FCA CP13/6: CRD IV for Investment Firms

Transcription

1 Raul O. Elias Policy, Risk and Research Division Financial Conduct Authority (FCA) 25 The North Colonnade Canary Wharf London E September 2013 Dear Mr Elias, FCA CP13/6: CRD IV for Investment Firms 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. We also thank you for the wider engagement that the FCA has conducted with us throughout the process for our members. We appreciate that some issues remain to be determined. We found the consultation very helpful. It is for that reason that we have raised several questions. We would like to stress these questions should not be seen as a comment on the helpfulness of the consultation, but as a reflection of the consideration that it has allowed our members to have. Key messages Scope Certain investment firms are excluded from being subject to most of the full Capital Requirements Directive IV and Regulation (CRD IV/R), pending the review by end 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 These are essentially limited licence firms which execute orders and/or manage portfolios, without holding client money/assets (and provided that they do not also undertake investment services or activities numbers (3), (6), (7) and/or (8) in Section A and/or Ancillary Service number (1) of Annex I of MiFID). As the UK Regulated Activities Order (RAO) regime does not exactly match the MiFID Services and Activities, there is the potential for some firms to have some doubt as to whether they fall within the scope of, or not, CRD IV/CRR. Examples of this are as follows:- MiFID Ancillary Service B1 in the Annex 1 of MIFID is Safekeeping and Administration of financial instruments for the account of clients, including custodianship and related services such as cash/collateral management. Where an asset management firm does not hold any client money/assets, but acts as agent when dealing in derivatives contracts where collateral is required, we would assume that this is not within the scope of MiFID Ancillary Service B1 as the asset manager does not have custody of the assets and money. Consequently, firms might revise their permissions given the capital impact. We also assume that investment firms that have the permission to control, but not hold, client money are within the terms of the exclusion in Article 4 (1) (2) (c) of the CRR as they are not permitted to hold money belonging to their clients. In addition, the definition of BIPRU firm in the amended Glossary does not appear to be consistent with the language in Article 95 (2) of CRR or Chapter 6 (section 6.2 on page 49) of the narrative to the FCA Consultation. We believe that this could be easily corrected by striking out the words only one or more the following and replace with a the. If this is not amended, firms which have the permissions to receive and transmit orders and give investment advice, would not fall within the definition of a BIPRU firm and therefore would be within the scope of IFPRU. We think that this is a drafting error. For clarity, we also recommend the inclusion of a BIPRU firm within the listed of types of firm which are not an IFPRU investment firm under IFPRU 1.1.5R. In due course, there may be a benefit in clarifying in more detail how the scope of the CRR interacts with permissions. That could occur on a bilateral basis with firm supervisors. Alternatively, limited statements in public from the FCA may be helpful. Significance The test of significance also has a big impact on the scope of these rules. We believe that a single numeric trigger for significance may lead to a disproportionate application of the rules. Reliance should not be placed on any one factor. Size, by itself, does not necessarily mean additional risk and/or complexity. We also do not believe that the suggested metrics reflect in any way differences in firms based upon their nature or internal organization. Indeed, we consider that a wide variety of factors are relevant in 2

3 determining a firm s significance, including, but not limited to: (a) leverage and interconnectedness; (b) liquidity;(c) magnitude of financial system risk; (d) transparency and disclosure practices; (e) frequency of valuation of holdings; (f) the absence or presence of a primary regulator; and (g) the distinction between asset managers and asset owners. The determination of significance is a complicated analysis, which requires a variety of factors to be taken into account. Size or regulatory classification by itself should not be determinative. We consider that such a multi-faceted approach is supported by the likes of the Financial Stability Board (FSB), which has publicly stated that determination should be by the activities undertaken by the entity in question (rather than solely pursuant to the type of entity). Should a firm then be judged significant, risk mitigation should involve qualitative measures, not just an automatic increase in capital. Corporate Governance It is not clear whether the governance requirements detailed for significant firms should apply at a solo level or at a group level. We believe that to apply such rules prescriptively at a solo / subsidiary level could be unduly burdensome on firms and could be contrary to the proportional approach being taken by the FCA. Our assumption is that these requirements can be satisfied at a group level, but we would like this clarified. We assume that the restrictions on corporate directorships do not include the directorships of funds operated by the investment manager. Credit Risk With the removal of the simplified approach to credit risk, investment firms are likely to be required to maintain (where publicly available anywhere in the world) credit ratings on all of their clients (i.e. to risk weight trade receivables) or have some other appropriate assessment of credit risk. This is unduly burdensome given the limited exposure of an asset manager given the risks of acting in an agency capacity. We urge the FCA to include a review of this requirement as part of the review in , following implementation of CRD IV/R. Capital Buffers As the capital planning buffer is being retained, is there a need for the other buffers to even be considered for use? Limited licence investment firms do not take risks with their balance sheets. The macro-prudential buffers are more appropriate for firms that take deposits and provide credit. Treatment of Groups Under the FCA s implementation approach to CRD IV/R, a number of investment firms currently within CRD III will remain within that framework pending the review at end 3

