PRU 8
PRU 8
PRU 8.4
Cross sector groups
- 01/12/2004
Application
PRU 8.4.1
See Notes
- (1) PRU 8.4 applies to every firm that is a member of a financial conglomerate other than:
- (a) an incoming EEA firm;
- (b) an incoming Treaty firm;
- (c) a UCITS qualifier; and
- (d) an ICVC.
- (2) PRU 8.4 does not apply to a firm with respect to a financial conglomerate of which it is a member if the interest of the financial conglomerate in that firm is no more than a participation.
- (3) PRU 8.4.25 R (Capital adequacy requirements: high level requirement), PRU 8.4.26 R (Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive), PRU 8.4.29 R (Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) and PRU 8.4.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.
- 11/08/2004
Purpose
PRU 8.4.2
See Notes
PRU 8.4 implements the Financial Groups Directive. However, material on the following topics is to be found elsewhere in the Handbook as follows:
- (1) further material on third-country financial conglomerates can be found in PRU 8.5;
- (2) SUP 15.9 contains notification rules for members of financial conglomerates;
- (3) material on reporting obligations can be found in SUP 16.7.73 R and SUP 16.7.74 R; and
- (4) material on systems and controls in financial conglomerates can be found in PRU 8.1.
- 11/08/2004
Introduction: identifying a financial conglomerate
PRU 8.4.3
See Notes
- (1) In general the process in (2) to (8) applies for identifying financial conglomerates.
- (2) Competent authorities that have authorised regulated entities should try to identify any consolidation group that is a financial conglomerate. If a competent authority is of the opinion that a regulated entity authorised by that competent authority is a member of a consolidation group which may be a financial conglomerate it should communicate its view to the other competent authorities concerned.
- (3) A competent authority may start (as described in (2)) the process of deciding whether a group is a financial conglomerate even if it would not be the coordinator.
- (4) A member of a group may also start that process by notifying one of the competent authorities that have authorised group members that its group may be a financial conglomerate, for example by notification under SUP 15.9.
- (5) If a group member gives a notification in accordance with (4), that does not automatically mean that the group should be treated as a financial conglomerate. The process described in (6) to (9) still applies.
- (6) The competent authority that would be coordinator will take the lead in establishing whether a group is a financial conglomerate once the process has been started as described in (2) and (3).
- (7) The process of establishing whether a group is a financial conglomerate will normally involve discussions between the financial conglomerate and the competent authorities concerned.
- (8) A financial conglomerate should be notified by its coordinator that it has been identified as a financial conglomerate and of the appointment of the coordinator. The notification should be given to the parent undertaking at the head of the group or, in the absence of a parent undertaking, the regulated entity with the largest balance sheet total in the most important financial sector. That notification does not of itself make a group into a financial conglomerate; whether or not a group is a financial conglomerate is governed by the definition of financial conglomerate as set out in PRU 8.4.
- (9) PRU 8 Ann 4R is a questionnaire (together with its explanatory notes) that the FSA asks groups that may be financial conglomerates to fill out in order to decide whether or not they are.
- 11/08/2004
Introduction: The role of other competent authorities
PRU 8.4.4
See Notes
A
lead supervisor (called the coordinator)
is appointed for each financial
conglomerate. Article 10 of the Financial Groups Directive describes the
criteria for deciding which competent
authority is appointed as coordinator.
Article 11 of the Financial
Groups Directive sets out the tasks of the coordinator.
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Definition of financial conglomerate: basic definition
Definition of financial conglomerate: sub-groups
PRU 8.4.6
See Notes
A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:
- (1) consolidation group; or
- (2) financial conglomerate; or
- (3) group of persons linked in some other way.
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Definition of financial conglomerate: the financial sectors: general
PRU 8.4.7
See Notes
For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:
- (1) the banking sector and the investment services sector, taken together; and
- (2) the insurance sector.
- 11/08/2004
PRU 8.4.8
See Notes
- (1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
- (2) Any mixed financial holding company is considered to be outside the overall financial sector for the purpose of the tests set out in the boxes titled Threshold Test 1, Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree.
