November 4, 2016 / 10:06 AM / 3 years ago

EU watchdog proposes lighter capital buffers for simpler funds

LONDON (Reuters) - Investment funds in the European Union that do not pose a risk to the financial system should have less onerous capital requirements than bigger rivals, the bloc’s banking watchdog said on Friday.

Chairperson of European Banking Authority (EBA) Andrea Enria attends a debate with the European Parliament's Economic and Monetary Affairs Committee in Brussels, Belgium September 26, 2016. REUTERS/Yves Herman

The European Banking Authority (EBA) launched a consultation on designing the first capital adequacy regime for a new category of smaller, less complex investment firms under EU law.

“The aim of this work is to develop a single, harmonized set of requirements that are reasonably simple, proportionate, and more relevant to the nature of investment business,” EBA said in a statement.

The aim is to propose a new regime by mid-2017 for the bloc’s executive European Commission to adopt. It will flesh out one element of an EU markets reform known at MiFID II that comes into force in January 2018.

“In particular, the EBA recommends a framework focused on the risks that investment firms pose to customers and to market integrity and liquidity.”

It is the latest example of the EU moving away from a “one size fits all” approach to capital by tailoring requirements to smaller firms.

The Investment Company Institute, an international funds sector trade body, said it objected to the EBA’s plan to tailor rules according to the size of a fund.

“Such a bank-oriented approach fails to understand the nature of investment firms managing retail investment funds and could introduce new risks into the system,” said ICI Global’s managing director for Europe, Patrice Berge-Vincent.

The group’s members are some of the largest in the world and would be unlikely to benefit from the lighter regime.

The EBA consultation also looks at three alternatives for setting possible minimum liquidity requirements for funds.

The aim is to have a clear distinction between the big investment firms that face capital rules similar to banks, and the smaller or simpler firms where such buffers would be disproportionate.

EBA is also looking at how this “large and extremely diverse” range of simpler investment funds are run, and how their senior staff are paid.

“All investment firms should have remuneration policies in place that are appropriately considering the protection of consumers, by ensuring that there are not any incentives for the mis-selling of products. Such a regime applies to all staff and tied agents,” the EBA paper said.

Reporting by Huw Jones; editing by Jason Neely

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