The document presents guidelines on the application of the group capital test (GCT) for investment firms, aiming to harmonize its interpretation within the European Union. It emphasizes the need to establish objective thresholds and criteria to assess whether the conditions for obtaining a derogation under the regulation are met. The guidelines also introduce some flexibility to account for the diversity of…
This document is a guide published in 2024 by the European Banking Authority (EBA) entitled “Guidelines on the application of the group capital test for investment firms.” It concerns the application of the group capital test (GCT) for investment firm groups, pursuant to Article 8 of Regulation (EU) 2019/2033 (IFR). The scope covers criteria for assessing the structural simplicity of groups, risks to clients and the market, as well as conditions for authorizing exemptions from the prudential consolidation regime. The guide is addressed to competent supervisory authorities and investment firms within the European Union, with an effective date set for 1 January 2025 (p. 1-3, 5-7, 15-17).
The guide aims to harmonize the application of the group capital test (GCT) provided by Article 8 of Regulation (EU) 2019/2033, in response to divergent interpretations among competent authorities and a growing demand for authorization to use the GCT. The objective is to ensure uniform application across the European Union by clarifying criteria to consider an investment firm group as sufficiently simple and not presenting significant risks to clients or the market. Key findings are that the diversity of group structures and investment firm profiles requires objective yet flexible criteria, including quantitative thresholds (number of entities, hierarchical levels, intragroup transfers) and qualitative factors (transparency, control). The guide details several conditions: a simplified approach for groups composed exclusively of small non-complex firms; criteria to assess structural simplicity; criteria to evaluate overall risks; conditions to grant a reduction in own funds requirements; and minimum information to be provided for assessment. It notably introduces the comparison of the ratio between own funds calculated under the GCT and under classical prudential consolidation as a key risk indicator. Main recommendations are that competent authorities must apply these criteria to grant or refuse exemptions, reassess existing authorizations, and ensure continuous monitoring. The guide also allows some flexibility to account for group specificities while maintaining a minimum prudential threshold, notably for subsidiaries located outside the EU (p. 3-4, 5-12, 17-23).
Regulation (EU) 2019/2033 requires investment firm groups to apply prudential consolidation under Article 7 but provides an exemption via the group capital test (GCT) under Article 8 for groups deemed sufficiently simple and low-risk. However, the lack of harmonized criteria has led to divergent practices among national authorities, creating a risk of unequal treatment and regulatory arbitrage. The guide was developed to establish common, objective, and proportionate criteria enabling competent authorities to uniformly assess groups’ structural simplicity, the significance of risks to clients and the market, and conditions for granting exemptions, including reductions in own funds requirements. The objective also includes clarifying the notions of “notional own funds” and “satisfactory level of prudence” for subsidiaries located in third countries. The scope covers investment firm groups in the EU, with particular attention to varied structures and diverse activity profiles. Limitations notably concern the consideration of exceptional operations and the flexibility left to authorities for specific cases (p. 5-12).
1. Simplified approach for groups of small non-complex firms:
- Applicable to groups composed solely of small, non-interconnected investment firms and ancillary service providers.
- Conditions include satisfactory organizational arrangements, majority of voting rights held within the group, transparency of capital links, and absence of obstacles to control by the parent company.
- The own funds ratio under the GCT must be at least 85% of that calculated under prudential consolidation (p. 17-18).
2. Structural simplicity criteria:
- Maximum of six entities in the group (with possible derogations).
- Maximum of one intermediate level between the parent company and subsidiaries (with possible derogations).
- Intragroup transfers of activities (AUM, ASA, CMH) limited to precise thresholds, notably no transfer of ASA and CMH.
- Transfers of trading positions subject to a threshold based on twice the CRR regulatory threshold for K-NPR and K-CMG.
- Transparency and simplicity of capital and contractual links, without hindrance to control or need for consolidated supervision (p. 18-22).