- (3) Determining whether the tests set out in the boxes titled Threshold Test 2 and Threshold Test 3 in the financial conglomerate definition decision tree are passed is based on considering the consolidated and/or aggregated activities of the members of the consolidation group within the insurance sector and the consolidated and/or aggregated activities of the members of the consolidation group within the banking sector and the investment services sector.
- 11/08/2004
Definition of financial conglomerate: adjustment of the percentages
PRU 8.4.9
See Notes
Once a financial conglomerate has become a financial conglomerate and subject to supervision in accordance with the Financial Groups Directive, the figures in the financial conglomerate definition decision tree are altered as follows:
- (1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
- (2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
- (3) the figure of six billion Euro in the box titled Threshold Test 3 is replaced by five billion Euro.
- 11/08/2004
PRU 8.4.10
See Notes
The alteration in PRU 8.4.9 R only applies to a financial conglomerate during the period that:
- (1) begins when the financial conglomerate would otherwise have stopped being a financial conglomerate because it does not meet one of the unaltered thresholds referred to in PRU 8.4.9 R; and
- (2) covers the three years following that date.
- 11/08/2004
Definition of financial conglomerate: balance sheet totals
PRU 8.4.11
See Notes
The
calculations referred to in the financial
conglomerate definition decision tree regarding the balance
sheet must be made on the basis of the aggregated balance sheet total of the
members of the consolidation
group, according to their annual accounts. For the purposes
of this calculation, undertakings in
which a participation is
held must be taken into account as regards the amount of their balance sheet
total corresponding to the aggregated proportional share held by the consolidation group.
However, where consolidated accounts are available, they must be used instead
of aggregated accounts.
- 11/08/2004
Definition of financial conglomerate: solvency requirement
PRU 8.4.12
See Notes
The
solvency and capital adequacy requirements referred to in the financial conglomerate definition decision
tree must be calculated in accordance with the provisions of
the relevant sectoral
rules.
- 11/08/2004
Definition of financial conglomerate: discretionary changes to the definition
PRU 8.4.13
See Notes
Articles 3(3) to 3(6), Article 5(4) and Article 6(5) of the Financial Groups Directive allow competent authorities, on a case by case basis, to:
- (1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate;
- (2) apply the scheme in the Financial Groups Directive to EEA regulated entities in specified kinds of group structures that do not come within the definition of financial conglomerate; and
- (3) exclude a particular entity in the scope of capital adequacy requirements that apply with respect to a financial conglomerate.
- 11/08/2004
Capital adequacy requirements: introduction
PRU 8.4.14
See Notes
The
capital adequacy provisions of PRU
8.4 are designed to be applied to EEA-based financial conglomerates.
- 11/08/2004
PRU 8.4.15
See Notes
PRU
8.4.25 R is a high level capital
adequacy rule.
It applies whether or not the FSA is
the coordinator of
the financial conglomerate concerned.
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PRU 8.4.16
See Notes
PRU
8.4.26 R to PRU
8.4.31 R and PRU
8 Ann 1R G implement the detailed capital adequacy requirements
of the Financial Groups
Directive. They only deal with a financial conglomerate for which the FSA is the coordinator. If another competent authority is coordinator of a financial conglomerate,
those rules do
not apply with respect to that financial
conglomerate and instead that coordinator will be responsible for implementing
those detailed requirements.
- 11/08/2004
PRU 8.4.17
See Notes
Annex I of the Financial Groups Directive lays down four methods for calculating capital adequacy at the level of a financial conglomerate. Those four methods are implemented as follows:
- (1) Method 1 calculates capital adequacy using accounting consolidation. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 1 of PRU 8 Ann 1R G.
- (2) Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 2 of PRU 8 Ann 1R 1.
- (3) Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by PRU 8.4.29 R to PRU 8.4.31 R and Part 3 of PRU 8 Ann 1R G.
- (4) Method 4 consists of a combination of Methods 1, 2 and 3 from Annex I of the Financial Groups Directive, or a combination of two of those Methods. It is implemented by PRU 8.4.26 R to PRU 8.4.28 R, PRU 8.4.30 R and Part 4 of PRU 8 Ann 1R G.
