BVI Bundesverband Investment und Asset Management eV
Our members are managers of funds such as UCITS or AIF under the UCITS Directive 2009/65/EC and AIFM Directive 2011/61/EU. According to Article 7(1)(a)(iii) of the UCITS Directive and Article 9(5) of the AIFM Directive, the own funds of the management companies shall never be less than the amount required under Article 21 of the Directive 2006/49/EC (now Article 97 of the CRR). Therefore, the proposed RTS is also relevant to our members.
According EBA’s proposal, the so called ‘subtractive approach’ apply under which variable costs items are deduced from the total expense as calculated according to the applicable accounting framework. This proposed calculation differs substantially from the current method in Germany, where a so called ‘additive approach’ is in place. The additive approach consists of adding up a number of pre-defined accounting items. According to the calculation in Germany, investment firms shall demonstrate that they have own funds amounting to at least 25 per cent of their costs shown in the profit and loss account in the last set of annual accounts under general administrative expenses, depreciation and value adjustments of tangible and intangible assets. Costs such as commission expenses are not considered. Some kinds of variable costs which are shown under the cost position ‘general administrative expenses’ as costs such as ‘wages and salaries’ (for example profit sharing, special payments) are also not considered because these costs do not belong to the category of fix costs (cf. BaFin Circular of 21 March 2007, WA 37 – Wp 2015 – 2007/0005). This approach is appropriate and has proven its worth.
However, we recognise that harmonising a standard on own funds requirements is a difficult task considering the existence of many different national accounting standards. Therefore, we support in general terms the aim of the proposed ‘subtractive approach’ provided that certain costs which do not technically belong to the category of fix costs may be deduced from the total expense. We will elaborate further on this proposal below.
Changing the calculation method would lead to ongoing implementation expenses and, in limited cases, to higher own funds requirements based of fixed overheads. This depends on how the wording of ‘total expense’ is defined and which variable costs items should be deduced from the total expense.
Therefore, we propose to clarify the definition of ‘total expense’. According to the Consultation Paper, EBA refers to the ‘total expenses as calculated according to the applicable accounting framework’. The resulting total expense is equal to the ‘expenses’ of the International Financial Reporting Standards (IFRS), which are defined as:
‘… decreases in economic benefits during the accounting period in the form of outflows or depletions of assets or incurrences of liabilities that result in decreases in equity, other then those relating to distributions to equity participants.’
This definition does not include distribution profits. Therefore, we request EBA to clarify that distribution profits are not taken into account under the definition of total expense. Moreover, contract-based profit transfers and taxes on income and similar tax group transfers should also be outside the scope of total expenses.
Furthermore, we disagree with the proposed list of items which may be deducted from the total expenses.
The list of items which may be deducted from the total expenses should also consider voluntary social security and fringe benefits, even in the event that the investment firm determines the amount of these items at its reasonable discretion (for example employees shares) or that the items are variable in relation of the amount (for example variable performance bonus, employees’ anniversaries).
The proposal under letter d) (shared commissions and fees payable which are directly related to commission and fees receivable) is too restricted. This would lead to the consequence that the commission expense would not be deducted from the total expense, even though the investment firm is able to finance the commission expense out of the commission income or the payment is based on another contract or calculation method (such as monthly advisory fee based on a quarterly management fee, sales commissions based on the front load of the fund). In particular, it is inherent in the system of sales commissions that there always must be a positive commission income. Therefore, in the asset management area it is not appropriate to consider the commission expense under the own funds requirements.
Extraordinary expenses should not be limited to non-recurring expenses such as reorganisation and legal costs. In our view, costs such as overtime payments or costs for in-house events should be deemed variable costs. Even though these costs could arise in a repeated manner, they may vary considerably in amount and should therefore be deemed extraordinary.
In summary, we propose amending the wording of Article 36(1) as follows:
1. For the purposes of Article 97(1) of Regulation (EU) No 575/2013 investment firms shall calculate their fixed overheads of the previous year, using figures resulting from the applicable accounting framework, by subtracting from the total expenses (before taxes on income, tax group and profit transfer) in their most recent audited annual financial statements, the following variable items:
(a) staff bonuses;
(b) employees', directors' and partners’ shares in profits;
(c) other appropriations of profits and fringe benefits, to the extent that they are discretionary;
(d) commission and fees payable which are covered by commission and fees receivable, which are included within total revenue;
(e) fees, brokerage and other charges paid to clearing houses, exchanges and intermediate brokers for the purposes of executing, registering or clearing transactions;
(f) fees to tied agents;
(g) interest paid to customers on client money;
(h) extraordinary and non-recurring expenses.
see above under Q1 and Q2
We do not have any comments on the inclusion of tied agents because our members are not subject to this clause.
However, EBA proposes under Article 36(5) of the draft RTS that firms shall divide the result of the calculation of paragraphs 1 and 2 by the number of months that are reflected in the financial statements and shall subsequently multiple the result by twelve, where the firm’s most recent audited financial statement does not reflect a twelve month period. In our view, this could be lead to disproportionate own fund requirements in cases that there is a concentration of relevant costs during the year. Therefore, we propose implementing appropriate corrective measures on initiative of the national authority or ESMA.