We appreciate that ancillary services such as advice on transactions between investors, should not be included in the measuring of the AUM, nor in that of the COH, given K-factors already account for them. In general, we support the attention the EBA has taken, in light of the objectives of the Regulation, to avoid double-counting assets.
While AUM does not have to be counted twice when it is the subject of a delegation by a “financial entity”, this term itself is not defined. We consider the EBA position - that it is confined only to EU entities such as AIFMs, UCITS management companies and MiFID entities - is too narrow. Our view is that this should be extended to any financial firm, irrespective of their location, to take into account cross-border situations.
For example, it is illogical to exclude from this concept entities just because they are not European or they are subject to a different (but still substantial and respected) scheme of regulation. The underlying clients of the non-European entity will not benefit from the increased capital requirement of the European firm to which portfolio management activities are delegated and it is likely to increase the cost of doing business with European firms which is not balanced by a commensurate benefit.
Moreover, it appears from the draft text that, when a portfolio manager appoints another investment firm to provide it with investment advice of an ongoing nature to assist it with its portfolio management functions, this should not be seen as a delegation.
The result of this is that the adviser will therefore need to include the assets in its own K-AUM. This would create a situation where there these are effectively double-counted, which is what the delegation provision was intended to avoid.
More specifically, the EBA language as drafted is not sufficiently tailored to reflect the way in which firms operate and for drawing a distinction between a delegation and the appointment of a sub-adviser. For example, it is common for portfolio managers to have some teams which locate investments and advise on them and teams which monitor those investments on an ongoing basis and provide advice on them. In each case, the advice will be given typically to the internal committee which takes the final decision. The service of portfolio management therefore does not take place in a single step. Separate steps can - and often do – include activities which would fall within the definition of advice of an ongoing nature. We believe that it should be permissible for part of the service to be delegated, even where each part is not separately identified in the appointment of the portfolio manager. These clarifications are required if the EBA seeks to avoid double-counting in those cases, especially as those examples effectively meet the purpose of the delegation provision.
Even if the EBA, counter to what could logically be expected given how the market operates, disagrees that there could be a partial delegation where the element to be delegated is not separately identified in the contract, the wording of the standards is still too broad. The form of appointment may list a number of services which are included in the overall provision of portfolio management and the manager could delegate part of the service it has been contracted to provide. Where part of that service relates to investment advice of an ongoing nature, the Regulation states that the entity to which that part has been delegated should not have to calculate AUM in respect of it. The proposed wording of the RTS would restrict this unnecessarily.
The extension of the concept of “significant influence” beyond the general interpretation in Directive 2013/34/EU (20% or more voting rights) may reveal itself problematic and not reflect the nature of the relationship between certain investment firms and the companies they are linked to.
These terms are already used in a number of EU legislations and are well understood. The EBA's proposed language will create tensions between different sets of rules and/or produce anomalous results, under which a firm needs to take one approach for the purposes of this Regulation and a different one under other regimes.
Perhaps most problematically, a number of the examples given in the standards would not necessarily mean that a firm is under "significant influence" of another firm as it is now understood, or that it is "managed on a unified basis" by another (and, indeed, protections may exist in governance arrangements or contractual documentation or other arrangements which would factually preclude such conclusions).
In relation to the "significant influence" concept in particular, the EBA's proposed elaboration appears to be inconsistent with the current CRD IV/CRR regime where this is a matter reserved for the national competent authority to address whether consolidation (on the basis of significant influence) is required in light of a specific set of facts. While this may change under the CRD V/CRR II regime for banks and certain large systemic investment firms, we suggest that the current CRD IV/CRR approach is more proportionate for firms within the scope of IFR/IFD, especially given their size and their heterogeneity.