Our question to the EBA on the scope of FINREP
Topic: Supervisory reporting
Legal act: Capital Requirements Regulation
Legal reference: Article 99, paragraphs 2 - 4
Subject matter: Scope of application of FINREP
Our question concerns paragraph 4. Does it empower national competent authorities to determine, in respect of smaller non-systemic institutions that for whatever reason use international accounting standards/ IFRS (and thereby fall under paragraph 2), that such institutions need not be required to report financial information as envisaged in paragraph 2? This would be on the grounds that such information is not necessary either to obtain (i) a comprehensive view of the [individual] risk profile of such institutions; or to obtain (ii) a view of the systemic risks posed by such institutions [collectively] to the financial sector or the real economy.
Background: This query is being submitted on behalf of UK building societies. UK building societies are mutual organisations, owned by their members, offering straightforward savings and mortgage accounts. A minimum of 75% of their lending must be in residential mortgages. Building society law forbids them to take risk positions in commodities, currencies or derivatives. Their business models are therefore very simple and their members local. With a few exceptions, building societies are not systemic even in domestic, let alone European terms.
Ten societies have issued listed capital securities and are therefore required to prepare their financial statements using IFRS. They vary in size; the largest has assets of €226,900 million, the second largest has assets of €39,860 million. The smallest society using IFRS has assets of €928 million. Had they not issued these securities and be forced onto IFRS, the vast majority of these building societies would have remained on the UK national financial reporting framework. They may have one or more relatively minor subsidiaries in the same line of business that together constitute a regulatory consolidated group.
With the advent of a new UK IFRS-based financial reporting framework, FRS 102, some non-systemically important institutions with no cross-border activities - a category that includes all building societies - are being advised to move straight to full IFRS. This brings in theory other smaller institutions that are regulatory consolidated groups (currently two) into scope for FINREP.
The cost to building societies of installing FINREP systems and the associated review and governance processes is disproportionately high and will have a significant impact on their financial position. We asked our larger affected societies what they estimated the direct implementation costs to be. While these seem low – under 1% of profits – the indirect costs multiplied this figure several times. The effect is greater on smaller societies which do not have the purchasing power of their larger peers or the range of specialist staff to draw on.
The data the smaller building societies will provide, on the other hand, will have absolutely no impact on assessing systemic risks to the financial sector or the real economy. And the competent authority has a wide range of other sources of information from which it can form a comprehensive view of the individual institution’s risk profile.
Without the possibility of such a determination by the competent authority, some local and regional mutuals that do not pose systemic risks to the financial sector could be caught by the wording in this Article and be required to report using FINREP: global investment banks owned by holding companies, for example, would not be. Mutuals could end up producing financial data that is inconsequential on the European or even national stage but costly to the institutions affected.
We therefore urge the EBA to clarify the scope for national competent authorities to disapply FINREP in respect of those smaller domestic mutuals such as building societies that otherwise fall under Paragraph 2.
Proposed answer: The principle of proportionality is fundamental to CRR and re-iterated at Recital 46: therefore provisions such as Article 99 should be interpreted in a proportionate way where permissible in context. Paragraph 4 of Article 99 qualifies the extent of financial information that needs to be reported under Paragraph 2.
There are two objectives for the competent authorities in relation to each institution or class of institution: they are to obtain (i) a comprehensive view of the [individual] risk profile of such institutions; and (ii) a view of the systemic risks posed by such institutions [collectively] to the financial sector or the real economy. The reporting of financial information is required only so far as necessary to fulfil either or both of these objectives.
Where (but only where) a competent authority is satisfied (i) that it can obtain a comprehensive profile of the risk profile of each such smaller institution from other sources of information; and (ii) that such institutions pose no systemic risks to the financial sector or to the real economy, the authority can legitimately disapply the obligation (in paragraph 2) to report financial information.
This approach would be consistent with the line taken in the executive summary of the draft ITS for supervisory reporting: “The most burdensome data points do not have to be reported by all institutions but only by those institutions which have significant risk exposures or significant activities.”