Reducing the relevant indicator by using expenditure on the outsourcing of services rendered by third parties which are not subject to rules under, or equivalent to the CRR

May the institution use expenditure on the outsourcing of services to reduce the relevant indicator when calculating own funds requirement under the Basic Indicator Approach (according to Article 316 of the CRR) if the outsourcing services were rendered by third parties which are not subject to rules under, or equivalent to the CRR?

When calculating the relevant indicator under the Basic Indicator Approach, according to Article 316(1) of the CRR the institution shall include each element in the sum of the elements listed in Table 1 of this paragraph. Article 316(1)(a) of the CRR indicates further that the institution shall calculate the relevant indicator before the deduction of any provisions and operating expenses. Moreover, fees paid for outsourcing services rendered by third parties which are not a parent or subsidiary of the institution or a subsidiary of a parent which is also the parent of the institution (further referred to as “third parties”) shall be included in operating expenses. This understanding is consistent with the OPE20 document by Bank for International Settlements dated 15 December 2019. In the light of the above, gross income is defined as net interest income plus net non-interest income. Furthermore, it is intended that this measure should be gross of operating expenses, including fees paid to outsourcing service providers. However, Article 316(1)(a) of the CRR also includes the possibility to reduce the relevant indicator by the use of expenditure on the outsourcing of services rendered by third parties. The key condition to apply a reduction is that the expenditure must be “incurred from” an undertaking subject to rules under, or equivalent to the CRR. In view of the above, the wording “incurred from” laid down in Article 316(1)(a) rises doubts, in particular when comparing translations to national languages of EU Member States. It remains unclear, whether the expenditure on the outsourcing of services rendered by third parties shall be: a) “incurred by” or b) “incurred in relation to” an undertaking subject to rules under, or equivalent to the CRR. In other words, it is of paramount importance to understand properly, if the expenditure refers to the undertaking that bears the cost (outsources the services) or to the undertaking that is providing the outsourcing services. In the first case, if the expenditure is incurred by an undertaking subject to rules under, or equivalent to the CRR, as stated above in point (a), interpreting this provision would violate the purpose of the Article 316 of the CRR, pursuant to which the relevant indicator shall be calculated before the deduction of any operating expenses (including fees paid for outsourcing services rendered by third parties). In the simplest example, when calculating own funds requirement on a solo level under the Basic Indicator Approach (according to Article 316 of the CRR), the institution, which incurred expenditure on the outsourcing of services rendered by third parties, could reduce the relevant indicator only because of the fact of being an institution under the CRR. In the latter case, if the expenditure is incurred by the institution in relation to an undertaking, that is providing the outsourcing services, as stated above in point (b), and which also is a third party, the possibility to apply the reduction of the relevant indicator by the institution should depend on whether that undertaking is subject to rules under, or equivalent to the CRR, or not. In view of the above interpretation, according to Article 316(1)(a) of the CRR the investment firm shall use the expenditure on the outsourcing of services rendered by third parties to reduce the relevant indicator only where an undertaking providing the outsourcing services is subject to rules under, or equivalent to the CRR.