3. Risk assessment for clients and market:
- The GCT/consolidation own funds ratio must be above 90% (95% or 100% if derogations).
- No issuance of unlisted debt instruments or shares to retail clients.
- Maximum of one compensating member in the group.
- If centralized coverage of K-NPR or K-TCD positions, presence of organizational arrangements and adequate risk controls.
- Consideration of ongoing enforcement procedures on group entities (p. 19-22).
4. Conditions for reduction of own funds requirements (Article 8(4) IFR):
- GCT/consolidation own funds ratio above 125%.
- Notional own funds for non-EU subsidiaries calculated according to IFR or recognized equivalent regime.
- The reduction must not lower the ratio below the 85% or 90% thresholds as applicable.
- Consideration of exchange rate risk in calculating own funds differences (p. 21-23).
5. Information to be provided to competent authorities:
- Description of group activities, up-to-date structure, intragroup transfers, calculations of own funds requirements under Articles 7 and 8, status of actual and notional own funds, declaration of compliance with criteria.
- Possibility to limit certain information in case of disproportionality (p. 22-23).
6. Process for granting, modifying, and withdrawing permissions:
- Continuous monitoring of conditions.
- Obligation to reassess existing permissions upon the guide’s entry into force.
- Withdrawal of permissions if criteria are not met, with transition to consolidated supervision (p. 23).
7. Impact analysis and data collected:
- Data collected from 28 national authorities covering 33 groups.
- Currently heterogeneous criteria, with an average of 6 entities and 2 levels for authorized groups.
- Thresholds calibrated on this data.
- Most currently authorized groups should remain eligible.
- Adaptation costs for authorities considered low, harmonization benefits significant (p. 24-32).
Findings:
- The application of the GCT is currently divergent among national authorities, lacking harmonized criteria (p. 3, 5).
- Most investment firm groups authorized to use the GCT have on average 6 entities and 2 hierarchical levels (p. 27-29).
- Authorized groups generally comply with proposed thresholds for intragroup transfers and do not issue unlisted instruments to retail clients nor have multiple compensating members (p. 29-31).
- The GCT/consolidation own funds ratio is on average well above set thresholds (p. 30-31).
Assumptions:
- Quantitative thresholds set (number of entities, levels, transfers) reflect a good approximation of structural simplicity (p. 27-29).
- The ratio between GCT and consolidation own funds is a reliable indicator of overall risk to clients and the market (p. 9, 20).
Interpretations:
- An approach combining quantitative and qualitative criteria achieves a balance between harmonization and flexibility (p. 3, 6).
- The possibility of conditional derogations allows adapting application to group specificities (p. 6, 18).
Uncertainties:
- The real impact on certain groups, notably those with complex structures or cross-border activities, remains to be observed post-implementation (p. 32).
- The administrative burden related to continuous calculation of the own funds ratio may be perceived as heavy but is limited to authorities’ requests (p. 34).
- The precise definition of a satisfactory level of prudence for non-EU subsidiaries depends on regulatory equivalence decisions (p. 21).
The EBA concludes that establishing harmonized criteria for applying the group capital test is necessary to ensure uniform application and avoid disparities among competent authorities. The guide proposes a clear and proportionate framework, combining quantitative thresholds and qualitative criteria, while leaving room for authorities’ discretion to account for group specificities. It recommends that authorities:
- Apply these criteria to grant or refuse permissions to use the GCT and to reduce own funds.
- Reassess permissions already granted at the effective date (1 January 2025) and revoke them if criteria are no longer met.
- Continuously monitor compliance conditions of groups benefiting from these permissions.
- Use the detailed information required for comprehensive assessment.
- Take into account the notions of notional own funds and satisfactory level of prudence for non-EU subsidiaries, relying on equivalence decisions.
The guide emphasizes that these measures should promote an effective and safe functioning of the investment firm sector in the EU while limiting administrative burdens (p. 3-4, 11-12, 17-23, 32-36).
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