We agree with EBA’s assessment in recital (1) of the Draft RTS that some of the K-factors in the IFR do not require further specifications, whereas for other K-factors such as AUM, CMH, COH, ASA and DTF, the methods for measuring those factors would benefit from further clarifications. However, we would like to highlight two specific points in this context:
1. Advisory arrangements of an on-going nature (Article 2 of the Draft RTS) and delegation of management of assets to another financial entity
We acknowledge that according to point (27) of Article 4(1) and Article 15(2) of the IFR the term ”assets under management” or “AUM” includes not only assets that an investment firm manages for its clients under discretionary portfolio management but also those related to nondiscretionary arrangements constituting investment advice of an ongoing nature.
In our opinion, however, it is not adequate and necessary to treat the investment services “portfolio man-agement” and “investment advice of on ongoing nature” equally in the methods for the K-factor calculation.
It is without doubt that the legislator differentiates between these two types of services, above all by formulat-ing a different programme of legal obligations attached to the services (with a much broader scope of legal obligations in case of portfolio management services). Paragraph 51 of the consultation paper acknowledges the necessity to distinguish between “portfolio management” and “nondiscretionary advisory arrangements of an ongoing nature”. Since an investment advisor only gives a recommendation to its client, the final decision whether or to which extent to invest/divest in a financial instrument will be taken by the client. A portfolio manager, on the other hand, makes own decisions in selecting financial instruments on behalf of a client and executes these decisions in its own authority, but in the name of and for the account of the client.
This demonstrates that the (operational) risk resulting from investment advisory services versus portfolio management services is different. Recital (24) of the IFR explicitly states that K-AUM in the context of port-folio management services shall capture the risk of harm to clients from an incorrect discretionary manage-ment of client portfolios or poor execution and provides reassurance and client benefits in terms of the conti-nuity of service of ongoing portfolio management. Operational risks resulting from poor execution, however, do not occur in the context of investment advice of an ongoing nature.
In considering the limited inherent risk of investment advice to create an event of failure which justifies addi-tional own capital requirements, we think it is appropriate to reduce the amount which should be included within the AUM amount that relate to non-discretionary advisory arrangements of an ongoing nature. We therefore propose an approach that is linked to a percentage of the amount that relate to non-discretionary advisory arrangements.
Moreover, we would like to clarify that – in line with the MiFID definition of investment advice – it is required that a personal recommendation to a client is in respect of one or more transactions relating to financial in-struments (see Article 4(1)(20) of the IFR) by replacing the term “assets” by the term “financial instruments”.
The annex to our response contains a proposal on how to amend Article 2(2) of the Draft RTS accordingly.
On a general note, we would like to emphasise the following point in that context: The delegation of portfo-lio management of collective undertakings such as UCITS or AIF to an investment firm providing portfolio management does not qualify as a practice ‘to promote ‘avoidance’’ of own capital re-quirements. However, such an impression could arise when reading paragraph 50 of the ’Background and rationale’ section in the consultation paper.
2. AUM in case of discretionary portfolio management (Article 3 of the Draft RTS)
Not being financial instruments, cash positions should be excluded from the calculation of the AUM in case of discretionary portfolio management. This approach would be also in line with the proposed Recital 2 of the Draft RTS that refers to financial instruments in the context of calculation of AUM. Moreover, according to the definition of the investment service portfolio management in the MiFID II, portfolio management means managing portfolios in accordance with mandates given by clients on a discretionary client-by-client basis where such portfolios include one or more financial instruments. This means that only financial instruments are in scope.
The annex to our response contains a proposal on how to amend Article 3 of the Draft RTS accordingly.
We agree with the proposed requirements for notion of segregated accounts which comply with the MiFID requirements. We do not see the need for further adjustments.
We strongly disagree with the scope of group constellations in Articles 2 to 5 of the Draft RTS as the approach taken by EBA goes beyond the scope of delegation. Such an extension is not covered by the mandate given in Article 7(5) IFR which states that the EBA shall develop draft RTS to specify ‘the details of the scope and methods for prudential consolidation of an investment firm group, in particular for the purpose of calculating the fixed overheads requirement, the permanent minimum capital requirement, the K-factor requirement on the basis of the consolidated situation of the investment firm group, and the method and nec-essary details to properly implement paragraph 2’ of Article 7 IFR. That mandate limits the EBA to develop details on the scope for prudential consolidation within the given definitions and provisions of the IFR. Article 7(5) IFR does not provide for a mandate to define a scope that is – in contrast to Article 18 CRR – not within the scope provided for under the IFR.