- 11/08/2004
PRU 8.4.18
See Notes
Part 4 of PRU 8 Ann 1R G (Use of Method 4 from Annex I of the Financial Conglomerates Directive) applies the FSA's sectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of PRU 8 Ann 1R G applies the FSA's sectoral rules for:
- (1) the insurance sector, that involves a combination of Methods 2 and 3; and
- (2) the banking sector and the investment services sector, that involves a combination of Methods 1 and 3.
- 11/08/2004
PRU 8.4.19
See Notes
Paragraph
5.5 of PRU
8 Ann 1R G (Capital adequacy calculations
for financial conglomerates) deals with a case in which there are no capital
ties between entities in a financial
conglomerate. In particular, the FSA, after consultation with the other relevant competent authorities and
in accordance with Annex I of the Financial
Groups Directive, will determine which proportional share of
a solvency deficit in such an entity will have to be taken into account, bearing
in mind the liability to which the existing relationship gives rise.
- 11/08/2004
PRU 8.4.20
See Notes
- (1) In the following cases, the FSA (acting as coordinator) may choose which of the four methods for calculating capital adequacy laid down in Annex I of the Financial Groups Directive should apply:
- (a) where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or
- (b) the only relevant competent authority for the financial conglomerate is the FSA.
- (2) PRU 8.4.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in PRU 8.4.28 R (1)(e) and PRU 8.4.28 R (1)(f). The process in PRU 8.4.22 G does not apply.
- 11/08/2004
PRU 8.4.21
See Notes
Where PRU
8.4.20 G does not apply, the Annex
I method to be applied is decided by the coordinator after
consultation with the relevant
competent authorities and the financial conglomerate itself.
- 11/08/2004
PRU 8.4.22
See Notes
The
method of calculating capital adequacy chosen in respect of a financial conglomerate as
described in PRU
8.4.21 G will
be applied with respect to that financial
conglomerate by varying the Part IV permission of a firm in that financial conglomerate to include a requirement. That requirement will have
the effect of obliging the firm to
ensure that the financial
conglomerate has capital resources of the type and amount needed
to comply with whichever of the methods in PRU
8 Ann 1R G is to be applied with respect to that financial conglomerate.
The powers in the Act relating
to waivers and
varying a firm's Part IV permission can
be used to implement one of the methods from Annex I of the Financial Groups Directive in a way that
is different from that set out in PRU
8.4 and PRU
8 Ann 1R G if
that is necessary to reflect the consultations referred to in PRU
8.4.21 G.
- 11/08/2004
PRU 8.4.23
See Notes
If
there is more than one firm in
a financial conglomerate with
a Part IV permission,
the FSA would
not normally expect to apply the requirement described
in PRU
8.4.22 G to all of them. Normally
it will only be necessary to apply it to one.
- 11/08/2004
PRU 8.4.24
See Notes
The FSA expects that in all
or most cases falling into PRU
8.4.21 G, the rules in
Part 4 of PRU
8 Ann 1R G will
be applied.
- 11/08/2004
PRU 8.4.32
See Notes
PRU
8.4.35 R implements Article 7(4) and Article 8(4) of the Financial Groups Directive, which provide
that where a financial
conglomerate is headed by a mixed financial holding company, the sectoral rules regarding risk concentration and intra-group transactions of
the most important financial
sector in the financial
conglomerate, if any, shall apply to that sector as a whole,
including the mixed financial
holding company.
- 11/08/2004
PRU 8.4.33
See Notes
Articles 7(3) (Risk concentration)
and 8(3) (Intra-group transactions) and Annex II (Technical application of
the provisions on intra-group transactions and risk concentration) of the Financial Groups Directive say
that Member States may apply at the level of the financial conglomerate the provisions of
the sectoral rules on risk concentrations and intra-group transactions. PRU
8.4 does not take up that option,
although the FSA may
impose such obligations on a case by case basis.
- 11/08/2004
The financial sectors: asset management companies
PRU 8.4.39
See Notes
- (1) In accordance with Article 30 of the Financial Groups Directive (Asset management companies), this rule deals with the inclusion of an asset management company that is a member of a financial conglomerate in the scope of regulation of financial conglomerates. This rule does not apply to the definition of financial conglomerate.
