UK FINANCE AND LEASING ASSOCIATION RESPONSE TO THE EUROPEAN COMMISSION CONSULTATION ON CAPITAL REQUIREMENTS DIRECTIVE (CRD) POTENTIAL CHANGES

1.  This is the response by the UK Finance and Leasing Association (FLA) to the European Commission’s working document on CRD potential changes.

2.  FLA members provided £28 billionto the businesssector and UK public services in 2007, representingalmost 30% of all fixed capital investment in the UKlast year(excluding real property and own-account software). FLA members provided £18.9 billion of financeto themotor sector. FLA members financedmore than50% of all new car registrations in the UKlast year.

3.  Our members include banks, subsidiaries of banks and building societies, the finance sections of leading retailers and manufacturing companies, and a range of independent firms. They provide a wide range of facilities, including finance leasing, operating leasing, hire purchase, conditional sale, personal contract purchase plans, personal lease plans, secured and unsecured personal loans, credit cards and store cards.

4.  The FLA is a member of Leaseurope.

5.  The FLA welcomes the Commission’s review of the CRD. It is timely given recent developments in banking markets globally. Our bank members are implementing the CRD in their businesses and we believe that it provides an excellent framework for banking supervision going forward.

6.  We only have comments on two suggestions in the working document. At page 38 it states:

“The following point 16.1.90 shall be inserted:

"16.1.90. The exposure value for leases shall be the discounted minimum lease payments. Minimum lease payments are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed

residual value fulfilling the set of conditions in Annex VIII, Part 1, points 26 to 28 regarding the eligibility of protection providers as well as the minimum requirements for recognising other types of guarantees provided in Annex VIII, Part 2, points 14 to 19 should also be included in the minimum lease payments. Those exposures shall be assigned to the relevant exposure class in accordance with Article 79. When the exposure

is a residual value of leased properties, the risk weighted exposure amounts shall be calculated as follows: 1/t x 100% x exposure value, where t is the greater of 1 and the nearest number of whole years of the lease remaining."”

In addition similar wording is used in Annex VII, Part 1, point 27 which includes the following sentence:-

“Except for when the exposure is a residual value of leased properties in which case it should be calculated as follows:

1/t x 100% x exposure value”

7.  The FLA is content with the revised wording on ‘1/t’. However we believe strongly that the suggested addition of “of leased properties” will add confusion. We understand from Leaseurope that the Commission is not trying to change the status quo i.e. the 1/t treatment applies to all leased assets, not simply, to use the American term, real estate i.e. land and buildings. But there is a risk that regulators would interpret the new formulation in the narrower sense. In ordinary English and in law “leased properties” usually means land and buildings. It would exclude vehicles, plant and equipment that are leased, in the UK and elsewhere, by the leasing and asset finance industry.

8.  We understand from Leaseurope that the Commission wished to align this provision with Article 86(8). That provision states:

“Article 86

1. Each exposure shall be assigned to one of the following

exposure classes: ….

(g) other non credit-obligation assets.

8. The exposure class referred to in point (g) of paragraph 1

shall include the residual value of leased properties if not

included in the lease exposure as defined in Annex VII, Part 3,

paragraph 4.”

9.  Annex VII, Part 3, paragraph 4 states:

The exposure value for leases shall be the discounted minimum lease payments. ‘Minimum lease payments’ are the payments over the lease term that the lessee is or can be required to make and any bargain option (i.e. option the exercise of which is reasonably certain). Any guaranteed residual value fulfilling the set of conditions in Annex VIII, Part 1, points 26 to 28 regarding the eligibility of protection

providers as well as the minimum requirements for recognising other types of guarantees provided in Annex VIII, Part 2, points 14 to 19 should also be included in the minimum lease payments.

10. We see 86(8) as setting out the provisions on the residual value of leased assets; accordingly the same confusion as referenced in 7 above could result.

11. We therefore ask the Commission to amend the wording in each of Article 86(8), Annex VII Part 1 point 27 and Annex VI Part 1 point 90 from “leased properties” to “leased assets”. We recognise that c-decision may be required but we believe that we should register the point now as the Commission is reviewing the Directive.

FLA Contact: Craig Pickering

For more about FLA please visit our e-politix micro-site at http://www.epolitix.com/forums/FLA

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