Moreover, the scope of the Draft RTS is in considerable contradiction to the approach taken by the IFR defi-nitions in Article 4(1)(11) and (25) of the “consolidated situation” and an investment firm group with the ex-plicit reference to Article 22 of Directive 2013/34/EU. In particular, the cases and scope of application de-fined in Article 22 of that Directive, especially the non-obligatory character of to Article 22(7) of Directive 2013/34/EU, would be undermined by the proposed Articles 2 to 5 of the Draft RTS. In addition, constella-tions referred to in Articles 3 and 4 of the Draft RTS go even beyond the scope of Article 22 of Directive 2012/34/EU and thus outside the defined scope of a “consolidated situation” and an investment firm group under the IFR. Furthermore, Articles 2 to 5 of the Draft RTS considerably deviate from the current regula-tions on own funds on a consolidated basis for groups consisting of investment firms only (i.e. without any credit institutions) according to Articles 98 and 18 CRR as amended by CRR II. This is not in line with the purpose described in Recital 12 of the IFR to mirror the existing treatment of such investment firm groups under the CRR and CRD. The EBA itself states the need to ensure such a consistency in Recitals 3 and 4 of the Draft RTS. In this context, it is not appropriate to use as blueprint for the IFR a draft RTS discussed un-der the CRR in 2017 with divergent legal basis that did not enter into force - also due to the justified criticism of the banking industry.
Furthermore, according to Article 7(1) and Recital 12 of the IFR, the parent undertaking of an investment firm group should be required to comply with the requirements of the IFR based on the consolidated situation of the group. We therefore strongly disagree with defining new responsibilities such as that an in-vestment firm being a subsidiary in an investment firm group (for instance as part of a holding struc-ture) should ensure that other entities within the group that are not subject of the IFR implement arrangements, processes and mechanisms to ensure proper consolidation without regard to its available legal means. Notwithstanding the above, we urge the EBA to clarify that such obligation for the parent undertaking of an investment firm group pursuant to Article 7(1) sentence 3 IFR does not go beyond and is limited by the boundaries applicable to a subsidiary under the laws of the country it is established under e.g. data protection or corporate law rules of such country.
Additionally, while we agree that accounting consolidation in financial statements provides no justified basis for prudential consolidation, it should be ensured under the Draft RTS that the methods of consolidation (Ar-ticles 6 and 7 of the Draft RTS), in accordance with provisions of the IFR, do not unnecessarily diverge, resulting in significant undue burden for investment firm groups. Such is currently the case as the Draft RTS in its choice of full consolidation as default method of consolidation disregards the aggregation method as equally suitable default method – in many cases for prudential consolidation due to its conservative approach even more.
In fact we have expected the Draft RTS to deal with principles regarding consolidation methods within the clear boundaries set by the IFR, considering its rationale to more suitably addressing specific risks and vul-nerabilities inherent to investment firms on a group level in contrast to such risks addressed under the CRR (IFR Recitals (2) and (3)). In this context we welcome the Draft RTS emphasising the scope of prudential consolidation of an investment firm group according to the IFR, as not extending beyond undertakings other than investment firms, financial institutions, ancillary service undertakings and tied agents. However, specifi-cations on special features of group members like management companies licenced under the AIFMD or UCITS Directive, as well as clarifying emphasis on the non-relevance of investment funds such as UCITS or AIF (neither classifying as “financial institutions” nor as “ancillary service undertaking”) and clear distinctions to outsourcings sufficiently addressed in the current regulatory framework, are completely missing in the draft RTS.
More specifically, we suggest the following amendments to the Draft RTS:
1. Article 2(1) of the Draft RTS: Group of undertakings which meet the conditions set out in Article 22 of Directive 2013/34/EU
We urge the EBA to delete Article 2(1) of the Draft RTS which refers to group constellations of para-graph 7 of Article 22 of Directive 2013/34/EU. Such an approach would not be in line with the definition set out in Article 4(1)(25) IFR. According to that definition, a group of undertakings which consists of a parent undertaking and its subsidiaries or of undertakings which meet all the conditions set out in Article 22 of Di-rective 2013/34/EU (without expressly referring to those of paragraph 7, cf. Article 18(3) CRR) should be qualified as an investment firm group. First and foremost this involves cases where Member States require to draw up consolidated financial statements and a consolidated management report if a parent undertaking fulfils certain conditions as stipulated in Article 22(1) to (6) of Directive 2013/34/EU (the legal successor to Articles 1 and 2 of Directive 83/349/EEC as referred to in the CRR) such as having a majority of the share-holders' or members' voting rights in a subsidiary undertaking.
