What’s new for payment institutions and investment intermediaries   

The National Assembly and the Financial Supervision Commission (FSC) recently adopted amendments to the Bulgarian legislation regarding payment institutions and investment intermediaries, respectively. In this article, you will find a summary of the most significant changes.   

Changes in the rules for restructuring of payment institutions

The National Assembly has regulated the restructuring of payment institutions by amending the Payment Services and Payment Systems Act. According to the voted amendments, the restructuring of a payment institution through merger and acquisition will be allowed only with another payment institution or electronic money company. The acquisition represents a type of restructuring whereby the entire property of one or more legal entities is transferred to an already incorporated company (acquiring entity), which becomes its legal successor (Art. 262 Commerce Act). Pursuant to the new regulation(1), upon acquisition, the right to perform activities for which the host company is not licensed will not be transferred. On the other hand, merger permission is granted only if the newly established company obtains a license corresponding to the type of services it will provide. In this case, the entire property of two or more companies (merging entities) is transferred to a newly incorporated entity, which becomes their legal successor (Art. 262a CA).

In the event of restructuring by means of a spin-off, a part of the property of one legal entity (restructuring entity) is transferred to another or multiple companies, which become its/their legal successor/s for this part of the property (Art. 262c CA). Upon restructuring of a payment institution by a spin-off, the receiving or newly established companies must hold or obtain a license for the respective activities, which they intend to perform and for which a license is required.   

Pursuant to the amendments(2), restructuring of a payment institution through a change in the legal form will be allowed only within the permitted types of companies in accordance with the requirements for issuing a license. In addition, the restructuring is possible only after prior permission from the Bulgarian National Bank (BNB) has been granted under conditions and rules in accordance with the procedure established by an ordinance of the BNB.   

Changes in the rules for investment intermediaries

New capital requirements   

The Financial Supervision Commission (FSC) adopted Ordinance No. 50 of 30 March 2022 (the Ordinance), concerning investment intermediaries. Some of the important points in the new regulation concern capital requirements for investment intermediaries, including rules on holding of additional own capital. According to Art. 4 of the Ordinance, in the initial capital of an operating company, calculated under the rules of Аrt. 3, which owns title over immovable property, shall be included only the value of the rights, which are directly related to the activities and services under Аrt. 6, para. 2 and 3 of Market of financial instruments Act (MFIA), in the amount of not more than 20 per cent of the required minimum amount of the capital under Art. 10 of MFIA. In addition, in case of significant deterioration of the financial situation, the investment firm is obliged to submit for approval within 5 days from the occurrence of the discrepancy a recovery program with a term no longer than 3 months for adjusting its financial condition, capital adequacy and liquidity in accordance with Regulation (EU) 2019/2033 and the acts on its implementation, MFIA and Ordinance No. 50 of 30 March 2022 (Article 12 (1).   

Another essential aspect enshrined in the new legislation concerns the requirements for investment intermediaries regarding capital adequacy and liquidity. Pursuant to Art. 13 (1) of the Ordinance, the investment intermediaries, which do not meet the conditions for small and unrelated investment intermediaries, defined in Art. 12 (1) of Regulation (EU) 2019/2033, should develop and implement reliable, effective and comprehensive mechanisms, strategies and processes that allow them to constantly assess and maintain internal capital and liquid assets in amounts, types and distributions, that they are adequate to cover the risks to which investment firms are or may be exposed, as well as the risks that they may pose to others.   

In addition, the Ordinance also regulates 1) the conditions, criteria and procedure for exemption from liquidity requirements; 2) requirements for keeping records and disclosing information by parent companies and investment intermediaries; 3) the supervision for the observance of these requirements; 4) the financial instruments that the investment intermediaries may hold for their own account, in the cases when they perform certain investment services; 5) the types of capital buffers that the investment intermediaries must maintain, the scope, the conditions and the order for their formation and updating; 6) additional requirements to significant investment intermediaries; 7) the requirements to the risk committees and the remuneration committees in the investment intermediaries under Art. 61a, para. 1 of MFIA; 8) the requirements for remuneration, the remuneration policy and its implementation; 9) the procedure, manner, scope and criteria for conducting the review and evaluation of the rules, strategies, processes and mechanisms introduced by the investment intermediary; 10) the requirements to the rehabilitation program and the procedure for its approval; 11) the requirements that transactions must meet in order to be considered significant.   

New gender equality requirements

The Financial Supervision Commission (FSC) introduced gender equality requirements among investment intermediaries through an Ordinance amending and supplementing Ordinance No. 38 of 21 May 2020 on the requirements for the activity of investment intermediaries. In light of the Communication of the Commission of 2020 entitled A Union of Equality: Gender Equality Strategy 2020-2025, the FSC established that investment intermediaries as legal entities should ensure an appropriate gender balance within their respective management and supervisory bodies and ensure compliance with the principle of equal opportunities in the selection of members(3). In order to maintain diversity in the composition of its bodies, the investment firm should have policies in place to ensure non-discrimination based on sex, race, colour, ethnic or social origin, genetic characteristics, religion or belief, belonging to a national minority, property status, disability, age or sexual orientation.  

When setting diversity objectives in the investment firm's management and supervisory body, it must take into account the results of diversity reports published by the European Securities and Markets Authority (ESMA), the European Banking Authority or other institutions of the European Union(4).   

The amendments also introduced that the decision for appointment must consider the fact that greater diversity contributes to the provision of constructive criticism and to the discussion of different points of view. According to these innovations, investment firms should not appoint members of their bodies solely for the purpose of enhancing diversity at the expense of the well-functioning and collective or individual suitability of the particular body concerned and of its individual members.

(1) Art. 16a of the Payment Services and Payment Systems Act (New - SG, issue 45 of 2022)   
(2) Art. 16a, para. 4 of the Payment Services and Payment Systems Act (New - SG, issue 45 of 2022)
(3) Art. 22, para. 2 of Ordinance No. 38 of 21 May 2020 on the requirements for the activity of investment intermediaries (New – SG, issue 26 of 2022 г., in force since 2 May 2022)
(4) Art. 25 of Ordinance No. 38 of 21 May 2020 on the requirements for the activity of investment intermediaries