S.I. No. 727/2004 - European Communities (Financial Conglomerates) Regulations 2004

• (5) If a financial conglomerate to which this Part applies is found not to be subject to supervision that is equivalent to that contemplated by the Financial Conglomerates Directive, the Bank may enter into an agreement with the other relevant competent authorities to apply these Regulations or regulations of another Member State that correspond to these Regulations, or such of them as may be specified in the agreement, to and in respect of the regulated entities within the conglomerate. On such an agreement being entered into, these Regulations or the regulations of the other Member State, or such of them as are specified in the agreement, apply to the financial conglomerate by the operation of this paragraph.

• (6) As an alternative to paragraph (5), the Bank may, if it is taken to be the co-ordinator of a financial conglomerate to which this Part applies, apply any other method that will ensure that the regulated entities within the conglomerate are subject to appropriate supplementary supervision. However, the Bank may take action under this paragraph only after consulting the other relevant competent authorities concerned.

• (7) If the Bank is taken to be the co-ordinator of a financial conglomerate to which this Part applies, it may, with the agreement of the other relevant competent authorities, require that a mixed financial holding company be established in respect of the conglomerate and that the company must, on being established, have its head office located within a Member State.

• (8) If a competent authority of another Member State is taken to be the co-ordinator of a financial conglomerate to which this Part applies, the Bank may enter into an agreement with that authority and the other relevant competent authorities under which—

• (a) a mixed financial holding company is required to be established in respect of the conglomerate, and

• (b) the company, on being established, is required to have its head office located within a Member State.

• (9) As soon as practicable after applying a method in accordance with paragraph (6), the Bank shall notify the European Commission of the method that has been used.

PART 7 MISCELLANEOUS PROVISIONS

Financial Conglomerates Committee to be notified of principles applicable to supervision of intra group transactions and risk concentration

33.

Regulations not to limit application of Sectoral Rules

34.

SCHEDULE 1 CAPITAL ADEQUACY REQUIREMENTS

[ Regulations 7 , 8 and 11 ]

Interpretation

“notional solvency requirement”, in relation to a non-regulated financial sector entity whose notional solvency requirement is to be calculated in accordance with paragraphs 6 to 9 of this Schedule, means the capital requirement with which such an entity would have to comply under the relevant Sectoral Rules if it were a regulated entity of the same financial sector;

“solvency requirement”, in relation to an asset management company, means the capital requirement specified in Article 5a(1)(a) of Directive 85/611/EEC.

How capital adequacy requirements are to be calculated

• (2) Without limiting subparagraph (3), if the Bank is the co-ordinator of a particular financial conglomerate, it may, after consulting the other relevant competent authorities and the conglomerate, decide which method is to be used by the conglomerate.

• (3) The Bank may require the calculation to be carried out according to one particular method among those described in this Schedule if the financial conglomerate concerned is headed by an authorised regulated entity. If a financial conglomerate is not headed by a regulated entity any of the methods described in this Schedule may be used except when the Bank is the sole competent authority involved, in which case the Bank shall determine the method to be used.

Technical principles: Supplementary capital adequacy requirements calculation

• (2) Whichever method is used to calculate the supplementary capital adequacy requirements of a non-regulated financial sector entity that is a subsidiary and that has a notional solvency deficit, the total notional solvency deficit of the subsidiary must be taken into account.

• (3) If, in either case, the responsibility of the parent undertaking that owns a share of the capital is limited strictly and unambiguously to that share, the co-ordinator of the financial conglomerate concerned may permit the solvency deficit or notional solvency deficit of the subsidiary concerned to be taken into account on a proportional basis.

• (4) If there are no capital ties between the entities that comprise a financial conglomerate, the co-ordinator of the conglomerate shall, after consulting the other relevant competent authorities, decide which proportional share will have to be taken into account, having regard to the liability to which the existing relationship gives rise.

Application of other technical principles

• (a) the multiple use of eligible elements for the calculation of own funds at the level of the financial conglomerate (multiple gearing) as well as any inappropriate intra-group creation of own funds must be eliminated;

• (b) in order to ensure the elimination of multiple gearing and the intra-group creation of own funds, the relevant competent authorities must apply by analogy the relevant principles prescribed by the relevant Sectoral Rules;

• (c) pending further harmonisation of the Sectoral Rules, the solvency requirements for each different financial sector represented in the conglomerate must be covered by own funds elements in accordance with the relevant Sectoral Rules;

• (d) if there is a deficit of own funds at the level of the conglomerate, only own funds elements that are eligible according to each of the Relevant Sectoral Rules (cross-sector capital) qualify for verification of compliance with the additional solvency requirements;

• (e) when the relevant Sectoral Rules provide for limits on the eligibility of certain own funds instruments (which would qualify as cross-sector capital) those limits are to similarly apply when own funds are calculated at the level of the conglomerate;

• (f) when calculating own funds at the level of the conglomerate, the relevant competent authorities must also take into account the effectiveness of the transferability and availability of the own funds across the different legal entities within the group, given the objectives of the capital adequacy rules;

• (g) the notional solvency requirement of a mixed financial holding company is to be calculated according to the relevant Sectoral Rules of the most important financial sector within the financial conglomerate.

