Response to consultation on draft Regulatory Technical Standards on own funds requirements for investment firms based on fixed overheads
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First, the impact is determined by how competent authorities exercise their discretion to vary the standard capital requirement from one-quarter of fixed overheads of the preceding year. We assume the intention is that the capital calculations should be recalculated on the one-quarter fixed overheads basis to take account of the increased capital requirement arising from the material change. It would be helpful if EBA could indicate that this is the intention in order to ensure common treatment across the EU.
Second, the impact is determined by the timing of the assessment and any notifications to be made by the firm relating to the assessment. It is implied from the RTS that firms should notify a 20% projected change to the CA, following which the CA may vary the requirement. For a small firm in a volatile business environment, that could require frequent notifications.
We believe a percentage threshold is a more flexible and proportionate metric than an absolute number. We would suggest 33% rather than 20%, in particular to reduce the burden on smaller firms.
Do you agree with the inclusion of tied agents, as set out in Article 36(4)? If not, what alternative do you suggest?
We do not agree with this inclusion. Either an expense is an expense of the investment firm or it is not. The anti-avoidance provision in Article 36(3) already allocates to an investment firm the fixed expenses of a third party which have been incurred on behalf of the investment firm. This applies equally to expenses incurred by a tied agent on behalf of an investment firm.Currently, a 35% share is proposed as the proportion of costs to be included for tied agents. Do you believe this is adequate?
We do not believe it is appropriate to allocate a pre-determined share to the investment firm in this way, because it may have no correspondence to the fixed expenditure effectively incurred for the investment firm. Where a tied agent is paid a percentage of commissions earned (so that if no commissions are earned, nothing is paid), the draft rule would artificially inflate the investment firm’s fixed overhead. Conversely where the tied agent is effectively a salaried employee of the investment firm and represents a fixed overhead, 35% could underestimate the fixed overhead. The rule should be designed to reflect the actual expenses incurred through a particular business arrangement rather than applying a notional value to all such arrangements.Do you agree with the proposed 20% threshold in Article 36a? Please provide evidence of the potential impact of this threshold.
The impact of the threshold depends on a number of factors.First, the impact is determined by how competent authorities exercise their discretion to vary the standard capital requirement from one-quarter of fixed overheads of the preceding year. We assume the intention is that the capital calculations should be recalculated on the one-quarter fixed overheads basis to take account of the increased capital requirement arising from the material change. It would be helpful if EBA could indicate that this is the intention in order to ensure common treatment across the EU.
Second, the impact is determined by the timing of the assessment and any notifications to be made by the firm relating to the assessment. It is implied from the RTS that firms should notify a 20% projected change to the CA, following which the CA may vary the requirement. For a small firm in a volatile business environment, that could require frequent notifications.
We believe a percentage threshold is a more flexible and proportionate metric than an absolute number. We would suggest 33% rather than 20%, in particular to reduce the burden on smaller firms.