4 2015. However, for some of these firms, the implications at a group level are uncertain. Assuming the regulatory purpose is to retain the status quo, it would be assumed that a group would wish to consolidate under BIPRU. Where the group has an entity within the scope of CRD IV/R, it raises the question whether there is any application of that directive and regulation at a group level. Whilst a waiver from consolidation may be requested under Article 19 (2) of CRR, there are areas of the text of CRDIV/R which may need clarification from the FCA. These include:- 1. Remuneration Codes - We note the requirements of Article 92 (1) of the CRD IV which discusses application of the remuneration provisions at group, parent company and subsidiary levels. However, our interpretation of SYSC A is that firms would apply the BIPRU Remuneration Code to group on a consolidated basis. 2. Public Disclosure - Application of CRR Articles 13 (2) and 431, and CRD IV Articles We would appreciate clarity that assuming a derogation from consolidation is granted under CRR Article 15, firms would not be required to meet the disclosure requirements as detailed in CRR Article 13 (2) and Part 8 (Articles ) on a group basis, as, under CRR Article 17, the requirements only apply on an individual basis. In respect of CRD Articles 89-90, the disclosure is required on a consolidated basis with the exception of the ROCE disclosure. As above, we are assuming that this would mean just at the level of the individual institution and its own subsidiaries rather than requiring a full group consolidation bringing in the non-crr parent company and its other non- CRR subsidiaries. 3. Application of SYSC 4.3A and SYSC 7 to Non-CRR Parent Financial Holding Companies - One effect of SYSC 12.1 is to apply SYSC 4.3A and SYSC 7 to non- CRR parent financial holding companies if it is a member of a consolidation group. In SYSC 4.3A the requirements to have a nominations committee only apply to CRR firms that are significant and significant IFPRU firms. Likewise the specific provisions in SYSC R make reference to a CRR firm that is significant. We assume the test for significant does not also apply to a non-crr parent financial holding company which is brought in under SYSC Internal Capital Adequacy Assessment (ICAAP) - Our analysis of Article 108 (1) of CRD IV is that a CRR firm will be required to prepare an ICAAP on an individual basis where the group has a waiver from consolidation. However, Article 108 (2) and (3) refer to parent institutions and parent financial holding companies required to meet the ICAAP obligations on a consolidated basis or on the basis of the consolidated situation of that firm. These are implemented in IFPRU in R R. Logically, we assume that a group would not be caught by these provisions on the basis that it has obtained a waiver from being a consolidation group for CRD IV/R purposes. CAD Article 22 groups and the investment firm consolidation waiver The proposed change to (2) appears to prevent a group with an IFPRU firm 4

5 from benefitting from an Investment firm consolidation supervision waiver, as per 8.4.1R and 8.4.9R (2). Is this a correct reading and must it be so? Pension Funds There appears to be no clear transitional provision within the consultation to enable a phased introduction of the deduction of pension fund deficits from own funds. For firms with a defined benefit pension scheme, a sudden introduction of this could be highly burdensome. Conclusion The IMA looks forward to working with the FCA to develop a framework that is appropriate and effective for all stakeholders. Annex 1 to our letter contains our formal response to the consultation, and Annex 2 further specific observations and questions arising from the proposals. 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 5

