Capital Requirements Directive 4: consultation on country-by-country reporting

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1 CBCR consultation Financial Services Group Floor 1, Red HM Treasury 1 Horse Guards Road London, SW1A 2HQ CBCRconsultation@hmtreasury.gsi.gov.uk 18 October 2013 Dear Ali, Capital Requirements Directive 4: consultation on country-by-country reporting Introduction The Investment Management Association (IMA) is the trade body for the UK asset management industry, representing around GBP4.5 trillion of funds under management. Its member firms include managers of a wide range of asset classes for a wide range of clients, including institutional funds, authorised unit trusts and open ended investment companies. We welcome the opportunity to comment on the latest consultation Key messages As stated in paragraph 1.5, there are other initiatives to improve transparency. We believe that these developments should be coordinated. Our members that are in scope of the Capital Requirements Directive 4 are essentially limited license investment firms, but also some limited activity investment firms. They merely act as agents for their clients. Their activities do not extend to the provision of credit, the acceptance of deposits or dealing on their own account. Therefore, a proportionate approach should be applied to them. As Article 89 is in the Directive, which requires national implementation, unlike the directly applicable Regulation, this allows Member States some discretion. We believe 65 Kingsway London WC2B 6TD Tel:+44(0) Fax:+44(0) Investment Management Association is a company limited by guarantee registered in England and Wales. Registered number Registered office as above.

2 that the Treasury should exercise this discretion and limit the scope to banks and investment banks. Sections 2.5 and 2.6 of the consultation refer to the global systematically important financial institutions (SIFIs). These institutions are specified as banks. This again suggests that the rules are targeted at banks rather than limited licence investment firms. The concept of proportionality is inherent throughout CRD IV. As limited license firms can only perform activities that are less risky and less complex than activities performed by credit institutions or full scope investment firms, we do not believe that it is necessary for limited license investment firms to have the same level of reporting as credit institutions and investment banks. The reporting requirements are for financial information nature. The information is to be published as an annex to the financial statements. Some agency asset managers may be excluded from reporting financial information (FINREP) because they not part of a bank. They are not subject to Article 4 of the Regulation No 1606/2002. Also, section 6.2 asks firms to refer to the definitions for Financial Reporting (FINREP) templates. The Directive seems inconsistent. No investment firm received public money as the financial crisis took hold. Unlike banks, which are regulated in accordance with their balance sheets systemic risk to the economy, whereas limited licence investment firms, which operate on an agency basis and do not trade their balance sheet, are prudentially supervised accordingly, ensuring they can meet their liabilities as they fall due and are able to wind their business up in an orderly manner without detriment to their clients. Therefore, these investment firms are unlikely to need public money. Conclusion The IMA looks forward to working with the Treasury to develop a framework that is appropriate and effective for all stakeholders. Annex 1 to our letter contains our formal response to the consultation. We hope that you will find our comments useful. Please contact me by way of (ihenry@investmentuk.org) or telephone on (00 44) (0) should you require further information. Yours sincerely, Irving Henry Prudential Specialist Investment Management Association 2

3 Annex 1 Question 1: Do respondents believe that it would be proportionate to apply the CBCR rules to all institutions captured by CRD4? If not, please describe what specific difficulties arise for particular categories of firms, and what approach you believe would be more proportionate whilst complying with Article 89. We believe that this requirement is aimed at banks, i.e. credit institutions and major investment firms that deal on their own account, the EUR 730k firms, and/or firms that pose systemic risk, so the rules should not be rolled out beyond them. If a firm operates in one country only, it should be exempt from the requirements or be able to state that it operates in one country only. Question 2: Do respondents agree that the CBCR requirement should apply equally to UK subsidiaries and to UK branches of institutions which are established in third countries? The rules should apply to the institutions detailed above, including their subsidiaries and branches. We agree with the Treasury that holding companies are not institutions, as defined in CRD IV/R and should, therefore, be exempt. Question 3: Which approach to consolidation (prudential or IFRS accounting) do respondents believe is more appropriate? One solution would be to allow firms to agree on the appropriate approach, either prudential or IFRS accounting, the latter to be in line with financial reporting, with their supervisors. Any change, either at the initiative of the firm or mandated by its supervisor, should be notified to the other party well in advance. Paragraph 3.2 requires disclosure from institutions and their subsidiaries and branches. This should be considered when the Treasury finalises the rules. Paragraphs 3.4 and 3.5 are not clear as they extend the scope to holding companies. We believe that consolidation, as per Article 89 of the Directive, means from the institution down, not up to the holding company, ensuring consistency with paragraph 3.2. If consolidation is required at from the institution down, there should be one set of disclosures, aggregated for the CRD IV/IFPRU firms in the group. It may not be appropriate to include the disclosures in the holding company s accounts as they may cover part of the group and would be inconsistent with other disclosures which will be on an accounting consolidation basis. Such disclosures could be published, which would exempt operating companies if they are in the disclosure, with an indication where the disclosures can be read. The approaches to consolidation are not appropriate. Paragraph 3.3 refers to the definition of consolidation in Article 4 of the Regulation, but then requires consolidation 3

