Those firms that remain categorised as BIPRU firms, as opposed to those subject to IFPRU, (see e.g. Regulatory Roundup 51) will be aware that calculation of the fixed overheads requirement (FOR) is a component in the calculation of the variable capital requirement (GENPRU 2.1.45). The FOR is based upon one-quarter of the firm’s total expenditure in its most recent audited annual report and accounts, as adjusted in line with GENPRU 2.1.54.
However matters are not so straightforward for IFPRU investment firms or for firms authorised under the AIFMD (full-scope) and UCITS firms. The reason for the latter two types of firms sharing the same issue with IFPRU investment firms is that the AIFMD (Article 9(5)) and UCITS IV (Article 7(1)(a)(iii)) require such firms to maintain minimum own funds as set out in Article 21 of CRD III (being equivalent to one quarter of their preceding year’s fixed overheads).
The introduction of CRD IV means that the minimum own funds must now be based upon Article 97 of CRD IV. Whilst the concept of ‘one-quarter of fixed overheads’ remains (“own funds based on fixed overheads”), CRD IV, and therefore IPRU(INV) 11, doesn’t tell a firm how to calculate its ‘fixed overheads’ – the calculation of fixed overheads in GENPRU 2.1.54 mentioned above relates to CRD III and not CRD IV. Full-scope AIFMs will have noticed that the required adjustments to total expenditure to ascertain the fixed overheads requirement that was in IPRU(INV) 11.3.4 were deleted from the Handbook with effect from 1st January 2014.
The EBA has recently published draft Regulatory Technical Standards (RTS) in respect the calculation of the own funds required under Article 97. The adjustments to total expenses do not precisely mirror the CRD III approach e.g. the RTS propose the deduction of fees to tied agents and then adding back 35% of all fees relating to tied agents. As such it may be in some cases that the ‘fixed overheads’ calculated under CRD IV will produce a different figure when calculated under CRD III.