FIA EPTA welcomes the objective of the EBA to ensure a harmonized interpretation and implementation of the Group Capital Test (“GCT”) by setting objective criteria to assess whether the structure of an investment firm group is: a) sufficiently simple, and b) poses significant risks to clients or to market. We agree that it is indeed important to ensure a level playing field in the application of the regime across the EU and important to provide guidelines to NCAs for them to supervise investments firms in an efficient manner.
While we support the EBA’s objectives with these draft guidelines, we feel that the Consultation Paper fails to recognize the critical importance of the GCT for the application of the governance and remunerations requirements on a consolidated level. Indeed, such requirements are made, for activities carried on in non-EU countries, more proportionate when the Group Capital Test is applied. This is evidenced by the cost benefit analysis that shows that the application of the GCT results on average in substantially higher capital requirements (on average 465% higher for firms applying for the GCT under Article 8(3) IFR), suggesting that the driver for such application is not a reduction of capital.
We also note from the EBA cost benefit analysis that very few firms applied for the GCT. Although there are indeed relatively few EU headquartered firms with significant operations in non-EU countries (due to the amount of capital and time needed to develop international activities), they still represent a material part of the liquidity provided to the EU capital market and contribute to the diversity of market participants, supporting the EU’s objective of open strategic autonomy. The EBA should therefore be mindful to support the international growth of more EU headquartered investment firms and, at the very least, not to disincentivise the small number of existing EU headquartered firms that already have an international presence. These EU headquartered firms indeed contribute to the stature of the EU as an global financial centre, which should also remain as a realistic location for non-EU firms.
We would therefore be very concerned about the significant impact that more stringent requirements, or any potential reduction or removal of the availability of the Group Capital Test, would have on the competitiveness of EU-headquartered firms compared to non-EU headquartered firms that are not, for example, subject to comparable remuneration and governance requirements. Furthermore, these international operations which are carried out in countries with well-established and mature prudential and risk management rules, are very important for EU headquartered firms for the following reasons:
- They reduce risk by providing diversification benefits
- They provide additional liquidity and financial resources by way of repatriation of profits to EU group holdings.
- They support innovation by allowing access to new technologies not yet developed in the EU.
Based on the above we would caution the EBA to not make the availability of the GCT more stringent as it would not make the system more resilient. By contrast, we would suggest the EBA to consider if the main concern of these guidelines is to set a minimum amount of capital, to disassociate the capital component from the governance and remuneration requirements (i.e., by allowing firms to apply Article 7 for capital but Article 8(3) or 8(4) for any other purposes). This has been presented as an option within paragraph 20 of section 3.2, whereby a competent authority may require the application of Article 7 of IFR only for the purposes of the calculation of capital requirements, without performing prudential consolidation of other aspects (i.e., Governance and Remuneration).
FIA EPTA would like to emphasize that the primary benefit of obtaining the Group Capital Test in its current form relates to the proportionate application of remuneration and governance requirements on a consolidated basis whereby the application of remuneration requirements for example would significantly impair the competitiveness of the firm to recruit and retain personnel on a global basis.
FIA EPTA also believes that the introduction of minimum ratios is not aligned with the intention of the Level 1 requirements, whereby any risk not sufficiently covered should be assessed as part of the ongoing SREP process, and reflected in the additional own funds requirements as set out in Article 40 IFD. We are therefore of the view that the introduction of any such ratios should be managed via the SREP (Pillar 2) process, and should not be introduced as a criteria for granting the Group Capital Test.
We further note, with concern, the EBA’s implied suggestion that third-country prudential regimes, even those with mature, well established, and well-known prudential regimes such as the US and Australia, may not be subject to a satisfactory level of prudence. This is a material departure to long established international practices that aim at strengthening existing international supervisory cooperation and focus on existing supervisory public information sources on the jurisdiction’s prudential standards, such as those published by the Basel Committee on Banking Supervision, including via its Regulatory Consistency Assessment Program. Departing from such practices again risk creating an uncompetitive environment for EU headquartered firms compared to jurisdictions that take a more proportionate approach.
Lastly, we would like to reiterate that prudential regulations have a key impact on the functioning of capital markets and policies should be proportionate and should achieve the right balance between mitigating prudential risk while promoting low barriers to entry to allow for better competition between investment firms and prevent an unlevel playing field between EU and non-EU headquartered investment firms.
These policies should also be assessed holistically with an assessment of the combined effects (as opposed to stand alone cost-benefit analysis) of key provisions such as, for example, the availability of the GCT, the application of the governance and remunerations requirements to non-EU entities, and the classification of investment firms as a bank in certain cases. In this respect, we encourage the EBA to closely monitor any negative (combined) impact of these prudential rules on the EU market.
These considerations would be aligned with the EBA’s mandate, under Recital 13 of the EBA Regulation, to take due account of the impact of its activities on competition and innovation within the international market, on the Union’s competitiveness and on the Union strategy for growth, while at the same time ensuring the well-functioning and prudential safety of the financial system.
- Prudential Regulation