Investment firms, which operate in financial markets and provide investment services to third parties, were subject to the same organizational regulations as credit institutions, despite their different business and risk profiles. Their activities are regulated by MiFID II, which was transposed by the Austrian Securities Supervision Act 2018.
However, in 2017, the European Banking Authority published an opinion in response to the call for advice on investment firms. The product of this effort is the legislative packet called Investment Firm Review, consisting of the directly applicable Investment Firm Regulation (EU) 2019/2033 (IFR) and the Directive (EU) 2019/2034. The latter was transposed to the new Austrian Investment Firm Act (Wertpapierfirmengesetz 2018, WPFG), which became legally effective as of February 1, 2023.
Both the IFR and WPFG provide a tailored regulatory framework for investment firms, legal entities providing investment services to third parties and/or executing orders on behalf of clients, which are required to comply with various obligations to ensure investor protection, market integrity, and the stability of the financial system.
The new law classifies investment firms into four categories. Category 1 and Category 1 minus investment firms – for the time being, not represented in Austria – require a banking license, must comply with credit institutions’ capital requirements, and include systemic investment firms that provide banking-like services such as trading on their own account and issuing financial instruments on a firm commitment basis. The majority of Austrian investment firms fall under Category 3, which comprises small and non-interconnected investment firms. Category 3 investment firms are subject to exemptions from certain provisions of the WPFG. All other mid-sized investment firms falling under Category 2 investment firms are entirely subject to the customized regime of the WPFG.
The harmonization efforts set in at the capital and liquidity requirements. Under the full scope of application for the Category 2 investment firms, there are three equity thresholds relating to the number and scope of the offered investment services. Liquidity requirements are set at one-third of the fixed overhead requirement, which must be at least one quarter of the preceding year’s fixed overheads. However, the competent supervisory Financial Market Authority (FMA) has issued an implementing regulation for Category 3 investment firms, exempting them from liquidity requirements based on the nature, scope, risk content, investor protection, and complexity of their business. The FMA will grant these exceptions upon request, or automatically if the investment firm offers only certain investment advice.
To prevent investment firms from taking excessive risks, similarly to credit institutions, there are rules in place regarding remuneration and governance. However, these rules are not as stringent as those for credit institutions and, e.g., do not specify a fixed maximum ratio between fixed and variable remuneration. Instead, investment firms are required to set an appropriate ratio themselves. Investment firms must comply with reporting obligations, which vary according to their category and the complexity of their business. The new investment firm regulation introduces many distinctions that emphasize the importance of strong internal control and auditing, as well as the need for external advice.
Non-compliance with the new rules and obligations is sanctioned by the FMA. The fines may reach up to 10% of the total annual net turnover and up to twice the benefit derived from the infringement, or up to EUR 5 million in the case of individuals as responsible persons. To mitigate the risk of fines, the WPFG provides for transitional periods. The Category 2 and 3 investment firms are exempted from the capital requirements for a period of six months (i.e., until August 1, 2023). The one-month exemption period regarding the reporting obligations has already passed.
Under the new regime, investment firms are no longer required to meet the excessive capital and other requirements set for credit institutions. Alternatively, investment firms are subject to standardized capital requirements, reporting obligations, and a supervisory framework tailored to their unique business risks and activities and staggered according to the size and complexity of the business. The potential legal and financial consequences of non-compliance with the new regulatory requirements highlight the importance of seeking professional advice to navigate this regulatory landscape effectively.
By Jasna Zwitter-Tehovnik, Partner, and Martin Navara, Associate, DLA Piper Weiss-Tessbach
This article was originally published in Issue 10.4 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.