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Guernsey Financial Services Commission

As stated by the EBA itself within the consultation paper “the general approach proposed by the EBA is to exclude from the scope of the definition of ‘shadow banking entities’ entities that are subject to an appropriate prudential framework either as a result of prudential consolidation or, where entities are not within the scope of consolidation, certain sector-specific prudential frameworks which are deemed to cover for the risks posed by the bank-like activities of the entity.”

The result of this is that a range of exclusions are required to create this definition. Again to directly quote the consultation paper (but our underline, our italics):

-Excluded undertakings means:

(1) undertakings included in consolidated supervision on the basis of the consolidated situation;

(2) undertakings not included in consolidated supervision but which are supervised on a consolidated basis by a third country competent authority pursuant to the law of a third country which applies prudential and supervisory requirements that are at least equivalent to those applied in the Union;

(3) undertakings which are not within the scope of point (1) and (2) but which are:

a) credit institutions;
b) investment firms;
c) third country credit institutions if the third country applies prudential and supervisory requirements to that institution that are at least equivalent to those applied in the Union;
d) recognised third country investment firms;
e) financial institutions authorised and supervised by the competent authorities or third country competent authorities and subject to prudential and supervisory requirements comparable to those applied to institutions in terms of robustness;
f) entities referred to in points (2) to (23) of Article 2(5) of the CRD;
g) entities referred to in Article 9(2) of the CRD;
h) insurance holding companies, insurance undertakings, reinsurance undertakings and third-country insurance undertakings and third-country reinsurance undertakings where the supervisory regime of the third country concerned is deemed equivalent;
i) undertakings excluded from the scope of Directive 2009/138/EC on the taking up and pursuit of the business of insurance and reinsurance in accordance with Article 4 of that Directive;
j) institutions for occupational retirement provision and institutions within the meaning of point (a) of Article 6 of Directive 2003/41/EC on the activities and supervision of institutions for occupational retirement provision, and third country institutions carrying out equivalent business and subject to prudential and supervisory requirements comparable to those applied to institutions within the meaning of point (a) of Article 6 of Directive 2003/41/EC in terms of robustness shall be treated as exposures to institutions.

We appreciate the EBA’s evident concern to ensure that there is a fair and appropriate treatment of third country firms by inclusion of various references to comparable or equivalent regulatory approaches for varying types of entities. As a third country jurisdiction we are keen to ensure the EU attains the greatest degree of consistency and transparency to the equivalence process. As we recently stated in our response to the European Commission’s Green Paper consultation on Capital Markets Union ‘We believe the EU should specifically prioritise creating a market that attracts international investment into Europe and allow access to the EU market by appropriately regulated third country jurisdictions that can demonstrate equivalence with a regulatory regime applied universally across all EU Member States.’

We have concerns however that the exact wording referring to third country equivalence (underlined and italicised) in each case above differs. Our concerns are that this differing language will preclude a consistent approach to the issue. In the absence of a universal or omnibus equivalence process discrepancies and inconsistencies are likely to occur.

Equivalence processes, where they exist, differ across differing types of financial intuition, depending on the EU Directive or EU Regulation that generates the primary regulatory oversight, and the significance or application of the equivalence assessment will differ. For example: CRR and Solvency II for credit institutions and insurance undertakings respectively where equivalence has applications for credit risk under CRR and market access under Solvency II. Of note also is the fact that under the EU AIFMD the regulatory regime for AIFs and AIFMs is deliberately distinct to the general regime for investment firms. Whilst the present approach is to treat AIFs as non-exempt, if this were to change subsequent to the consultation process we would note this distinction is not accommodated in the excluded undertakings section.

We note the recent equivalence decisions under CRR , or more precisely the Commission implementing decision of 12 December (Decision 2014/908/EU) which came into force on 1 January 2015, was relevant to the treatment of credit risk only in the context of Articles 107(4), 114(7), 115(4), 116(5) and 142(2) of the Regulation.

We have no doubt as to the objectivity of the assessment and process that led to this decision but there was little transparency. As a third country that is deemed equivalent for credit institutions we received no communication of this decision, nor explanation as to the cause of the omission from consideration of equivalence for investment firms.

In this regard we welcome the acknowledgement of the EBA to the importance of this issue in this consultation and through the publication of its questionnaire on the assessment of equivalence with the European regulatory and supervisory framework. To this event, we would welcome further continued dialogue on this point and volunteer to contribute and participate in any working or expert groups that may be deemed desirable or necessary to develop a successful resolution of this issue.
Andy Sloan
01481 732836