BBA feedback on updated FINREP technical standards of 15 March 2013

Transcription

1 Faridah Pullara Prudential Regulatory Authority Bank of England 20 Moorgate London EC2R 6DA 03 June 2013 Dear Faridah, BBA feedback on updated FINREP technical standards of 15 March 2013 The BBA has held a number of meetings with our members regarding the EBA s update on the technical standards on supervisory reporting requirements regarding FINREP on 15 March Please find attached to this letter a copy of the letter we sent to the EBA detailing our key concerns around FINREP. The BBA would also ask the following questions of the PRA: Could the PRA confirm to what extent will the PRA have national discretion over the implementation of FINREP? Could the PRA provide further details on how it plans to use the data? Furthermore, is it likely to be published, and if so can the PRA provide further details on the due process? Can the PRA confirm to the industry its plans for testing GABRIEL, particularly with regards to XBRL? The PRA must consider that firms will need an absolute minimum of 4 month s notice prior the implementation date in order to undergo the necessary system changes and testing. Can the PRA confirm whether they will be undergoing a consultation process on FINREP? The BBA is very keen to work with the PRA with regards to the implementation of FINREP reporting. We would be delighted to provide any assistance we can to the PRA in the future. Yours sincerely, Robert Driver Policy Advisor Prudential Capital & Risk robert.driver@bba.org.uk Tel:

2 2 Mr Wolfgang Strohbach European Banking Authority Tower 42 (Level 18) 25 Old Broad Street London EC2N 1EX 03 June 2013 Dear Mr Strohbach, BBA feedback on updated FINREP technical standards of 15 March 2013 The BBA has held a number of meetings with our members regarding the EBA s update on the technical standards on supervisory reporting requirements regarding FINREP on 15 March Please find the annex attached to this letter which details our findings and comments. The BBA is aware that the EBA is working to a very challenging timetable in order to meet its objectives for FINREP, and there are many technical issues that will need to be resolved. Nevertheless, the sooner we can have some answers to what is detailed in this letter, the more time firms will have to implement the necessary changes to their systems which will enable them to provide you with the timely, accurate and relevant data that you require. Bearing this in mind, we would ask the EBA to pay particular attention to our suggestion for the completion of certain templates on a best efforts basis. The BBA would be delighted to provide any assistance we can in this matter, whether it be holding meetings to discuss points of particular difficulty, or seeing if we can find members to volunteer to help with any queries you may have. Yours sincerely, Robert Driver Policy Advisor Prudential Capital & Risk robert.driver@bba.org.uk Tel:

3 3 Annex: BBA feedback on updated FINREP technical standards of 15 March 2013 General issues Level of reporting The industry was working on the basis that the requirements would apply at the regulatory consolidated group level only, and so capability to support sub-group reporting was not incorporated into the original specification and therefore was not built into systems under development. According to CP 50, depending on the timing of its finalisation, the application date regarding financial information on an individual level may be later than for the requirements laid down in this ITS Based on this it would be unreasonable to expect firms to report FINREP for unconsolidated groups as well. In a situation where an institution is in scope for FINREP is not the ultimate parent of the financial/mixed holding group, can the EBA clarify at which level FINREP is required? The CRR appears to imply the requirements would apply only at the financial/mixed holding group level. Credit institutions or investment firms The industry has been working on the basis that the requirements would only apply to credit institutions as specified by CP50. Can the EBA clarify that it is not intending to change this scope without consultation, as stated within CP50? For certain groups the distinction between credit institutions and investment firms is significant and reliance had been placed upon CP50, such groups would not be in a position now to comply with FINREP with effect from 1 Jan Templates to be completed on a best efforts basis There are a number of templates which are either complex or firms will find particularly challenging to implement. We would highlight these templates as 3.1, 3.2, 5.1, 7, 8, 12, 13, 14, 17, 21 & 31. We would ask the EBA to consider accepting these templates on a best efforts basis for a period of 18 months from commencement of FINREP reporting. (iv) Granularity FINREP as it stands asks for a very wide range of data at a granular level. It will be highly onerous to report much of this information. An example of this is the template on group structure, which is excessively detailed for a quarterly report. It is also unclear how it the data will be used; the EBA needs to clarify its intentions of use. An example of this would be fair value reporting. The current format is very granular, and firms do not record their data in this way. It would be helpful if the EBA could explain why they want this level of granularity as it will help firms ensure they understand the EBA objectives and adapt their systems accordingly

