December in the EU's Banking Union and its Single Supervisory Mechanism (SSM) marks a time to reflect on past performance and focus on future areas in terms of supervisory priorities and remedial action. In April 2019, our Eurozone Hub reported1 on the consultation led by the European Central Bank (ECB) on SSM fees that closed on June 6, 2019. On December 17, 2019, the ECB-SSM announced its revised methodology by way of Regulation (EU) 2019/21552 and ECB Decision (EU) 2019/21583 to simplify the supervisory fee calculation process for Banking Union Supervised Institutions (BUSIs).
The SSM's supervisory fees are made up of a minimum fee component and a variable fee component and while those core principles are not being tweaked, a lot of other things are. Some of the changes introduced go to how supervisory fees are calculated and others go to when fees are charged. This marks the first major update4 to SSM supervisory fee calculations since the SSM's inception in 2014. This matters as the ECB-SSM's fees have been steadily growing since the Banking Union was launched and as its supervisory activities have expanded.
Smarter and more transparent billing?
The new methodology will mean the ECB-SSM will calculate fees based on supervisory costs actually incurred rather than expected costs. The ECB-SSM will levy these fees at the end of the fee cycle. This marks a welcome move by the ECB-SSM in smart billing but also translates into cost savings for certain firms. It also marks a move by the ECB-SSM to be more transparent in how it calculates fees and how it communicates this publically. While the ECB has published SSM fee details in the past on its website, the ECB-SSM is now more firmly committed to, within four months after the end of each fee period, publish on the ECB's website the total amount of annual supervisory fees for each category of BUSI and groups of supervised BUSIs for the relevant fee period.
The changes to the calculation methodology will apply from the 2020 fee period and fees for the 2020 fee period will be collected in the second quarter for the following year for the 12 months ending December. This means that fees for the 2020 supervisory cycle will be collected from second quarter 2021. Importantly, the cut-off date by which BUSIs must annually inform the ECB-SSM when and who a group of fee-paying entities nominates the fee debtor for the whole group is now September 30 as opposed to July 1 of each calendar year.
The biggest winners from this change are those SSM-indirectly supervised BUSIs i.e. less significant institutions (LSIs) and/or LSI groups with €1 billion in total assets. For those firms, their minimum fee component is halved. By the ECB-SSM's estimation around two thirds of LSIs will benefit from this change. For those LSIs that do not receive a reduction, their annual supervisory fees could, depending on the firm's risk exposure, actually increase. Equally, "fee-paying branches" will no longer be required to provide an auditor verification as means of certification of the total assets of the branch for the purposes of calculating the supervisory fee and instead will submit to the NCA a "management letter" certifying the total assets of the branch. This will be a relief for certain branches.
Overall, the proposed changes also aim to limit the volatility in variations of the annual supervisory fee for all BUSIs and some of that is due to changes in the calculation methodology as opposed to the invoicing cycle.
More reflective definitions of total assets and risk exposure
The definition in the revised Regulation changes how the ECB-SSM views total assets is also changing so that from 2020 total assets means:
- for a supervised group, the total value of assets as determined in accordance with the SSM Framework Regulation, excluding assets of subsidiaries established in non-Banking Union Member States and third countries unless otherwise decided by a supervised group;
- for a fee-paying branch, the total value of assets as reported for prudential purposes. Where the total value of assets is not required to be reported for prudential purposes, total assets means the total value of assets as determined on the basis of the most recent audited annual accounts prepared in accordance with International Financial Reporting Standards (IFRS), as applicable in the EU, and, if those annual accounts are not available, the annual accounts prepared in accordance with applicable national accounting laws. For fee-paying branches that do not prepare annual accounts, total assets means the total value of assets as determined in accordance with the SSM Framework Regulation;
- for two or more fee-paying branches that are deemed to be one branch by the ECB-SSM, the sum of the total value of assets as determined for each fee-paying branch respectively; and
- in all other cases, the total value of assets as determined in accordance with the SSM Framework Regulation.
The definition of "total risk exposure" has also been amended in the revised Regulation to take account of the changes made to total assets (above) so that it now reads:
- for a supervised group, the amount as determined at the highest level of consolidation within the Banking Union Member States and calculated in accordance with Article 92(3) CRR, excluding the risk exposure amount of subsidiaries established in non-Banking Union Member States and third countries unless otherwise decided by a supervised group;
- for a fee-paying branch and two or more fee-paying branches that are deemed to be one branch, zero;
- in all other cases, the amount as calculated in accordance with Article 92(3) of CRR.
These changes are also important as they play a part in how the ECB-SSM determines the fee factors of BUSIs in accordance with the methodology set out in Decision (EU) 2019/2158. Conceptually the approach in the Decision is similar to that of the revised Regulation, but there are some differences to account for the SSM's use of data it receives from "common reporting" (COREP) and "financial reporting" (FINREP) submissions from BUSIs.
In keeping with the ECB-SSM commitment to reuse information it already has collected for supervisory fee calculation purposes, the principles in the Decision also require the ECB to ensure consistency in supervisory fee calculation for BUSIs, as fee debtors, where the ECB already has information (form COREP and FINREP) and the fee factors of those fee debtors that need to report relevant information separately. The ECB and NCAs in the SSM are required to perform data quality checks on information submitted by the BUSIs via the relevant NCAs to the ECB-SSM.
While the changes above "only" affect the SSM's annual supervisory fees and despite BUSIs being liable for fees to other national competent authorities, the move to this new methodology is likely to provide for more clarity on supervisory fees as well as transparency in the event of BUSIs having questions on calculations. The move to what many may consider a fairer invoicing cycle is also likely to be welcomed.
If you would like to receive further analysis on the changes or any related issues to the ECB-SSM's supervisory interface and engagement, please contact one of our Eurozone Hub key contacts to the right.
1 See coverage here.
2 Which amends ECB's existing rules in Regulation (EU) No. 1163/2014 using an ECB Regulation that is available here.
3 See recast ECB Decision (EU) 2019/2158 available here.
4 The ECB-SSM have thankfully begun to publish delta views showing changes, which is available here.
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