• (2) Subparagraph (1) has effect irrespective of the method used for calculating the supplementary capital adequacy requirements of the regulated entities within a financial conglomerate as prescribed by paragraphs 6 to 9 of this Schedule.

Technical calculation methods

• (a) the accounting consolidation method (method 1);

• (b) the deduction and aggregation method (method 2);

• (c) the book value/requirement deduction method (method 3);

• (d) a combination of methods 1, 2 and 3 (method 4).

Use of method 1 (the accounting consolidation method)

• (a) the own funds of the conglomerate calculated on the basis of the consolidated position of the group, with the eligible elements being those qualifying in accordance with the relevant Sectoral Rules, and

• (b) the sum of the solvency requirements for each different financial sector represented in the group, with the solvency requirements for each such sector being calculated in accordance with the relevant Sectoral Rules.

The difference may not be negative.

• (2) For the purposes of subparagraph (1), the relevant Sectoral Rules are—

• (a) Directive 2000/12/EC, Title V, Chapter 3, in relation to credit institutions, and

• (b) Directive 98/78/EC in relation to insurance undertakings, and

• (c) Directive 93/6/EEC in relation to credit institutions and investment firms.

• (3) A notional solvency requirement must be calculated in respect of a non-regulated financial sector entity that is not included in the sectoral solvency requirement calculations.

Use of method 2 (the deduction and aggregation method)

• (a) the sum of the own funds of each regulated and non-regulated financial sector entity within the financial conglomerate, with the eligible elements being those qualifying in accordance with the relevant Sectoral Rules, and

• (b) the sum of—

• (i) the solvency requirements for each regulated and non-regulated financial sector entity within the group, those requirements being calculated in accordance with the relevant Sectoral Rules, and

• (ii) the book value of the participatory interests in other entities of the group.

The difference may not be negative.

• (2) A notional solvency requirement must be calculated in respect of a non-regulated financial sector entity.

• (3) For the purpose of paragraph (1), own funds and solvency requirements are to be taken into account for their proportional share as provided for in Regulation 8(6) and in accordance with the technical principles prescribed by this Schedule.

Use of method 3 (the book value/requirement deduction method)

• (a) the own funds of the parent undertaking or the entity at the head of the financial conglomerate, with the eligible elements being those qualifying in accordance with the relevant Sectoral Rules, and

• (b) the sum of—

• (i) the solvency requirement of the parent undertaking or entity, and

• (ii) the higher of the book value of the participatory interest that that undertaking or entity has in other entities within the group and the solvency requirements of those entities.

The difference may not be negative.

• (2) The solvency requirements of the entities referred to in sub-subparagraph (1)(b)(ii) must be taken into account for their proportional share as provided for in Regulation 8(6) and in accordance with the technical principles prescribed by this Schedule.

• (3) A notional solvency requirement must be calculated in respect of non-regulated financial sector entities.

• (4) When valuing the elements eligible for the calculation of the supplementary capital adequacy requirements, participatory interests may be valued by the equity method in accordance with the option specified in Article 59(2)(b) of Directive 78/660/EEC.

Use of method 4 (combination of methods 1, 2 and 3)

SCHEDULE 2 TECHNICAL APPLICATION OF THE PROVISIONS ON INTRA-GROUP TRANSACTIONS AND RISK CONCENTRATION

[ Regulations 9 and 10 ]

Identifying kinds of transactions and risks that regulated entities within the conglomerate are required to report on

• (2) When defining, or giving its opinion about, the kinds of transactions and risks referred to in subparagraph (1), the co-ordinator and the relevant competent authorities shall take into account the specific group and risk management structure of the financial conglomerate concerned. In order to identify significant risk concentration and significant intra-group transactions that are required to be reported in accordance with Regulations 8 and 9, the co-ordinator shall, after consulting the other relevant competent authorities and the conglomerate, define appropriate thresholds based on regulatory own funds or technical provisions, or both.

Monitoring and assessing intra-group transactions and risk concentrations of the regulated entities

• (a) the possible risk that problems arising in one sector of the conglomerate would, or could, be transmitted to other sectors of the conglomerate;

• (b) the risk of a conflict of interests;

• (c) the risk of circumvention of the relevant Sectoral Rules;

• (d) the level and volume of risks.

Co-ordinator may apply Sectoral Rules relating to intra-group transactions and risk concentration

Explanatory Note

These Regulations give effect to Directive 2002/87/EC of the European Parliament and of the Council of 16 December 2002 on the supplementary supervision of credit institutions, insurance undertakings and investment firms in a financial conglomerate and amending Council Directives 73/239/EEC, 79/267/EEC, 92/49/EEC, 92/96/EEC, 93/6/EEC and 93/22/EEC, and Directives 98/78/EC and 2000/12/EC of the European Parliament and of the Council.

The Regulations puts new rules in place regarding the supplementary supervision of regulated entities in a financial conglomerate. A financial conglomerate is a major financial group which provides products and services in different financial sectors.