4 4 (v) Link between IFRS and FINREP Can the EBA confirm how they will approach any future changes in IFRS be reflected in FINREP? Although they should be aligned now, there are many instances where the FINREP proposals are not properly aligned with IFRS. Where there is ambiguity, we would recommend alignment with IFRS as a default position. For example, how does the EBA intend to align fair value reporting requirements with IFRS 7 and 13? We would also request the EBA aligns its reporting frequency requirements with those of IFRS. Can the EBA also clarify how it will deal with the extension of IFRS within the EU? Specifically, from 1 Jan 2015 UK GAAP will be moving to a framework based upon IFRS. As a result many UK consolidated groups will be adopting IFRS under Regulation (EC) 1606/2002. Will this bring such consolidated groups also into the scope of FINREP? In regards to the adoption of IFRS, we strongly recommend the concept of materiality is acknowledged as a basis of preparation for FINREP. (vi) Frequency of reporting There are cases where instances where current industry practice is to report annually, but the proposals may require more frequent reporting, for example, actuarial reports for pension schemes & revaluation of investment properties. It would represent a considerable additional burden to collect, review and submit these quarterly, especially where valuations are required to make them meaningful. We do not believe this is practical, nor can we see any benefit in more regular reporting. (vii) Potential sanctions Can the EBA confirm what action it is likely to pursue if firms cannot complete any of the templates, or further to this any individual parts of the template? (viii) CP50 The updated March guidance contains new references but templates refer back to CP50 so the two do not match; the EBA needs to update this. (ix) Future interaction with the EBA Could the EBA confirm what provisions they will put in place for interacting with the industry with regards to the ongoing implementation and development of FINREP reporting? For example, will the EBA have on their system for submitting questions on their website, and if so when this will start? General issues regarding templates There is an issue with templates in part 5 not complying with CP50. Can the EBA confirm its rationale for this? Could members provide more detail on this? Reporting of associates under the Prudential scope: the level of granularity of data required when proportionally consolidating financial associates in FINREP exceeds what is currently available. Some countries have legal restrictions on sharing such information. The EBA needs to take this issue into consideration when drafting the final templates.

5 5 (iv) (v) (vi) Changes in fair value due to changes in credit risk [Multiple tables]: FINREP requirements exceed those of IFRS mandating the isolation and reporting of this more pervasively, and at a more granular level. The calculation itself is a challenge given the granularity. Can the EBA confirm how firms should approach this issue? Can the EBA confirm what currency firms should reporting be in, and to what scale (i.e. thousands, millions etc)? For firms that do not currently use NACE codes, and would not be in a position to map over their current codes, what does the EBA recommend these firms do? Counterpart definitions: could the EBA please provide more detailed guidance on the definition of counterparties? Issues concerning multiple tables: (iv) (v) 3.1, 3.2, 29.1, 17.5, 11.2 : Could the EBA explain its rationale for Product type split for CVA? 16, 30 ( Definition of Key management personnel): do banks need to confirm the definition of key management of the institution or its parent? The template currently refers to IAS It is unclear whether there is a choice to report the entity s key management related party transactions or the parent or both? Also, it is not clear whether parent is defined as immediate parent entity or ultimate parent entity. We would point to the IAS requirement to disclose information with related parties is based on that information being necessary for users to understand the potential effect of the relationship on the financial statements. We would expect that this criterion can also be applied for FINREP reporting. For example where KMPs have loans, deposit, credit card etc. balances with the bank in the ordinary course of being a customer that such information is not necessary to the understanding of the financial statements. 4,9: Do "Mortgages" in FINREP include 1st and 2nd lien? Does row 300 include personal loans which are not reported as mortgages? 1 &14.1: The heading cash and cash balances at central banks is broken down into (a) cash in hand, (b) cash balances at central banks and (c) other demand deposits with credit institutions. The third element seems to introduce a definition of cash equivalents into a number described as cash which will lead to a difference from both the cash line on the statutory balance sheet and the cash and cash equivalents used in the IFRS cash flow statement. Can the EBA explain its rationale behind this If these statements are for IFRS filers, would it not be better to be consistent with filed IFRS accounts? Tables 10 and 14: The geographic requirement in respect of every country by location of customer where that is over 0.5% of the total is very onerous and the value of this degree of precision is unclear. Could the EBA follow IFRS8 and use large regional buckets, or at least adopt a more achievable threshold for major countries? Also, the definition of a country will need to be precise if that threshold is to be applied.