Moreover, and much more importantly, the approach proposed by the EBA in Article 2 of the Draft RTS ignores that the conditions in paragraph 7 of Article 22 of Directive 2013/34/EU depend on the non-obligatory choice of implementation by the Member state in its national law. According to Article 22(7) of Directive 2013/34/EU, a Member State may require any undertaking governed by its national law to draw up consoli-dated financial statements and a consolidated management report if certain conditions are fulfilled (such as non-related undertakings are managed on a unified basis in accordance with a contract). Therefore, the EBA approach set out in Article 2 of the Draft RTS would lead to the situation that these undertakings would be qualified as an investment firm group which are required to comply with certain rules of the IFD and IFR on a consolidated basis in any case and in disregard of the Level 1 backed choice of a Member State not to im-plement Article 22(7) of Directive 2013/34/EU. In contrast to Article 18(3) CRR, also no explicit reference is made to Article 22(7) of Directive 2013/34/EU in Article 7 IFR and therefore the scope of an investment firm group pursuant to Article 4(1)(25) IFR does not extend beyond the obligatory provisions of Article 22(1) to (6) of Directive 2013/34/EU to be implemented in a Member State. Furthermore, based on the information available to us, a large majority of Member States have opted not to exercise the discretion pursuant to Arti-cle 22(7) of Directive 2013/34/EU, which can be interpreted as evidence that the perceived usefulness of consolidated financial data obtained for such groups is limited either in absolute terms or in relative terms compared to the efforts required to prepare such consolidated financial data. Article 2 of the Draft RTS goes thus beyond what is covered by the IFR and the regulations referred to and should – as well as its relation-ship to group entities qualifying as parent undertaking and subsidiaries as per Article 4(1)(42) and (51) IFR – be reconsidered by the EBA.
2. Articles 3 to 5 of the Draft RTS: Extending the definition of an investment firm group
We urge the EBA to delete Articles 3 to 5 of the Draft RTS. We strongly disagree with the proposed substantial extension of the scope by referring to further group constellations such as undertakings with significant influence without participation or capital ties (Article 3 of the Draft RTS), single management other than pursuant to a contract, clauses in memoranda or articles of association (Article 4 of the Draft RTS) or participations or capital ties (Article 5 of the Draft RTS).
We are aware that in its hearing on 30 June 2020, the EBA referred to its consultation on technical standards specifying the methods of prudential consolidation under Article 18 of Regulation (EU) No 575/2013 (Capital Requirements Regulation - CRR), 9 November 2017. However, this ignores the rationale of the IFR and the fundamentally different regulated scope in the IFR on the one hand and in the CRR, especially its Article 18, on the other hand. In detail:
- Legal definition of an ‘investment firm group’: Article 4(1)(25) IFR defines the following group con-stellation of which at least one is an investment firm and which does not include a credit institution:
“a group of undertakings which consists of a parent undertaking and its subsidiaries or a group of undertakings which meet the conditions set out in Article 22 of Directive 2013/34/EU of the Europe-an Parliament and of the Council” .
According to this Level 1 definition of “investment firm group”, there is no room for extending the scope on Level 2 to cases as proposed by the EBA in Articles 3 to 5 of the Draft RTS. This is a major differ-ence compared to the existing rules on prudential consolidation under the CRR because the CRR does not even define an equivalent term to ‘investment firm group’ and the scope of Articles 3 to 5 of the Draft RTS is not covered by Article 22 of Directive 2013/34/EU. Any such extension would require re-spective Level 1 amendments of IFR and cannot be effected by means of RTS.
- The IFR does not contain a provision resembling Article 18(5) and (6) CRR: According to Article 18(5) and (6) CRR, competent authorities shall determine whether consolidation is required in case of other participations or capital ties or significant influence without a participation or other capital ties and single management other than pursuant a contract, memorandum or articles of association. There is nei-ther a comparable regulation in the IFR nor a mandate to specify such cases in a Draft RTS under the IFR. The reference to a similar approach of the EBA public consultation on technical standards specify-ing the methods of prudential consolidation under Article 18 CRR is therefore in no way appropriate. In view of the rationale of the IFR to provide a regulatory framework for investment firms more suitably addressing specific risks and vulnerabilities inherent to investment firms in contrast to such risks ad-dressed under the CRR (cf. Recitals (2) and (3) IFR), the need to ensure consistence between the scope and methods of prudential consolidation in banking and investment firm groups (cf. Recitals (3) of the Draft RTS) neither provides a justification or mandate for an alignment of the Drafts RTS to the scope and methods of consolidation specified in Article 18 CRR beyond the provisions of the IFR. Arti-cles 3 to 5 of the Draft RTS are therefore also not appropriate as scope of consolidation under Article 7 IFR. This applies even more as the RTS on methods of prudential consolidation under Article 18 CRR is under development and has not even entered into force yet.
