Response to consultation on draft RTS on the identification of a group of connected clients (GCC)
Go back
Is it unclear, whether the personal equality of members of the supervisory board has to be checked in a dualistic system as well. The identification of personal equalities between legal persons requires huge effort, if corporate structures (100 companies and more) between different control groups (between which economic dependencies are checked) are very large.
Examples would be required on how personal equalities (basically, no element of control between the owners and the company – no control at all between the management and the company) lead to economic dependencies (which additional conditions need to be met).
Moreover, it should be clarified in Art. 1 para 5, if the conditions laid down in Article 1 paragraph 5 are met in the case of companies, which have a licence according to the following regulations – since it can be assumed that in these cases the respective company is sufficiently segregated and insolvency proof:
UCITS acc to Reg. 2009/65/EC
AIFM acc to Reg. 2011/61/EU
ELIF acc to Reg. (EU) 2015/760
ESEF acc to Reg. (EU) 346/213
EVCF acc to Reg. (EU) 345/2013
Article 1 of these draft RTS sets out the circumstances where a single risk is deemed existing because of control, as in Section 4 of the GL. This shall be the case where two or more natural and/or legal persons constitute a single risk because one of them is required to prepare consolidated financial statements in accordance with national GAAP or IFRS.
As already mentioned above, some of the requirements of the existing GLs would become mandatory under the wording of the draft RTS. In the draft RTS, the wording “shall constitute a single risk” indicates that, in any case where there are consolidated financial statements, institutions have to form a group of connected clients. In our view, that goes too far because there are different possibilities as to why consolidated financial statements have to be set up and this would not take into account the particularities of the internal intra-group situation.
Only "fully consolidated companies" with a majority shareholding of more than 50% shall „automatically“ form a group through the control exercised. Questioning for indirect control or economic dependency can be done on the basis of the minor involved companies.
In addition, there is need for a lot of time and effort to scrutinize documents in order to correctly form groups of connected clients. Time and effort would increase significantly if Art 1 (1) would enter into force in the proposed wording and extent (Compliance cost to identify and maintain all relevant exposures for the large exposure reporting). The draft does not give due consideration to such costs which are also not taken into account in Part 5.1 on the cost-benefit analysis.
Moreover, national discretions have to be taken into account, where a consolidation required is based on banking law.
It should be clarified that a “supervisory consolidation” for certain purposes (e.g. credit institutions permanently affiliated to a central body according to Art. 10 CRR) should not be covered under Art. 1 (1). National law in various Member States defines and regulates associations according to Art 10 CRR and requires a consolidated financial statement. Thus, there is a contractual group but no control according to IFRS 10. (For instance, in Austria Para 30a (8) BWG stipulates that, for the purposes of full consolidation, the central organisation is to be treated as a superordinate institution and each assigned institution and, under certain conditions, each contributing legal entity as a subordinate institution.) In the absence of an ultimate controlling parent company, a consolidated presentation can only be prepared in the sense of a group of equals.
Ad Para 1 Lit. f: We do not have any concrete examples for lit. f (same source of funds to repay loans). In the example E6 we are not aware of the concrete flow of payments. Hence, the example E6 is not clear in relation to lit. f.
Ad Para 1 Lit. h: Where is the difference to lit. f?
In general, we think that it is important to have the possibility to explain, why certain listed circumstances or indicators nevertheless do not lead to a single risk. Banks may still face the problem that there is uncertainty on the extent to which arguments made to refrain from economic dependency are accepted. Moreover, the assessment whether an economic dependency exists can be time and resource intensive for banks.
In our view a separate section should be included on how to apply the connectedness at the individual level taking into account the particularities of intra-group situations and relations, instead of applying the consolidated approach to the solo level on a 1:1 basis.
However, there is a situation where additional explanation is necessary, namely, in Scenario E 2 Variation on baseline scenario (no direct exposure to source of risk). There is a need to form a GCC in case two or more entities are dependent on non-client. What remains unclear is how to approach in case when there is only one client of the reporting institution with economic dependency on non-client. The fact that there is no direct exposure to source of risk (entity A) has no influence on economic dependency of entity client (entity B) and all potential negative consequences it may encounter in case of negative developments of entity A.
Scenario E 8 is clear.
An example is missing with a 50:50 ownership, where neither P1 nor P2 exercises an influence on the companies concerned. In this case no person would have to be connected with the companies, since the ownership is not exceeding 50%. We ask you for reasons of clarity to add such an example. Optimally, it should also be clarified that if the ownership is 51:49, but according to the syndicate agreement the voting rights are 50:50, there is no connection as well.
1. defining of quantitative threshold of significant stake, or
2. additional descriptive guidelines regarding its easier identification
Question 1. Could you please indicate, if the approach of sections 4, 6 and 7 of the existing EBA guidelines, now transposed in the Articles of the draft RTS, remains sound and is implementable with no major challenge or unduly high costs. Please elaborate.