6 6 (vi) (vii) (viii) (ix) 3.1, 3.2, 11.2, 29.1: Rationale for Product type split for Change in Fair Value due to changes in credit risk: given that credit risk changes are counterparty driven, can the EBA confirm its thinking behind requiring further product type split? 3, 5: This table requires the inclusion of accrued interest as part of the carrying amount of financial assets / liabilities. This is different to the treatment of accrued interest under IFRS, where it is reported under prepayments and accrued interest for assets and accrual and deferred income for liabilities. We would suggest aligning the reporting of accrued interest in these tables with IFRS. 3.1, 3.2 & 5.1: These tables require the reporting of accumulated changes in fair value due to credit risk for debt securities, loans, deposits and derivatives. We request the EBA allow the presentational policy adopted for external reporting to be permitted. We recommend specification on the calculation of fair value due to credit risk to be provided by the EBA to ensure consistency in reporting by institutions. Individual templates 1.1 There is a requirement to report accumulated other comprehensive income (presumably life to date). Can the EBA confirm why? This value will not agree to any combination of numbers on the statutory balance sheets and doesn't represent anything tangible. We already publish such other comprehensive movements quarterly. R010/C010 - Demand deposits: can the EBA provide clarification as to whether this balance should include other demand deposits which are currently included in the financial statements within Loans to Banks? Accumulated other comprehensive income: can the EBA confirm whether this meant to be OCI for the year only or cumulative all years? We are assuming the latter, although this means providing the cumulative balance on each OCI constituent, which is move than is required for IFRS reporting (OCI during the year is analysed, but not all elements of the b/f and c/f balances). If it aims at collecting information since IFRS adoption, this will significantly increase significantly the effort to reconcile to current IFRS disclosures that are YTD for the year (3,6, 9 and 12 months respectively). We would recommend alignment with IFRS. The guidance for : Reserves or accumulated losses of investments in subsidaries, joint ventures and associates states that it should include the cumulative P&L income and expense arising from [equity invested] investment in subs, JVs and associates, (not usually separately disclosed under IFRS). If this does have to be

7 7 stripped out of Retained earnings [b/f] then the guidance given on retained earnings (CRR 22 (28)) seems to be incomplete, because it defines retained earnings as being in line with IFRS definition, with no qualification for the adjustment relating to equity accounted I nvestments. Could the EBA confirm/clarify the requirement? Can the EBA confirm the rationale as to why every line on table 1.3 is not referenced to table 20, even though table 20 is an analysis of every line in table 1.3 per the validations? 2 In reporting instructions in part 2 section 18 there is an option regarding the treatment of the interest income earned on trading assets. We agree with this flexibility as it enables institutions to align its own reporting to FINREP reducing complexity and aiding reconciliation. We recommend that the EBA extends this principle to all components of trading income and expense. 3.1 Can the EBA provide further guidelines on how to isolate credit risk? Each bank takes a different approach to this so some basic guidelines with a view to promoting consistency would be beneficial. Due to the short term nature of trading positions (eg equities) we consider the split of positions by sector to be less relevant. We recommend the EBA reduces the disclosures required on trading books. 4.1 R280: Collateral: can the EBA clarify whether assets that are partially collaterised should be included? "Based on ITS definition: ""mortgage loans"" (row 280) are analysed from the viewpoint of collateral type; while ""credit for consumption"" (row 300) is analysed from the viewpoint of loan purpose. Are these 2 lines mutually exclusive? Consider an example - a loan taken by an individual for travelling which is collateralised by mortgage (be it first charge or second lien), such loan should then be reported under both rows 280 and 300. Is this understanding correct?" 6.1 R020/100/180: Can the EBA provide a further definition required on of which: defaulted with regards to off balance sheet exposures? 6.2 Can the EBA confirm whether this would this include sub-participations? 7

8 8 R020/080/140/200/260/280: can the EBA clarify the definition of economic hedge. Derivatives Trading - Column 040 requires "of which sold": For swaps how can one ascertain whether they have been bought or sold? Whilst some boxes in Column 40 have been greyed out to take account of the fact that swaps do not have a purchase or sale indicator, the subtotal rows still require completion eg rows 10, 70, 130, 250, 290. Can the EBA confirm whether these be greyed out too? Carrying amounts will be reflected gross therefore will not tie back to Templates 1.1 and 1.2 as unable to allocate netting down to a product level. 8 R / C : Can the EBA provide further explanation of what is required on Portfolio/ Cashflow value of interest rate risk? 10 C010: Can the EBA provide further explanation of what is required on what is defined by "Gross" carrying amount? 12 C100: Can the EBA provide a definition of servicing rights? 13 (iv) (v) (vi) Can the EBA explain its rationale to track life-to-date fair value changes on financial instruments? This table reports fair value hierarchy levelling data in categories that differ from what is reported under IFRS. Additionally, reporting of change in fair value for the period on Level 2 instruments and accumulated change in fair value by classification and instrument type by level (inclusive of all levels) is incremental to IFRS. Given the effort required in completing this information, we query why the information is required and whether the details cannot be aligned to IFRS (7 & 13) requirements. We recommend the EBA aligns the changes in fair value for current period and accumulated fair value for level 1, 2, & 3 assets and liabilities to IFRS (7 & 13) requirements. Can the EBA confirm what does change in fair value for the period represent is this just unrealised? Fair Value Hierarchy: financial instruments at fair value: Please clarify the terms "period" and "Accumulated". If period is YTD (as per the FAQ issued) does the EBA require Life to date for accumulated as firms will find this very difficult to track? Changes to fair value attributable to credit status is difficult for firms to implement from a practical perspective, especially at the specified level of granularity. We recommend the EBA remove the requirement to split out embedded derivatives on hybrid instruments not designated at fair value through P&L.

