9.3 Investment firm Directive

467. The IFD proposal contains several topics, not all of which will be discussed here. The IFD contains rules which define the competent authority and the responsibilities and powers of that authority. It also defines the cooperation between home and host supervisors and the tasks and responsibilities of both, as well as those of the competent authority responsible for consolidated supervision. These sections of the IFD proposal have not changed compared to the CRD 2013. It also contains the initial capital requirements which are discussed in Section 9.2.2 above.

468. Two topics included in the IFD proposal will be discussed in more detail: the governance requirements for investment firms including the supervisory review that competent authorities need to perform and the remuneration requirements included in these governance requirements.

469. Firstly, the main intentions of the governance and supervisory review sections have not changed in the IFD proposal compared to the CRD 2013. An investment firm should have in place sound risk management to manage and control its risk. The supervisory authority should have in place a process to analyse the risk management of an investment firm and the risk to which that investment firm is exposed. This supervisory review should culminate in a decision by that supervisory authority on the level of required capital for that investment firm. The main difference as compared to the CRD 2013 regime is that Class 3 investment firms are exempted from applying certain governance requirements.1

470. Secondly, a notable change in the requirements in the IFD lies within the remuneration requirements. While the CRD 2013 remuneration requirements contains a limit on variable remuneration for all credit institutions and investment firms subject to the CRD 2013 regime, the original IFD proposal only included a requirement that investment firms set their own limit on variable remuneration.2 According to the EC “the revenues of investment firms in the form of fees, commissions and other revenues in relation to the provision of different investment services are highly volatile. Limiting the variable component of remuneration to a portion of the fixed component of remuneration would affect the firm’s ability to reduce remuneration at times of reduced revenues and could lead to an increase of the firm’s fixed cost base, leading in turn to risks for the firm’s ability to withstand times of economic downturn or reduced revenues. To avoid those risks, a single maximum ratio between the variable and the fixed elements of remuneration should not be imposed on non-systemic investment firms. Instead, those investment firms should set appropriate ratios themselves”.3

471. Ever since the financial crisis, and especially in the Netherlands, the variable remuneration of firms active in the financial sector has been a subject of heated political debate. This political debate has resulted in the introduction of a member state option in the IFD PC 14 which allowed member states to set a maximum percentage of variable remuneration. No further justification has been provided by the EC in the Presidency Compromise. In the final texts of the IFD, this member state option has been deleted. The recitals, however, still give member states the possibility to deviate from the requirements included in article 30 of the IFD. The recitals of the IFD contain the following: “[…] this directive should not preclude Member States from implementing measures in national law designed to subject investment firms to stricter requirements with regard to the maximum ratio between the variable and the fixed elements of the remuneration. This directive should also not prevent Member States from imposing a maximum ratio, as referred in the previous sentence on all or on specific types of investment firms”.5 It is however questionable why the European legislators removed the member state option in article 28 of the IFD PC 1 (or article 30 in the final text of the IFD) and replaced it with this recital which in essence gives member states the same possibilities to maximise the variable remuneration as the deleted member state option did. By having this possibility in the recitals, the IFD regime becomes less transparent as not all applicable rules or member state options are included in the actual legislative articles of the Directive. As this recital gives member states the same options as the member state option of the IFD PC 1, deleting this member state option in the IFD seems rather pointless.

472. The original IFD proposal had the benefit that the EC chose to address the remuneration question for investment firms from a more rational perspective. For a firm whose earnings are volatile and are often related to the return generated for its clients, a limit on variable remuneration does not seem appropriate. Having investment firms set their own limit will make sure that the variable remuneration is aligned with the risk profile of the investment firm and the earnings and expenditure profile of that investment firm. This sound and rational approach to remuneration has however been compromised by politically motivated changes in the final texts of the IFD.