According to our understanding, there are no changes in terms of methodology or treatment of connected clients presented by this draft.Question 2. Have you identified any additional aspect(s) that would require clarification? In this vein, would you see the need for further illustrative examples (and if yes, on which precise situation or specific case)? Please elaborate.
With regards to control relationship, please refer to answers on Q3 and Q4. With regards to economic dependency, not all conceivable cases can be captured since economic dependency is always determined on the specific circumstances of each case. In that respect, the list of circumstances in Article 2 is correctly considered as non-exhaustive (as provided in preamble). Furthermore, please refer to answers on Q8.Is it unclear, whether the personal equality of members of the supervisory board has to be checked in a dualistic system as well. The identification of personal equalities between legal persons requires huge effort, if corporate structures (100 companies and more) between different control groups (between which economic dependencies are checked) are very large.
Examples would be required on how personal equalities (basically, no element of control between the owners and the company – no control at all between the management and the company) lead to economic dependencies (which additional conditions need to be met).
Question 3. After considering the circumstances set out in Article 1 that constitute a single risk by means of control, could you please indicate if the described circumstances are sufficiently clear? Please elaborate.
In Article 1, Para 3, the wording in (c) the natural or legal person has the right or ability to coordinate the management of one or more natural or legal persons, is not clear enough. The existing explanation of the same circumstance in valid GL GCC (Section 4 under vi.) provides more clarity: right or ability to coordinate the management of an entity with that of other entities in pursuit of a common objective (e.g. where the same natural persons are involved in the management or board of two or more entities).Moreover, it should be clarified in Art. 1 para 5, if the conditions laid down in Article 1 paragraph 5 are met in the case of companies, which have a licence according to the following regulations – since it can be assumed that in these cases the respective company is sufficiently segregated and insolvency proof:
UCITS acc to Reg. 2009/65/EC
AIFM acc to Reg. 2011/61/EU
ELIF acc to Reg. (EU) 2015/760
ESEF acc to Reg. (EU) 346/213
EVCF acc to Reg. (EU) 345/2013
Article 1 of these draft RTS sets out the circumstances where a single risk is deemed existing because of control, as in Section 4 of the GL. This shall be the case where two or more natural and/or legal persons constitute a single risk because one of them is required to prepare consolidated financial statements in accordance with national GAAP or IFRS.
As already mentioned above, some of the requirements of the existing GLs would become mandatory under the wording of the draft RTS. In the draft RTS, the wording “shall constitute a single risk” indicates that, in any case where there are consolidated financial statements, institutions have to form a group of connected clients. In our view, that goes too far because there are different possibilities as to why consolidated financial statements have to be set up and this would not take into account the particularities of the internal intra-group situation.
Only "fully consolidated companies" with a majority shareholding of more than 50% shall „automatically“ form a group through the control exercised. Questioning for indirect control or economic dependency can be done on the basis of the minor involved companies.
In addition, there is need for a lot of time and effort to scrutinize documents in order to correctly form groups of connected clients. Time and effort would increase significantly if Art 1 (1) would enter into force in the proposed wording and extent (Compliance cost to identify and maintain all relevant exposures for the large exposure reporting). The draft does not give due consideration to such costs which are also not taken into account in Part 5.1 on the cost-benefit analysis.
Moreover, national discretions have to be taken into account, where a consolidation required is based on banking law.
It should be clarified that a “supervisory consolidation” for certain purposes (e.g. credit institutions permanently affiliated to a central body according to Art. 10 CRR) should not be covered under Art. 1 (1). National law in various Member States defines and regulates associations according to Art 10 CRR and requires a consolidated financial statement. Thus, there is a contractual group but no control according to IFRS 10. (For instance, in Austria Para 30a (8) BWG stipulates that, for the purposes of full consolidation, the central organisation is to be treated as a superordinate institution and each assigned institution and, under certain conditions, each contributing legal entity as a subordinate institution.) In the absence of an ultimate controlling parent company, a consolidated presentation can only be prepared in the sense of a group of equals.
Question 4. Is the additional Scenario C 0 related to the determination of a group of connected clients by means of control, listed in Section 3.4.1 (Groups of connected clients based on a control relationship), sufficiently clear? Would you see need for further illustrative examples of a control relationship?
As defined by the regulator, Scenario 0 is a baseline scenario and thus the easiest case to encounter when determining the existence of control relationship. It would be useful to provide additional scenarios for other cases that are covered by Article 1 in paragraphs 2, 3 and 4 circumstances leading to GCC formation based on control.Question 5. After considering the circumstances set out in Article 2 that constitute a single risk by means of economic dependency, could you please indicate if the described circumstances are sufficiently clear? Please elaborate.