- Articles 3 to 5 of the Draft RTS are much more stringent as the approach of Article 18(6) CRR: We understand the proposed Articles 3 to 5 in conjunction with Articles 6 to 7 of the Draft RTS in such a way that competent authorities should only have a right to choose the consolidation method (such as full or proportional consolidation, aggregation method), but no longer whether consolidation is required or not. Irrespective of the lack of a legal basis for such an approach, this would be much more stringent as it is currently required under the CRR: according to Article 18(6) CRR, competent authorities shall de-termine whether consolidation is required in additional cases such as of significant influence or single management.
3. Contractual arrangements: delegation or outsourcing in the asset management sector
Apart from the lack of legal basis the cases proposed by the EBA in Articles 2 and 3 of the Draft RTS would lead to inappropriate group constellations in the asset management sector, especially in the context of gener-ic or market standard outsourcing.
The following example will demonstrate this:
- Asset management companies, qualifying as financial institutions in the meaning of the definition in Arti-cle 4(1)(14) IFR, could be related with an investment firm on a contractual basis. Under the Draft RTS it should be made clear that asset management companies do not fulfil the group approach proposed by the EBA, as there is no prudential necessity.
- According to the UCITS Directive and the AIFMD, management companies can delegate portfolio man-agement services of the investment funds such as UCITS or AIF to third parties (such as investment firms with a licence to provide asset management) on a contractual basis. That case is fully covered by the prudential requirements of the AIFMD or UCITS Directive. However, Articles 2 and 3 of the Draft RTS on prudential consolidation of investment firm groups could be understood in such a way that such a contract would qualify as a significant influence without participation or capital ties (e.g. due to the ra-ther broad notion of “existence of material transactions between the two undertakings” pursuant to point c) of Art. 3(2) of the Draft RTS). This would lead to the situation that the investment firm and the man-agement company would be qualified as an investment firm group with the effect that the investment firm must carry out consolidation of the management company although this case is already compre-hensively covered by the UCITS Directive or the AIFMD. Also, the Draft RTS does not consider the cir-cumstance that a management company typically delegates portfolio management services of the in-vestment funds not only to one, but various third parties. This could subject one and the same manage-ment company as part of various investment firm groups.
In the further alternative, if EBA maintains its approach, we urge to clarify that, in the absence of other circumstances leading to the formation of a regulatory group case of generic or market stand-ard outsourcing, such as a delegation of portfolio management services of the investment funds or the AIF or UCITS management companies, respectively, (which involves standard contractual termi-nation rights for the undertaking delegating the right) in the above sense does not lead to the for-mation of a regulatory group.
In general, we welcome a clarification that participating undertakings subject to prudential supervision should benefit from the proportional consolidation because it considers that the probability of materialisation of a step-in risk of the parent undertaking is very low as a result of sector-specific prudential requirements that apply for these entities. Also, asset management companies (which qualify as financial institutions in the meaning of the definition in Article 4(1)(14) IFR and therefore also as financial sector entities) are subject to strict prudential requirements under the UCITS Directive and the AIFMD.
However, while we agree that accounting consolidation in financial statements provides no justified basis for prudential consolidation, it should be ensured under the Draft RTS that the methods of consolidation (Articles 6 and 7 of the Draft RTS), in accordance with provisions of the IFR, do not unnecessarily diverge, resulting in significant undue burden for investment firm groups. Such is currently the case as Article 6 of the Draft RTS in its choice of full consolidation as default method of consolidation disregard the aggregation method as equally – in many cases for prudential consolidation due to its conservative approach even more – suitable and appropriate default method. For example, the aggregation method allows for a more specific consol-idation of group undertakings or reporting date specific currency conversion.