6 Annex 1 Q1: Do you agree with our overall approach to CRD IV transposition outlined in this section pending the Commission s review of the prudential regime for investment sector firms by the end of 2015? If not, please explain why not and what alternative you would suggest. We agree with the FCA s pragmatic approach and look forward to working with the FCA and its European peers on the Commission s review of the prudential regime for investment sector firms. There may be some aspects of UK CRD III implementing legislation which HMT should consider altering to avoid an unlevel playing field where conflicting circumstances arise between BIPRU Firms and IFPRU Firms post 31 December Q2: Given there are no proposed substantive changes to the existing Pillar 2 regime do you agree that existing GENPRU and BIPRU Pillar 2 guidance should be copied across to IFPRU? If not, please explain why not, including alternative approaches and the rationale for those approaches. We agree that existing GENPRU and BIPRU Pillar 2 guidance should be copied across to IFPRU. Q3: Do you agree with our initial view that, if possible and depending upon the decisions of the Treasury regarding the designated authorities, the discretions to exempt investment firms that are SMEs from the capital conservation buffer, and from the countercyclical buffer should be exercised? If not please explain why not. We agree with the FCA s initial view that, if possible and depending upon the decisions of the Treasury regarding the designated authorities, the discretions to exempt investment firms that are SMEs from the capital conservation buffer, and from the countercyclical buffer should be exercised. This said, we query the need for such buffers as limited licence investment firms do not take risks with their balance sheets. These buffers are more appropriate for firms that take deposits and provide loans. It would be helpful for the FCA to explain the relationship between CCB and CCyB, and existing ICGs granted, i.e. does ICG sit on top of the CCB and/or CCyB? Q4: Do you agree with our initial view that, in light of the review by the EU Commission of the prudential regime for all investment sector firms required by end 2015, that the discretion to accelerate the five year transition timetables for the capital conservation buffer, and for the countercyclical buffer should not be exercised by whoever is the designated responsible authority? If not, please explain why not including alternative transition approaches and the rationale for those approaches. We agree with the FCA s initial view that, in light of the review by the EU Commission of the prudential regime for all investment sector firms required by end 2015, that the discretion to accelerate the five year transition timetables for the capital conservation 6

7 buffer, and for the countercyclical buffer should not, for Investment Firms, be exercised by whoever is the designated responsible authority. As above, we query the need for such buffers as limited licence investment firms do not take risks with their balance sheets. These buffers are more appropriate for firms that take deposits and provide loans, but recognise that the buffers should only apply if such an investment firm is significant. Q5: Do you agree that the calculation of the Maximum Distributable Amount (MDA) should be submitted to the FCA within five working days? If not, please explain why not and propose alternative notice periods and the rationale for those notice periods. Firms may need more time, especially to validate data. Their reporting mechanics differ, especially if there are overseas elements to consider. There are overlaps with month end and consolidated quarterly reporting, CoRep and the new approach to credit risk. What is the rationale for five days? Is there a benchmark? Q6: Do you agree that where the firm fails to meet the Combined Buffer (CB) and has a Maximum Distributable Amount (MDA) in place, that firms must give a minimum of three months notice to create obligations or make payments or distributions that would otherwise be prohibited because of the requirement to have an MDA? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We are unsure of the FCA s rationale to take this approach. Whilst this approach would only apply to IMA members that are significant, this appears more appropriate for a firm that takes risks with its balance sheet, has a weak capital base and needs a capital remediation programme. Q7: Until such point as we are able to consult further on our future policy, do you agree that the CPB should be maintained and added to the Pillar 2A charge to the extent that there is no identifiable double counting? If not, please explain why not including alternative transition approaches and the rationale for those approaches. We agree that the CPB should be maintained and added to the Pillar 2A charge to the extent that there is no identifiable double counting. We welcome the FCA s recognition of double counting as an issue to beware of. Q8: Do you agree with our proposed approach on stress testing and to report results annually in the case of those firms that are significant pending the EBA guidelines on this matter? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We think that the FCA s proposed approach on stress testing and to report results annually in the case of those firms that are significant pending the EBA guidelines on this matter is reasonable. 7