Paragraph 2 fully incorporates Section 6 of the GL GCC and is complemented by the Basel Framework LEX requirements specified in 10.16 (6) and (7). The Basel requirements were already inherent to the Section 6 of GL GCC but are now separately highlighted with points (a) and (h) in the list of circumstances leading to economic dependency.Ad Para 1 Lit. f: We do not have any concrete examples for lit. f (same source of funds to repay loans). In the example E6 we are not aware of the concrete flow of payments. Hence, the example E6 is not clear in relation to lit. f.
Ad Para 1 Lit. h: Where is the difference to lit. f?
In general, we think that it is important to have the possibility to explain, why certain listed circumstances or indicators nevertheless do not lead to a single risk. Banks may still face the problem that there is uncertainty on the extent to which arguments made to refrain from economic dependency are accepted. Moreover, the assessment whether an economic dependency exists can be time and resource intensive for banks.
In our view a separate section should be included on how to apply the connectedness at the individual level taking into account the particularities of intra-group situations and relations, instead of applying the consolidated approach to the solo level on a 1:1 basis.
Question 6. In point (c) of Article 2(1), would you prefer following a quantitative approach by replacing the term “significant part” with a threshold of “50% or more” as envisaged in point 1 of LEX 10.16? What would be the advantages or disadvantages? Please elaborate.
Regarding the proposal to include a quantitative threshold of 50% in some situations, we are of the view that argumentations, provided during consultations related to GL GCC which were fully noted and accepted by EBA, are still valid and fully applicable. Each credit institution should decide on its own – based on the individual case – what constitutes a “significant part”. Concrete thresholds are not helpful in this regard. In that respect, we support keeping the existing term of “a significant part” since its interpretation will depend on the specific situation and might involve different percentages.Question 7. What is your view on the wording “that cannot be replaced in a timely manner without excessively increased costs” compared to the wording used in the GL “that cannot be easily replaced”? What do you think about this change, is it more comprehensible? Please elaborate.
The proposed wording is in need of increased interpretation, i.e. the banks have to specify what they understand as ‘timely manner’ and ‘excessively increased costs’. In addition, both aspects (‘timely manner’ and ‘excessively increased costs’) do not necessarily have to be connected to financial difficulties for the particular clients. Therefore, we do not consider the proposed change as more comprehensible.Question 8. Is the additional Scenario E 8 related to the determination of a group of connected clients by means of economic dependencies, listed in Section 3.4.2 (Establishing interconnectedness based on economic dependency), sufficiently clear? Would you see need for further illustrative examples of an economic dependency relationship? Please elaborate.
Scenario 8 illustrates point (i) of Article 2, Paragraph 1 of RTS and is derived from paragraph 7 of Article 22 of Directive 2013/34/EU. In that respect, it is sufficiently clear.However, there is a situation where additional explanation is necessary, namely, in Scenario E 2 Variation on baseline scenario (no direct exposure to source of risk). There is a need to form a GCC in case two or more entities are dependent on non-client. What remains unclear is how to approach in case when there is only one client of the reporting institution with economic dependency on non-client. The fact that there is no direct exposure to source of risk (entity A) has no influence on economic dependency of entity client (entity B) and all potential negative consequences it may encounter in case of negative developments of entity A.
Scenario E 8 is clear.
An example is missing with a 50:50 ownership, where neither P1 nor P2 exercises an influence on the companies concerned. In this case no person would have to be connected with the companies, since the ownership is not exceeding 50%. We ask you for reasons of clarity to add such an example. Optimally, it should also be clarified that if the ownership is 51:49, but according to the syndicate agreement the voting rights are 50:50, there is no connection as well.
Question 9. After considering the circumstances set out in Article 3 that constitute a single risk by means of the combined existence of control and economic dependencies, could you please indicate if the described circumstances are sufficiently clear? Please elaborate.
From our perspective, Article 3 supported with scenarios providing additional insight in combined occurrence of control and economic dependency (C/E 1 One – way dependency; C/E 2 Two – way dependency; C/E 3 Downstream contagion; C/E 4 Upstream contagion) is sufficiently clear.Question 10. Is the additional Scenario E 7 related to the determination of a group of connected clients by means of the combined existence of control and economic dependencies, listed in Section 3.4.3 (Relation between interconnectedness through control and interconnectedness through economic dependency), sufficiently clear? Please elaborate.
In respect to provided Scenario E 7, it would be useful to provide more details regarding the comment given in footnote 9: ”Where a shareholder owns less than 50% but still holds a significant stake and has the ability to exercise a dominant influence, institutions need to assess the grouping requirements on the basis of a case-by-case analysis.” either with:1. defining of quantitative threshold of significant stake, or
2. additional descriptive guidelines regarding its easier identification