7.1 “Firm” and “investment firm” under CRD 2013 and CRR

243. One of the major changes in the CRD 2013 and the CRR for the applicable prudential regime for investment firms was the change in the definition of ‘investment firm’ in the CRR. It is important to note that European legislation contains two separate and distinct definitions of the term ‘investment firm’.1 These definitions differ significantly. One definition for an investment firm is included in MiFID II,2 which defines an investment firm as “any legal person whose regular occupation or business is the provision of one or more investment services to third parties and/or the performance of one or more investment activities on a professional basis” (a MiFID investment firm). Any person or undertaking who performs an investment service or activity falls within the definition of investment firm in MiFID.

244. The CRR also uses the term ‘investment firm’ but defines it as a smaller subset of those (legal) persons which qualify under the MiFID II definition. In the CRR (and previously the CAD) an ‘investment firm’3 is any (legal or natural) person who qualifies as an investment firm under the MiFID II definition, but excluding (1) credit institutions, (2) local firms and (3) a subset of firms providing specific investment services. Credit institutions are excluded4 from the definition in the CRR, because the CRR and the CRD 2013 are (primarily) focused on credit institutions. Including credit institutions in the CRR definition of investment firm would have resulted in credit institutions being subject to the CRD 2013 and the CRR twice, once as credit institutions and once as investment firms. A credit institution can perform the investment services and activities listed in the annex to MiFID as part of the activities which fall under mutual recognition.5 In other words, the CRD 2013 and the CRR allow credit institutions to perform MiFID services and activities on the basis of the CRD 2013 licence. The inclusion of credit institutions in the CRR definition of investment firm would only lead to a redundancy in applicable rules on credit institutions.

245. The second and third exclusions of the definition of investment firm in the CRR define a subset of smaller firms which have, theoretically, a less risky profile when measured against the intentions of the CRR and the CRD (both the 2006 and 2013 versions) to protect depositors and investors and to ensure financial stability. The third exclusion6 from the definition in the CRR has been significantly changed in the drafting of the CRR. In the CAD this exclusion read: “firms which are only authorised to provide the service of investment advice and/or receive and transmit orders from investors without holding money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients”.7 Under this definition in the CAD only a relatively small subset of firms which qualify as investment firms under MiFID were excluded from the scope of the CAD, namely those firms which are only authorised to perform investment services of receiving and transmitting orders and providing investment advice, as set forth in Annex 1 Section A of MiFID. In the Netherlands this comprised 25 firms out of the total of 247 MiFID investment firms,8 See also table 6.

246. Under the CRR this third exclusion has been incorporated in Point c of Subparagraph 2 of Paragraph 1 of Article 49 and now reads: “firms which are [1] not authorized to provide the ancillary service [of safekeeping and administration of financial instrument for clients], [2] which provide only one or more of the investment services and activities listed in Points 1, 2, 4 and 5 of Section A of Annex 1 [of the MiFID]10 and [3] which are not permitted to hold money or securities belonging to their clients and which for that reason may not at any time place themselves in debt with those clients”.11 The difference as compared to the previous exclusion in the CAD12 is that the CRR exclusion also covers the investment services of ‘execution of orders’, ‘portfolio management’ and the ancillary service of ‘safekeeping and administration of financial instruments’. Although this change seems minor, it has a big impact on the scope of the CRR and CRD 2013 and the regulated entities which are subject to the provisions of the CRD 2013 and the CRR. As stated above, in the Netherlands as of April 2014, 247 firms held MiFID licences as MiFID investment firms. Only 39 of these MiFID investment firms qualify as CRR investment firms. That means the change in Article 4, Paragraph 1, Subparagraph 2, Point C increases the number of excluded MiFID investment firms from 25 to 208. In the UK, for instance, this change in definition has resulted in 1000 firms, out of a total of 2400 CRD 2006 investment firms, being excluded from the scope of the CRR.13 The CRR refers to these excluded MiFID investment firms simply as ‘firms’. Being excluded from the CRR definition of investment firm does not mean that those firms do not fall under certain provisions of the CRD 2013 and the CRR, as will be discussed in Section 7.2.14 Table 6 provides an overview of the impact that the change in the definition of investment firm has had on various member states of the European Union. The impact of the change in the definition of investment firm in most member states is significant. Germany, the Netherlands, Malta and Luxembourg have the most significant change in the number of investment firms which fall under the full scope of the CRR. In these countries the number of excluded firms increased by a factor of four or more. Although, in absolute terms, the impact in Austria is not as big as in other member states, it does, however, lead to a situation in which no MiFID investment firm in Austria qualifies as an investment firm under the CRR.

Table 6: Number of investment firms15

247. The exclusion of these firms from the CRR definition of investment firm can be explained by the potential risks the activities performed by these types of firms pose for their investors. Chapter 6 discussed the European legislator’s rationale for including investment firms in the prudential supervisory regime. One of the main reasons is that investment firms pose risks similar to those of banks which perform the same investment services or activities. For a MiFID investment firm to qualify under the exclusions to the definition of a CRR investment firm, it has to fulfil all three criteria specified in Point c of the definition of ‘investment firm’ in the CRR.16 The investment firm should not be allowed to perform any safekeeping activities and should not be allowed to place itself in debt with its clients. These two criteria ensure that the failure of the investment firm has limited impact on the funds or securities belonging to the investor. The investor may suffer only a discontinuation of the service provided by the investment firm. The limitation of the activities which an investment firm may perform under the exclusion in the CRR definition to only the following investment services (or a combination of them) ‘execution of orders’, ‘portfolio management’, ‘investment advice’ and ‘order transmission’, also limits the potential risks for investors. Firms falling under the exclusion in the CRR definition are not allowed to perform any activities which result in taking risk exposures onto the investment firm’s own balance sheet. These firms are not allowed to trade on own account while simultaneously being involved in trading activities for clients, to operate a multilateral trading facility or OTF or to place instruments with or without a firm commitment basis.

248. The substantial impact of the change in the definition of investment firm shows that the European legislators themselves had doubts about the applicability of the CRD 2013 and the CRR to investment firms. The European legislators apparently agreed with and supported the view of European Union member states that the investment firms which qualify under the exclusion of the CRR should not be subject to the full scope of the CRR.

249. Being excluded from the definition of investment firm does not mean that these types of (excluded) investment firms are excluded from applicability of the CRR completely. Firms that are excluded from the definition of investment firm in the CRR are nevertheless required to hold sufficient capital, as will be discussed in the following section.17 This change in the definition of investment firm, therefore, seems to be an incomplete change to the prudential regime for investment firms if the intention was to exclude these firms entirely from the prudential requirements. If the intention of the European Commission and its member states was to exempt these firms from certain requirements in the CRD 2013 and the CRR, a change in the definition does not seem the most logical approach.

250. Given the CRR definition of investment firm and the large share of MiFID investment firms which are now excluded from the CRR definition, it is essential for an investment firm to understand whether, for the purposes of the CRR and CRD 2013, they can be seen as a ‘firm’ or ‘investment firm’. The next sections discuss, given the distinction between ‘firms’ and ‘investment firms’, which requirements of the CRD 2013 and the CRR are applicable to MiFID investment firms and which CRR requirements do not apply in the new regime.