8 Further to engagement with the EBA, we would welcome further information as to how the FCA will interact with the EBA in this regard, particularly as limited licence and limited activity investment firms are not the EBA s core constituency. It would be most helpful if the FCA were to arrange a forum with the EBA and limited licence and limited activity investment firms. Q9: Do you agree with our proposal to continue the UK s liquidity regime (including ILAS) until binding minimum standards for liquidity coverage requirements are implemented in the CRR in 2015? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We believe that the current approach, which differentiates between business models and allows for modifications if an investment firm proves that it operates in a simple manner, should continue until After that date, which may coincide with the review mandated by CRD IV, a proportionate approach should remain. Q10: In your view, is this approach proportional and risk based? If not, which category or categories of firms (within the solely FCA regulated CRD IV population) do you perceive as appropriate to submit CRD IV liquidity reporting forms from 2014 and be subject to binding liquidity requirements from 2015? This is linked to the range of permissions and passports held by firms and their significance. We would expect our members to be outside the regime. Q11: Do you agree that these proposals meet our approach of applying the transitional provisions whilst ensuring that we do not materially reduce the standards of the current FCA framework? If not, please indicate why not stating your reasons and your alternative proposal. Under Article 36 (1) (e) of the CRR, institutions are required to deduct defined benefit pension fund assets on the balance sheet of the institution from Common Equity Tier 1 items. For firms within the scope of CRR and with such pension scheme arrangements, this could present a material change to their capital adequacy requirements. Under the proposed transitional provisions in Table 9 of the consultation, the FCA is proposing to apply a 100% rate with effect from January We note under Article 469 (1) of the CRR that for the period from 1 January 2014 to 31 December 2017, the applicable percentages set out in Article 478 can be applied to deductions of defined benefit pension scheme assets. The FCA s intended approach was only not to apply the minimal pace of transition approach where it would not be materially detrimental to firms. Therefore, we suggest that to ensure that firms have the ability to smooth their transition into a deducting pension scheme assets, the FCA uses its discretion to apply a percentage rate in each of the years 2014 to 2017 starting from the 20% rate for We acknowledge that some issues may be a matter for HM Treasury. Q12: If appropriate, please can you provide a list of all capital instruments used by partnerships and LLPs that, in your opinion, satisfy the criteria outlined in article 28 of the CRR? 8

9 In accordance with the existing requirements of GENPRU R, the list of eligible instruments must include eligible partnership capital which means a partner s account into which capital contributed by the partners is paid and from which under the terms of the partnership agreement an amount representing capital may be withdrawn by a partner only if:- a) He/she ceases to be a partner and an equal amount is transferred to another such account by his/her former partners or any person replacing him/her as their partner; b) The partnership is wound up or otherwise dissolved; or c) The firm has ceased to be authorised or no longer has a permission to conduct regulated activities. This is essential in order to enable the legitimate business structure of a general partnership to continue in existence under the prudential regime for such firms. We also note in proposed rule R of IFPRU that a firm must notify the FCA of its intention, or the intention of another member of its group that is not a firm included in the supervision on a consolidated basis of the firm, to issue a capital instrument at least one month before the intended date of issue. We have two comments on this text:- 1. The inclusion of the word not is inconsistent with IFPRU R and appears illogical as it requires notification for instruments issued outside the consolidation group; and 2. This should not apply to eligible partnership capital which by its nature would result in multiple notifications to the FCA of routine changes to the partnership capital. Notification should only be required if there was a proposed overall reduction in eligible partnership capital. Q13: Considering the legal constraints in respect of EU regulation and in the context of internal models, do you agree to our proposal to use guidance where appropriate while explaining the operational implications of the changes via targeted communications? If not, please explain why not and propose alternative approaches and the rationale for those approaches. No comment. None of our members use internal modelling. Q14: Do you agree with our approach to these exemptions? If not, which exemptions under Article 400 (2) of the CRR do you believe should be included, or should not be included, which is contrary to the proposed amendments? We agree with the FCA s approach to exemptions. Q15: Do you agree with our proposal not to exercise the exemption in article 400 (2) (k) of the Regulation? If not, please explain the reasons why not. 9

