COREP Confusion

Firms should cover their backs with reporting requirements

CORDIUM

RD-IV is the EU implementation of Basel III, which seeks to enhance the capital adequacy of banks and investment firms. The types of firms likely to be affected by CRD-IV are:

  • BIPRU €125k or €730k firms; and
  • BIPRU €50k firms performing the safekeeping and administration of financial instruments for the account of clients and/or placing financial instruments without a firm commitment basis.
  • Affected firms were migrated from CRD-III to CRD-IV on 1 January 2014.

For CRD IV firms, a new EU-wide supervisory reporting framework – comprised of Common Reporting (COREP) and Financial Reporting (FINREP) – has been introduced with the aim of harmonising prudential reporting across Europe in order to identify concentrations of risk in the macro economy.

COREP covers capital requirements, own funds and liquidity, whereas FINREP pertains to consolidated reporting, and COREP and FINREP will either supplement or supersede the current GABRIEL reports, depending upon the activities of the firm. The deadline for submission of initial COREP returns for firms within the scope of CRD-IV had been deferred to 30 June 2014. The FCA is not planning to update GABRIEL reporting schedules to reflect this and many firms have noted a 2 June 2014 deadline, which is in fact incorrect.

A significant number of the firms that were migrated from CRD-III to CRD-IV on 1 January 2014 have determined that it is appropriate to accept a limitation to their permissions which will take them out of the CRD-IV capital regime and hence remove the need for COREP reporting. The mechanism for effecting this change is to seek approval for a variation of permissions (VoP), and in respect of such firms, we have observed a number of inconsistent outcomes:

  • Some firms that had their VoP applications approved prior to the 31 March 2014 ‘as at’ date for initial COREP returns have had difficulty in persuading the FCA’s Firm Contact Centre to remove the initial COREP return from their reporting schedule. This is despite the fact that any reporting under COREP as at 31 March 2014 would demonstrate a capital adequacy position based on a directive (CRD-IV) which did not apply to those firms at that date;
  • Other firms that had VoP applications approved after 31 March 2014, have noted that the initial COREP return has been removed from their reporting schedule, despite the fact that CRD-IV applied to them on that date;
  • Some firms have been told by the FCA that, provided they have submitted a VoP application that will take them out of the scope of CRD-IV on approval, they may safely ignore any COREP returns showing in their reporting schedule, regardless of the timing of approval of the VoP.

More recently, the FCA appears to be adopting the line that COREP returns are mandated by the European Banking Authority (EBA) and not the FCA and it is for firms and not for the FCA to determine whether or not to submit (by 30 June 2014) an initial COREP return.

What should firms do amidst this confusion?
Without crystal ball-gazing it is impossible to know whether the FCA or the EBA will take any action against firms who, for whatever reason, do not report by the required deadline, and indeed some level of risk appears to extend to any firm choosing not to report that was subject to CRD-IV at any time since it was implemented on 1 January 2014.
One would expect that the absolute level of risk is dependent, in part, on the duration of the Directive’s applicability to the firm and on whether, as at 30 June 2014, COREP returns are included in the firm’s GABRIEL reporting schedule. We advise the following:

  • Firms that have received an approval of a VoP application should check their GABRIEL reporting schedule and, if it continues to include COREP items, seek assurances from the Firm Contact Centre that this will be removed and that no COREP reporting is due on 30 June 2014.
  • Firms that have applied for a VoP should raise this with their Cordium Consultant who will be able to advise on the options available to you; and
  • Firms that wish to but have not yet submitted a VoP application should do so as soon possible.

After taking such mitigating action as is appropriate, there will still be some remaining level of risk of action. Firms wishing to guard against this, including any that have yet to submit a VoP application, should still plan to submit initial COREP returns by 30 June 2014. They should then continue to submit quarterly returns for any calendar quarter during which they were subject to CRD-IV, no matter how briefly, until such point in time that COREP returns are removed from the firm’s reporting schedule or such assurances have been received from the FCA that allow the firm to conclude that they are comfortable with the remaining risk.