Furthermore, we would like to emphasize one important aspect related to the interplay between accounting consolidation and prudential consolidation which in our view should be considered in the specification of the methods for prudential consolidation (Articles 6 and 7 of the Draft RTS). In cases in which consolidated fi-nancial statements are prepared at the level of the Union parent undertaking (as defined in Article 1(1) of the Draft RTS), such consolidated financial statements generally represent the natural starting point for pruden-tial consolidation (e.g. for the determination of consolidated own funds). It needs to be observed, however, that in several practically highly relevant cases no consolidated financial statements are prepared at the level of the Union parent undertaking. In one category of cases, the Union parent undertaking is itself the subsidi-ary of an ‘ultimate’ parent undertaking incorporated in the same Member State and the latter ‘ultimate’ parent undertaking (which prepares consolidated financial statements involving the subgroup of the Union parent undertaking) does not qualify as credit institution / investment firm / financial institution / ancillary services undertaking. In a second category of cases, the Union parent undertaking is itself the subsidiary of credit institution / investment firm / holding company incorporated in a third country and the latter parent undertaking prepares consolidated financial statements on the basis of equivalent accounting standards, which implies that an exemption from the obligation to prepare consolidated financial statements applies at the level of the Union parent undertaking (cf. e.g. Article 23(8) of Directive 2013/34/EU). EBA is kindly asked to consid-er whether for such and related constellations, use of an aggregation method could be admissible for the Union parent undertaking for purposes of prudential consolidation.
We urge EBA therefore to amend Article 6 of the Draft RTS by establishing full consolidation and the aggregation method as equally eligible default consolidation method with an obligation for the Union parent undertaking to formally declare one as its individual choice of default method, the remaining method, together with the proportional consolidation becoming applicable upon permission by the supervisor. Where the supervisor objects to the individual choice in default method as not being appropriate for the respective investment firm group, the other method shall become the default method.
See our answer to Q7
We disagree to involve ‘the MiFID part of the AUM of asset management companies and of third country entities that would have been asset management companies had they been authorised in the Union’ in the AUM of the group as proposed in Article 11(3)(c) of the Draft RTS. Paragraph (ii) in Article 11(3)(c) of the Draft RTS should therefore be deleted.
The MiFID part of the AUM of asset managers is already subject to prudential supervision: The ap-proach proposed by the EBA would imply that the MiFID part of the AUM of asset managers is not part of prudential supervision on solo-level of the asset manager and would pose risks to clients which are not cov-ered. However, the opposite is the case: Asset management companies are already subject to their own regulatory prudential requirements for own funds under the AIFMD and the UCITS Directive irrespective of whether and to what extent they provide additional services (such as those within the meaning of Article 6(3)(a) and (b) of the UCITS Directive and Article 6(4)(a) and (b) of the AIFMD for which certain MiFID rules apply (cf. Article 6(4) of the UCITS Directive and Article 6(6) of the AIMFD)). Rigorous capital requirements which reflect all risks of these asset managers (also encompassing these services) are already in place un-der the UCITS Directive or the AIFMD. Moreover, they are obliged to cover operational risks (such as pro-fessional liability risks) through additional own funds .
Such an approach would be much stricter as the current approach in Article 95 of the CRR. The cur-rent approach under the CRR does not cover ‘the MiFID part of AUM’ of asset managers as a special item. We are aware that a K-factor approach does not exist under the CRR. However, Article 15(1)(a) of the CRR refers to Article 95(2) of the CRR with a calculation of the total risk exposure amount as the higher of the sum of the certain items covering different risk types (such as trading book risks, concentration risks) or a special factor multiplied by the amount based on the fixed overheads requirements. In fact, all our members affected currently apply the capital calculation method based on the fixed overheads required in Article 95(2) CRR. The new approach based on ‘the MiFID part of AUM’ would not be in line with the objective of the IFR to mirror the existing treatment of investment firm groups under the CRR and CRD Regulation (cf. Recital 12 of the IFR). In any case, a potential step-in risk of a parent undertaking regarding an asset manager being part of an investment firm group will be sufficiently covered by the fixed overheads requirements. Such an approach should be appropriate as the AIFMD and the UCITS Directive as well refer to a minimum capital limit based on the fixed overheads required. According to Article 9(5) of the AIFMD and Article 7(1)(a)(ii) of the UCITS Directive, the own funds of the management company shall never be less than the amount pre-scribed in Article 13 IFR (in the meaning of the amendment made in Articles 60 and 61 of the IFD).
Such an approach would contradict the objective of the new framework to simplify the prudential requirements: Asset management companies are themselves not covered by the scope of the IFD/IFR framework, even if they provide additional MiFID services. The approach proposed by the EBA would, how-ever, result in an (indirect) obligation of asset managers being part of an investment firm group to calculate the MiFID part of AUM based on the K-factor approach established in the investment firm regime although this approach does not apply to them in particular. The objective of the new framework was that the rules on own funds introduced by the IFR will remain largely unchanged compared with the current CRR ones and that their implementation should therefore not represent a challenge for the industry.