10 No comment. It is unlikely that our members have exposure to recognised investment exchanges. Q16: Do you agree with this approach in relation to articles 395 and 396 of the Regulation? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We agree with the FCA s approach in relation to Articles 395 and 396 of the Regulation. Q17: Do you agree with the approach of allowing firms to report a quarterly leverage ratio as opposed to a three monthly ratios averaged for the quarter? If not, please explain why not and propose alternative approaches and the rationale for those approaches. As discussed above with regard to buffers, we would not expect there to be a need for a leverage limit as limited licence and limited activity investment firms do not take risks with their balance sheets. This ratio is more appropriate for a firm that takes deposits and provides loans. Q18: Do you agree with our proposal for an interim list of recognised exchanges pending the ESMA ITSs including our approach for third country stock exchanges? If not please propose changes to the list explaining the rationale why. We think that the FCA s proposal for an interim list of recognised exchanges pending the ESMA ITSs including our approach for third country stock exchanges is sensible. The list should evolve. Q19: Do you agree that this approach in relation to the discretion in article 99 of the Regulation is proportionate and risk based? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We agree that the FCA s approach in relation to the discretion in Article 99 of the Regulation is proportionate and risk based. Q20: Do you agree with our proposal to exercise the discretions in articles 124(2) and 126(3) of the Regulation to maintain a risk weight of 100% for exposures to UK commercial real estate, as it is currently the case? If not, please explain why not and propose alternative approaches and the rationale for those approaches. No comment. None of our members holds real estate assets. On a related note, we think that it is a pity that the simplified credit risk calculation is no longer permitted. We believe that the approach should be revisited in the Commission s review of the prudential regime for investment sector firms. The new approach means more work, for example due diligence on individual counterparties and reporting under CoRep. This may be appropriate for firms that take risks with their balance sheets, but is of little value to limited licence and limited activity investment firms. 10

11 Q21: Do you agree with our proposal to publish an objective criteria identifying which firms these policies refer to? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We do not agree with the proposed definition of significant within IFPRU1.1.20R. We do not believe that the suggested metrics reflect in any way differences in firms based upon their nature or internal organisation. For example, the application of certain requirements may differ for a general partnership structure of a firm to that which is a publicly listed company. In line with other areas of CRD IV/R, we believe that the FCA should retain the language of the Level One text to provide sufficient flexibility to assess the merits of each set of circumstances presented. It would appear to be too narrow to define significant based upon five quantitative metrics and potentially troublesome for firms which may over time drift above or below any one of the measures. However, if quantitative metrics are used, exceeding a single threshold from a range of thresholds may give a very narrow view. Other measures to determine the size/significance of firms generally rely on exceeding two or more measures to trigger applicability for example 2003/361/EC concerning the definition of micro, small and medium-sized enterprises. Q22: Do you agree that the combination of these metrics sufficiently capture the size, internal organisation and nature, scope and complexity of an investment firm s activities? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We do not believe that size alone has an impact on risk. Also, it s not clear how complexity is determined. Q23: Do you agree that these thresholds are appropriate? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We do not consider that the current proposed single numeric trigger for significance is appropriate. Size, by itself, does not necessarily mean additional risk and/or complexity. Indeed, we consider that a wide variety of factors are relevant in determining a firm s significance, including but not limited to: (a) leverage and interconnectedness; (b) liquidity;(c) magnitude of financial system risk; (d) transparency and disclosure practices; (e) frequency of valuation of holdings; (f) the absence or presence of a primary regulator; and (g) the distinction between asset managers and asset owners. Client Money/Assets are not relevant criteria for significant firms. They are off-balance sheet activity. For all firms, these activities already have a robustly defined set of governance arrangements to support the complexity of the firms engaged in these activities without reference to the size of activities, namely the CF10a function and external audit oversight. We do not believe that adding further risk mitigation through Corporate Governance policies will provide incremental benefits to the costs incurred. The size of the activity does not reflect the complexity. Q24: Do you agree with our proposal to define a firm as a significant firm if it exceeds at least one of these thresholds? If not, please explain why not and propose alternative approaches and the rationale for those approaches. 11

