called "class 1" firms, have more than €30 billion ($35.3 billion) each in assets under management and provide underwriting services and "deal on own account" — trading in financial instruments against their own proprietary capital.
As such, these firms would be treated in the same way as banks, falling under the supervision of the European Central Bank in its supervisory capacity.
"Smaller firms would enjoy a new bespoke regime with dedicated prudential requirements," which in most cases would be different from those applicable to banks. These firms — 'class 3' — would be further split into two groups: the smallest and least risky firms will see their capital requirements set in a simpler way, with no additional requirements on corporate governance or remuneration. For larger firms — "class 2" and categorized by a number of features including assets under management of more than €1.2 billion but less than €30 billion — the proposal would introduce "a new way of measuring their risks based on the business models. For firms that trade financial instruments, these will be combined with a simplified version of existing rules," said the release.
"Our rules must be proportionate and risk sensitive," said Valdis Dombrovskis, vice president responsible for financial stability, financial services and capital markets union at the commission, in the news release. "This overhaul will help all investment firms to link savings from consumers and investors to companies. The new rules will support well-functioning capital markets, while ensuring financial stability."
The proposal will be discussed by the European Parliament and European Council. Any adoption would be subject to an implementation period of 18 months.