4 of all institutions and financial institutions that are its subsidiaries. Not all of the firms that are in the scope of CRD IV/IFPRU are subject to IFRS. Question 4: Do respondents believe the above approach for reflecting consolidation adjustments is satisfactory? If not, please describe an approach that you believe would be more suitable. Yes. This is satisfactory. Question 5: Do respondents agree that the appropriate definition of the term establishment in this context should be both subsidiary and branch? We believe that establishment should mean a material subsidiary only. A branch has no legal personality. It would be a significant burden on firms to separate, in a meaningful way, data within the same legal entity. In many circumstances, costs and revenue may not be easily attributable to parts of the same firm. Question 6: Do respondents think there should be a standard template for disclosures? A government standard template could be helpful to align practice, but some firms may want to provide their data in different formats and, in some cases, with additional explanations. A standard template in that case would be too restrictive. There should be flexibility to allow for narrative and reconciliations where necessary. As above, if a firm operates in one country only, it should be exempt from the requirements or be able to state that it operates in one country only. Question 7: Do respondents agree with the above approach? If not, please describe an approach that you believe would be more suitable. We agree with the above approach. If it is appropriate for a firm to report these matters in its annual report, that format should be acceptable. Question 8: Can respondents identify any serious impediments to institutions reporting the relevant information by July 2014? Limited licence investment firms which are in the scope of CRD IV as, in essence, they have the permissions to hold client money, and safeguard and administer client assets. As CRD IV and the Alternative Investment Fund Manager Directive (AIFMD) roll out over the next year, many firms will be restructuring their activities, often due to the fact that they either don t need to hold client money, or the permission to do so has never been or is no longer exercised. In addition to the permission issue, many firms are waiting for the FCA to opine on consolidation and (the test of) significance. Firms in the scope of CRD IV will have to report under CoRep and possibly FinRep, both onerous and expensive. The reporting requirements in CRD IV/R are based on the calendar year. Not all firms report according to that. As per the European Banking Authority s (EBA) standards on reporting, the Treasury should allow for the firms own reporting year. 4

5 Question 9: Do these auditing requirements pose any difficulties? It is worth noting that the first disclosures may not be happening at the same time as a set of annual financial statements, so there would need to be a separate audit, with related costs. This cost is likely to be disproportionate to the public good created from it. Question 10: Do respondents agree with the above definition of turnover? Yes, we agree with the definition. Paragraph 6.3 s definition is appropriate for banks/credit institutions, including their subsidiaries and branches, but not limited licence investment firms. Question 11: Do respondents agree to limit the scope of tax on profit and loss to corporation tax payments? This measure of tax ignores the total tax contribution of the entity, which will be higher than pure corporation tax. The outcome is that readers are likely to assume that corporation tax is the ONLY tax an entity pays, while the reality is completely different. Therefore, it is misleading. Therefore, we suggest that in-scope entities should disclose only their total tax contribution. Question 12: Do respondents agree that disclosures should be reported on a cash-paid basis? The reporting of tax on a cash paid basis sounds easy, but reconciling this in a meaningful way to accounting profit is likely to be complex and confuse readers. There is an obvious timing difference between the tax due on the reported turnover and the cash paid for tax due. Numerous tax adjustments including group relief and brought forward losses will skew the cash tax paid in a year. Presenting the financial information this way could be very misleading to readers of the country by country reporting information. A more sensible approach would be to report the tax due. In additions to the questions raised by the Treasury, we would like the following clarified: The consultation does not make clear which entity would be required to report the financial information. Paragraph 2.2 suggests that the CRD IV/IFPRU entity specifically should be reporting the information on a consolidated basis and not the parent company of the CRD IV/IFPRU entities in a group. Article 89 requires that institutions must disclose the relevant information from 1 January 2015 annually. However, it does not say which financial year the information must relate to. 5

6 Question 13: Do respondents agree that using the existing method for corporation tax attribution ensures minimal additional compliance burdens with respect to disclosure by UK branches of third country institutions? Yes, we agree. Question 14: Do respondents agree with the above definition of public subsidies? Yes, we agree. Question 15: Can respondents outline how the new reporting requirements will differ from what they are currently required to report and what, if any, additional information is required. Firms do no not have to report these details in all of the jurisdictions where they operate. 6