The following matters were identified as lacking specific clarity in the Investment Firm Regulation text published in December 2019:
(i) A specific definition of Assets Under Management for the purpose of the K-AUM factor;
(ii) The correct treatment of cross-holdings between entities of the same consolidation group when calculating AUM; and
(iii) The definition of AUM in respect of “non-discretionary arrangements of an on-going nature” for the purpose of the K-AUM factor.
The EBA draft RTS provides clarity on the definition of AUM to be applied for the purpose of discretionary portfolio management. Specifically, Section 7, Article 3 states that:
(i) the calculation shall include the value of financial instruments calculated at fair value in accordance with the applicable accounting standards;
(ii) financial instruments with a negative fair value shall be included in absolute value; and
(iii) the calculation shall include cash except any amounts covered under Client Money Held (‘CMH’) in accordance with Article 4.
However, clarity has not been provided in respect of the treatment of cross-holdings between entities of the same consolidation group, or in relation to the definition of AUM for non-discretionary arrangements of an on-going nature.
The following matters would benefit from further clarity (references to articles are referring to the articles in Section 7 of the EBA/2020/06 consultation paper unless otherwise stated):
(i) The EBA 2020/06 consultation paper and draft RTS text is ambiguous in relation to the advisory services which should be considered in scope of “non-discretionary advisory services”. Clarity is required to ensure assets are included / excluded correctly in the K-AUM calculation.
 Article 2(1) notes that assets relating to the advisory services referred to in Directive 2014/65/EU (Annex 1, Section B (Para. 3)) should not be included in the value of AUM to be used for the purpose of the K-AUM factor. The RTS presents this as a complete reference to the type of advisory services which would not satisfy the definition of “non-discretionary advisory arrangements”.
 However, Section 3.6.3 (Para. 48) of the EBA 2020/06 consultation paper suggests that the reference to Directive 2014/65/EU (Annex 1, Section B (Para. 3)) is only illustrative and that the range of services to be excluded from the definition of non-discretionary services could be more extensive. Section 3.6.3 (Para. 46) notes that the definition of AUM includes Assets “managed under certain non-discretionary arrangements” but does not elaborate on the type of arrangements this refers to.
 Taking these points together, we are unclear as to how to distinguish between in-scope and out-of-scope advisory services for the purpose of calculating non-discretionary AUM and would value additional clarity in the RTS text.
(ii) Section 3.6.4 (Para. 49) and Article 17 of the IFR refer to instances where an investment firm “delegates management of assets to another financial entity” but does not clarify the distinction between investment firms and financial entities. Clarity on the distinction between these two terms, within the RTS text, would be welcomed. Section 3.6.4 (Para. 50) distinguishes between investment firms and AIFMD / UCITS management companies – if relevant, a similar distinction within the RTS text may support the application of Article 17of the IFR.
Furthermore, explicit confirmation that the delegation provisions apply equally to (i) delegation between IFD / IFR firms and an AIFMD / UCITS management company; and (ii) delegation between two firms which are both in-scope of the IFD / IFR, would be valuable.
If there are instances where the delegation provisions would not apply (i.e. where one of the entities party to the delegation is not required to calculate an AUM-based capital requirement), clarity on the principles to be considered / the approach to be adopted would be welcomed. Whilst such circumstances are referred to in section 3.6.4 (Para. 50) this is not explicitly addressed within the RTS.
(iii) Neither the EBA/2020/06 consultation paper or the draft RTS clarify the correct treatment of cross-holdings between two entities within the same consolidation group or which have the same ultimate parent company, where both entities are required to calculate an AUM-based capital requirement. Specific clarity on this point within the RTS would be welcomed.
(iv) Article 2(2) clarifies the treatment of assets where both discretionary portfolio management and non-discretionary advisory services are provided by different entities. However, in the instance that both discretionary portfolio management and non-discretionary advisory services are provided by different entities within the same consolidation group, we believe this results in double-counting. This is contrary to the intention outlined in section 3.6.4 (Para. 50) of the EBA/2020/06 consultation paper where it is indicated that double counting should be avoided. The approach proposed in the draft RTS is particularly punitive for consolidation groups given that assets managed under both discretionary and non-discretionary arrangements are subject to the same co-efficient when calculating the K-AUM requirement.
It has been noted that Article 15(5)(b) of the IFR states five key requirements for the notion of segregated accounts. Requirements (a), (b), (c) and (e) can be applied to segregated accounts but they do not define segregated accounts. These four points, however, are aligned to reflect the UK Client Assets regulations (‘CASS’). Point (d) does define a segregated account which is helpful to understand the inclusions.
Our view is the definition of what constitutes a segregated account and a non-segregated account remains ambiguous and therefore we would welcome additional clarity on the definition of these. For example, at present in the UK, the CASS regulations clearly state that if an investment firm holds client monies in a non-segregated account, it would be considered a regulatory breach. It is in the interest of all investment firms to have a clear understanding of the definition and requirements to ensure these are adhered to and these are consistently applied across the industry.
We have no additional comments.
We have no additional comments.
We have no additional comments.
We have no additional comments.
We have no additional comments.
The RTS provides complete discretion to the NCA to impose a different method of consolidation on investment firms where applicable. The text does not specify when the NCA would notify the firm of the method of consolidation they are to apply or how long after the decision is confirmed that consolidation should be altered.
We believe it would be beneficial for further guidance to be provided on the process and timescales involved regarding the notifications from the NCA which would allow firms/groups to take the necessary steps to address the requirements, rather than potentially giving NCAs discretion to change the obligations imposed at short notice. Article 32 of Directive 2013/36/EU provides an example of how derogations can operate and be monitored.
Section 12 (Article 11) of the Consultation Paper provides guidance on consolidation in respect of K-AUM – we would welcome explicit confirmation, either within the RTS text or in a response to the consultation process, that the provision of Article 11 (Para. 3(c(ii))) is intended to capture the AUM of MiFID activities performed under a MiFID ‘top-up permission’ when this is performed by, for example, an AIFM or UCITS manager.
Andrew Johnstone