9 Rows 200 and 210: Can the EBA provide a definition for small and medium sized enterprises and commercial real estate? 14.6 Line 050 and 060: It is unclear how firms report the counterparty residence of a short position. For example, does residence of counterparty refer to the issuer or the holder of the security? We recommend the EBA removes this requirement These tables were not part of the August 2012 version of the FINREP templates. Tables 14.4 & 14.6 were removed from an earlier version and we would like to understand why they have been re-introduced. Given the significant effort and difficulty involved in completing these tables, can the EBA confirm the purpose of collecting this information? The preferred solution would be for all three tables to be removed and the position as at August 2012 to be reinstated. Alternatively, once we have a better understanding of why the information is required, we may be able to recommend a less onerous reporting process.this also presents a challenge both from a definitional perspective (consistency with COREP / NACE) and from a data quality perspective given the short notice. The fact that the disclosures have been reintroduced after being removed impacts the design and implementation of the solution at a very late time in the process. Clarification required - definition of residence: For an entity, is it the country of incorporation? For a branch, is it the country where the branch is located? For retail customers, is it the country of residence of the customer? Given the large number of retail customers, the significant effort involved in determining residence and the local nature of retail banking, would it be reasonable to assume that all retail customers adopt the same residence as the incorporated entity or branch? The exception to this would be off-shore banking centres and the sale of certain products targeted at non-resident customers. 14 and 16 Can the EBA confirm which entities are considered to by unconsolidated structured entities under a regulatory consolidation circle? The EBA should also note what is unconsolidated for regulatory purposes may not be for accounting purposes. 17.3

10 10 Gains and losses on Short Positions in the held for trading instruments category. As it is difficult identifying short positions due to the fact that they fluctuate and change daily. Can the EBA explain its perceived benefits for quarterly analysis? 20 The table asks for opening/closing balances on c100 profit attributable to the parent (i.e. profit for the year) and c110 interim dividends. Can the EBA explain their rationale for requesting a reconciliation of opening to closing balances when these items by their nature have no opening or closing balance? C010: can the EBA provide clarification required on accounting standard reference for "Capital" 21.2 Could the EBA please provide further clarity on the requirements for subordinated financial assets? 23.2 This table requires the disclosure of fair value assets into three IAS 39 categories of accounting mismatch, evaluation on a fair value basis and hybrid contracts. This disclosure is not required under IFRS and the information is currently unavailable. We recommend that given this is not an IFRS disclosure requirement it is removed Hybrid financial instruments not designated at fair value through profit or loss appear to need to have their embedded derivatives split out. Can the EBA explain why? Bifurcation is not required under IFRS if the whole instrument is fair valued and to do so would be very burdensome - and does not have an obvious value. 24 The definition of payment services provided in the instructions in annex III accompanying the templates is unclear as not conforming to industry practice. Furthermore, it is not industry practice to report asset distribution for insurance products as required in the table. Given the difficulty in obtaining this information, could the EBA explain the purpose of the information requested? We recommend that the EBA t provides further clarification on the definition of payment services and remove the reporting of asset distribution for insurance products. 26 This is not an IFRS requirement; can the EBA explain its rationale for including it? 27

11 11 Generally this information is only updated annually for the purpose of disclosures in the AFS. We recommend the EBA makes this an annual requirement or state that institutions would disclose latest available information Can the EBA provide clarification on definition of holding company (direct / indirect?) C180: Can the EBA provide clarification on whether this is goodwill in associates proportionately consolidated into the Regulatory Group? Group structure entity-by-entity. There are a large number of entities in the Group and information is generally reported by aggregating smaller entities into reporting units by country or region. This table requires information to be reported for each entity of the Group, which is an enormous task and we would question the value of the information collected. We recommend the EBA restricts the reporting requirement to the most material entities, with materiality pre-defined by the EBA e.g. principal subsidiaries in Pillar (iv) Can the EBA confirm if there any validation related to this table? I.E. Debt Securities as per table 1? At the time of writing there is no LEI code in common use. Can the EBA confirm their current position on this? Can the EBA provide further clarification required on the scope of this table and the term 'instrument by instrument'?