Fri, Jan 31, 2014

EBA publish final DRAFT RTS on own funds requirement for investment firms

On January 29, 2014, the EBA published its ‘Final DRAFT Regulatory Technical Standards on Own Funds – Based on Fixed Overheads’ (RTS).  It should be noted that these standards remain in DRAFT because they now need to be formally adopted and published on the EU Official Journal website. The next step is the two-month objection period, i.e. the period within which the EU Parliament, Commission and Council have to object to the draft RTS.

Once they are published on the EU Official Journal website (no sooner than 29 March 2014) they will come in to force 20 days later, the earliest date being Friday 18 April. Interestingly, this is likely to coincide with the point that firms will be recalculating their Fixed Overhead Requirements (‘FOR’) based on Audited Fixed Expenditure to 31 December 2013 (being shortly before the 80 Business Days within which audited accounts must be adopted and forwarded to the FCA).

It is important to note:

  • This new basis of determining Fixed Expenditure, and consequently FOR which is 25% of fixed expenditure, will apply to all Investment Firms subject to the Fixed Overhead Requirement, i.e. IFPRU Limited License and Limited Activity Investment Firms, BIPRU Firms, UCITS Firms and AIFMs.

  • The extent to which, under the existing FCA’s basis of determining fixed expenditure, a Firm deducts certain ‘variable/non-guaranteed’ expenditure, will dictate whether this new basis will result in a higher FOR.

  • Inevitably, there appear to be a number of unclear elements which, importantly, include:

  • What does it mean when it says a Firm may deduct ‘non-recurring expenses from non-ordinary activities’ – what, precisely, are ‘non-ordinary activities?’

Note: the existing Accounting Standards, for example UK GAAP’s FRS 3, does not clarify, sufficiently, the difference between Ordinary and non-Ordinary expenditure.  Could, for example, expenses in relation to ‘non-ordinary activities’ be classified as exceptional expenses?

  • Although the EBA’s document does not expressly say this, it may be inferred where a Firm, for example, ‘guarantees Drawings’ to Partners or Members, that these may well need to be included as a fixed expense.  The EBA’s analysis of Question 2 (on page 20 of the Draft RTS) which deals with similar circumstances, requires contractually guaranteed payments to be treated as Fixed Expenditure.

  • Both of these points require clarification so that Firms may proceed confidently.

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