9.2.2.1 Initial capital and permanent minimum requirement

396. All investment firms are required, when applying for an authorization, to have a minimum amount of “initial capital”.1 This initial capital requirement is dependent on the types of activities2 performed by the investment firm. To determine the activities performed by the investment firm the IFD refers to Annex I of MiFID II,3 which includes nine activities or services an investment firm can perform.4 Those investment firms that perform the activities of “dealing on own account”, “underwriting or placing with firm commitment basis” are subject to an initial capital requirement of €750,000.5 The initial capital requirement for an MTF and OTF is €150,000.6 If the investment firm operating an OTF “engages in or is permitted to dealing on own account”7 the initial capital requirement is increased to €750,000. An investment firm that “is not allowed to provide these services and which does not hold client money or securities”8 should have an initial capital of € 75.000.9 All other investment firms will have an initial capital of €150,000.10

397. The IFD contains a slight increase in the initial capital levels as compared to the CRD 2013. The initial capital levels under the CRD 2013 where €730,000, €125,000 and €50,000.11 This means that the IFD contains increases of the initial capital requirements of €20,000 to €750,000, and increases of €25,000 to €150,000 and €75,000. The EBA, in its report of November 2017, stated that the initial capital requirements as included in the CRD 2013 should be adjusted “because the current levels were set in 1993”.12 The levels of the initial capital requirement have not been adjusted for inflation since 1993 and have thus remained constant for more than 25 years. If the Commission intended the increase in the IFD to also include the “missed” inflation correction since 1993, the actual increase itself seems to be relatively low. Increasing the initial capital requirements by the inflation amount might, however, lead to excessive entry barriers. As investment firms need to comply with the initial capital requirement before obtaining an authorisation, any increase in the initial capital requirement will directly affect new investment firms from becoming active. The EC states that there “should not [be] excessive or disproportionate hurdles to market entry”.13 This means that raising the initial capital levels to fully include inflation might create a barrier that would hinder the market entry of new applicants. As all investment firms will also be subject to a capital requirement, which will increase as the business of the investment firm grows, raising the initial capital levels to fully include inflation might not be necessary as a means of increasing overall capital levels.

398. With the IFR and IFD the EC also introduces a “new” and more explicit capital requirement, the permanent minimum requirement, as compared to the CRD 2013 and the CRR regime. Although presented as “new”, the requirement was already included in the CRR in Article 93,14 which stated that the own funds requirement could never be lower than the required initial capital. This requirement in the CRR, however, contained some practical issues, as discussed in Chapter 7. The requirement in the IFR is “to ensure that investment firms always operate on the basis of the level of capital required for their authorisation”.15 The permanent minimum requirement therefore, serves as a “floor” for the capital requirements. Whereas other requirements such as the fixed overhead requirement and the K-factor requirements are variable requirements, the permanent minimum requirement is fixed overtime. The permanent minimum requirement should mitigate the issues of the CRR requirement as discussed in Section 7.2.2, by virtue of the permanent minimum requirement being a more explicit own funds requirement and more explicitly linked to the type of own funds that can used to meet this requirement.