12 We believe that a firm should be classified as significant if it exceeds more than one of these thresholds. The triggers should not be taken at face value. The thresholds should be used as guidance and the basis of a dialogue, including the type of firm, between firms and their regulators. We note that the Prudential Regulation Authority (PRA) proposes to use quantitative thresholds as indicators, rather than presumption, and the basis for discussion between a firm and its supervisor. In this instance, we support consistency between the FCA and PRA. Q25: Do you agree to our proposal to exercise the discretion in Article 95 (2) of the CRR to retain current CRD rules in force on own funds requirements (Pillar 1) for BIPRU firms keeping the status quo pending the EU-wide review of what is an appropriate prudential regime as a whole for firms in the investment sector in 2015? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We agree with the FCA s proposal to exercise the discretion in Article 95 (2) of the CRR to retain current CRD rules in force on own funds requirements (Pillar 1) for BIPRU firms keeping the status quo pending the EU-wide review of what is an appropriate prudential regime as a whole for firms in the investment sector in However, the definition of BIPRU firm in the amended Glossary does not appear to be consistent with the language in Article 95 (2) of CRR or Chapter 6 (section 6.2 on page 49) of the narrative to the FCA Consultation. We believe that this could be easily corrected by striking out the words only one or more the following and replace with a the. If this is not amended, firms which have the permissions to receive and transmit orders and give investment advice, would not fall within the definition of a BIPRU firm and therefore would be within the scope of IFPRU. This goes beyond the Level One text and is clearly not the intention of the FCA. For clarity, we also recommend the inclusion of a BIPRU firm within the listed of types of firm which are not an IFPRU investment firm under IFPRU 1.1.5R. Q26: Do you agree to our proposal to retain current CRD rules in force on Pillar 2, Pillar 3 and systems and control requirements in SYSC (including the Remuneration Code) for BIPRU firms keeping the status quo pending the EUwide review of what is an appropriate prudential regime as a whole for firms in the investment sector in 2015? If not, please explain why not and propose alternative approaches and the rationale for those approaches. We agree with the FCA s proposal to retain current CRD rules in force on Pillar 2, Pillar 3 and systems and control requirements in SYSC (including the Remuneration Code) for BIPRU firms keeping the status quo pending the EUwide review of what is an appropriate prudential regime as a whole for firms in the investment sector in Q27: Do you agree to our proposal to grant CRR-based permissions with effect from 1 January 2014 to those firms currently holding an eligible waiver related to a GENPRU / BIPRU rule listed in tables 12 and 13 provided the conditions in paragraph 7.6 are 12

13 met? If not please explain why not and propose alternative approaches and the rationale for those approaches. No comment. Q28: Do you have any comments on our cost benefit analysis? No comment. Q29: Do you agree with our proposed approach to the national discretions? If not, please indicate the areas of national discretion where you disagree with the FCA proposal stating your reasons and alternative proposal. We agree with the FCA s proposed approach to the national discretions in the main. However, we do ask for clarification on the treatment within the transitional arrangements of GENPRU 1.3.9R. Is the FCA applying national discretion on GENPRU 1.3.9R as a whole or just GENPRU 1.3.9R (1)? If it only relates to GENPRU 1.3.9R (1), then where and how is the FCA proposing to address the rule requirements under GENPRU 1.3.9R (2) (b) in respect of defined benefit liabilities for occupational pension schemes. However, if indeed the discretion relates to GENPRU 1.3.9R in its entirety, then how should firms apply the transitional provisions for CRR Article 467 (1) noted in Table 9 (page 34) in relation to GENPRU 1.3.9R (2) (b)? Also, with reference to Table 9 is it the intention of the FCA to apply a figure of 60% from January 2015 in relation to the transitional provisions for CRR Article 467 (1) or should the figure be 40%? In the absence of transitional arrangements, the implementation of CRD IV would result in an immediate and material additional deduction from the capital resources of those firms that have a deficit funding plan in place that exceeds a five-year time horizon. Particularly in respect of limited licence investment firms, this impact would seem to cut across the stated aims of the FCA s overall approach, as set out in paragraph 1.21 of the consultation paper. Also, we seek clarification under Article 473 CRR. This Article indicated there will be transitional arrangements for pension fund accounting under IAS19 (IFRS). Does the FCA expect these transitional arrangements to be mirrored for FRS 17 (UK GAAP) accounting? Q30: Do you believe that there are any articles in the Directive or in the Regulation not covered in Annex 3 which would require the FCA to exercise its discretion as a CA? If so, what articles would you suggest and why? We believe that the coverage is reasonable. 13

