18 March 2005

Afei Memorandum on Treatment of Investment Firms

This memorandum summarises the shared concerns of the investment firms’ community across much of the EU in relation to the expected detrimental impact of the Capital Requirements Directive, and puts forward proposals for minimising that impact.

The application of the Basel II banking framework to investment firms within the EU, through the implementation of the re-cast Capital Adequacy Directive (now the Capital Requirements Directive, or CRD), is of great concern to the community we represent. For more than two years the trade associations representing investment firms within ten European countries have been sharing their views on this development, in order to establish a common position. Although recognising that the models and markets under which our member firms operate are different, we consider that the new regime will impact on our industry in fundamentally similar ways, giving rise to similar issues. The purpose of this memorandum is to set out our common position and explain the issues that underlie it.

We have noted the response of the European Commission to concerns expressed about the application of Basel II to investment firms, which enables certain types of investment firms to adopt a different treatment in regard to the new operational risk capital charges. However, we do not feel that the scope of the relevant derogations goes far enough to ensure that all investment firms are treated in the most appropriate way. Recognising that it is unlikely that reconsideration will be given to the application of the CRD to investment firms, we are proposing that the capital charge for operational risk, where it applies, should at least be subject to a threshold to prevent disproportionate increases in levels of regulatory capital.

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