14 Annex 2 1) On what basis has the FCA concluded that CPMI are IFPRU Firms and not BIPRU Firms from 1 January 2014? The basis of CPMI individual portfolio management is identical to the type of Investment Firm which will not be classified as an IFPRU Firm. It would seem that CPMI should remain subject to the same GENPRU provisions implemented with effect from 22 July ) Are BIPRU Firms from 1 January 2014 able to hold the Dealing in Investments as Principal with a Matched Principal Limitation remain BIPRU Firms? It appears that they can as per IFPRU ? However, this is in IFPRU, not the rules which apply to BIPRU Firms. The FCA is proposing guidance to this effect, i.e. whether box management equates to Dealing as Principal, in a revised version of Q63 in PERG Given that revisions have been proposed to Q63 in CP13/9 (see page 87 of Appendix 15 and page 87 of Appendix 16), it would be helpful to understand from the FCA what it is proposing in this regard. For example, the revision on page 87 of Appendix 15 could be read as suggesting that a UCITS management company is only subject to CRD IV when it undertakes safeguarding activities. 3) What is the practical difference in the CRR s definition of Investment Firm as per CRR Article 4.1 between? MiFID Activity B1 (in Annex 1 of MiFID; and At CRR 4.1 (2) (c) which are not permitted to hold client money or securities belonging to their clients and which for that reason may not, at any time, put themselves in debt with these client. 4) IFPRU (3) (c) permits the management of individual portfolio of investments in Financial Instruments Although it is claimed to be a MiFID Activity, A (4) of Annex 1 and as defined in Article 4 (1) (9) of MiFID being interpreted that way, MiFID Annex 1A does not seem to agree. CRR Article 95 (2) is interpreted to mean the following: (a) Article 95 (2) refers to Investment Firms referred to in 95 (1) which those are specifically not permitted to undertake: (b) Dealing on Own Account; and (a) Underwriting of Financial Instruments and/or Placing of Financial Instruments on a Firm Commitment basis ( Underwriting ). (b) Specifically this does not preclude Firms which are permitted to Safeguard/Administer Client Assets/Money. Article 95 (2) also includes those Investment Firms which are permitted to undertake: 14

15 (a) Execution of Orders on behalf of Clients; and (b) Portfolio Management. (c) But expressly this does not preclude Firms which are permitted to Safeguard/Administer Client Assets/Money. Therefore, does CRR Article 95 (2) simply permit a discretion to the UK to apply a different basis of calculating the Own Funds Requirement for Firms which are within CRDIV Scope, as they are permitted to Safeguard/Administer Client Assets/Money but are not permitted to Deal on Own Account or Underwrite, but are permitted to Execute Orders and undertake Portfolio Management? Article 95 does not appear to apply to what would now be classified as a BIPRU Firms as they would not be permitted to Safeguard/Administer Client Assets/Money, i.e. those Investment Firms completely out of CRD Scope from 1 January Is it, therefore, correct to say that the UK is free to apply any prudential regime it chooses to what will be classified as BIPRU Firms from 1 January 2014? That the UK is free to adopt the CRR Article 95 (2) discretion to apply a different Own Funds Requirement to IFPRU Firms which do Safeguard/Administer Client Assets/Money, are permitted to Execute Orders and undertake Portfolio Management, but do not Deal on Own Account or Underwrite? 5) Composition of the Risk Committee - Article 76 (3): The drafting of the Directive seems to suggest that the Risk Committee must be composed solely of Non- Executive Directors (NEDs). Further, the Directive implies that NEDs must be appointed to the Board. 6) "Member States shall ensure that institutions that are significant in terms of their size, internal organisation and the nature, scope and complexity of their activities establish a risk committee composed of members of the management body who do not perform any executive function in the institution concerned. Members of the risk committee shall have appropriate knowledge, skills and expertise to fully understand and monitor the risk strategy and the risk appetite of the institution. Firms from outside the UK rarely operate a Risk Committee composed solely of NEDs. We are taking the view that, with regard to these firms, anyone holding a Control Function (CF) (other than CF2) would be performing an executive function. Current risk committees are chaired by Chief Risk Officers (CF28), though membership doesn't include NEDs. 7) Nomination Committee - Article 88 (2): The drafting of the directive seems to suggest that the setting up of a nomination committee must be done at legal entity level. The preference is likely to be the establishment of a Group 15

16 Nominations Committee for third country firms. We assume that an arrangement at group level will suffice. This would follow the structure/positioning of the Compensation and Benefits Committees at third country firms which are composed of NEDs. 16