- (2) An asset management company is in the overall financial sector and is a regulated entity for the purpose of:
- (a) PRU 8.4.26 R to PRU 8.4.36 R;
- (b) PRU 8 Ann 1R G (Capital adequacy calculations for financial conglomerates) and PRU 8 Ann 2R (Prudential rules for third country groups); and
- (c) any other provision of the Handbook relating to the supervision of financial conglomerates.
- (3) In the case of a financial conglomerate for which the FSA is the coordinator, all asset management companies must be allocated to one financial sector for the purposes in (2), being either the investment services sector or the insurance sector. But if that choice has not been made in accordance with (4) and notified to the FSA in accordance with (4)(d), an asset management company must be allocated to the investment services sector.
- (4) The choice in (3):
- (a) must be made by the undertaking in the financial conglomerate holding the position referred to in Article 4(2) of the Financial Groups Directive (group member to whom notice must be given that the group has been found to be a financial conglomerate);
- (b) applies to all asset management companies that are members of the financial conglomerate from time to time;
- (c) cannot be changed; and
- (d) must be notified to the FSA as soon as reasonably practicable after the notification in (4)(a).
- 11/08/2004
Application
PRU 8.5.1
See Notes
PRU 8.5 applies to every firm that is a member of a third-country group. But it does not apply to:
- (1) an incoming EEA firm; or
- (2) an incoming Treaty firm; or
- (3) a UCITS qualifier; or
- (4) an ICVC.
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Purpose
PRU 8.5.2
See Notes
PRU 8.5 implements in part Article 18 of the Financial Groups Directive and Article 56a
of the Banking Consolidation
Directive.
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Equivalence
PRU 8.5.3
See Notes
The first question that must be asked
about a third-country
financial group is whether the EEA regulated entities in that third-country group are
subject to supervision by a third-country
competent authority, which is equivalent to that provided for
by the Financial Groups
Directive (in the case of a financial conglomerate) or the EEA prudential sectoral legislation for
the banking sector or
the investment services
sector (in the case of a banking
and investment group). Article 18(1) of the Financial Groups Directive sets out the
process for establishing equivalence with respect to third-country financial conglomerates and
the first three paragraphs of Article 56a of the Banking Consolidation Directive
does so with respect to third-country
banking and investment groups.
- 11/08/2004
Other methods: General
PRU 8.5.4
See Notes
If the supervision of a third-country group by
a third-country competent
authority does not meet the equivalence test referred to in PRU 8.5.3 G, competent authorities may apply other methods
that ensure appropriate supervision of the EEA regulated entities in that third-country group in
accordance with the aims of supplementary supervision under the Financial Groups Directive or
consolidated supervision under the applicable EEA prudential sectoral legislation.
- 11/08/2004
Supervision by analogy: introduction
PRU 8.5.5
See Notes
If the supervision of a third-country group by
a third-country competent
authority does not meet the equivalence test referred to in PRU 8.5.3 G, a competent authority may, rather than take
the measures described in PRU 8.5.4 G, apply, by analogy, the provisions concerning supplementary supervision
under the Financial Groups
Directive or, as applicable, consolidated supervision under
the applicable EEA prudential
sectoral legislation, to the EEA regulated entities in the banking sector, investment services sector and
(in the case of a financial
conglomerate) insurance
sector.
- 11/08/2004
PRU 8.5.6
See Notes
The FSA believes
that it will only be right to adopt the option in PRU 8.5.5 G in response to very unusual group structures.
- 11/08/2004
PRU 8.5.7
See Notes
PRU 8.5.8 R and PRU 8.5.9 R and PRU 8 Ann 2R set out rules to deal with the
situation covered in PRU 8.5.5 G. Those rules do
not apply automatically. Instead, they can only be applied with respect to
a particular third-country
group through the Part
IV permission of a firm in
that third-country group.
Broadly speaking the procedure described in PRU
8.4.22 G also applies to this process.
- 11/08/2004
PRU 8 Ann 2R
PRU 8 Ann 2R
- 01/12/2004
Prudential
rules for third country groups (PRU 8.5.8 R to PRU 8.5.9 R)
- 11/08/2004
PRU 8 Ann 2R 1
Table: PART 1: Third-country financial conglomerates
| 1.1 | This Part of this annex sets out the rules with which a firm must comply under PRU 8.5.8 R with respect to a financial conglomerate of which it is a member. |
| 1.2 | A firm must comply, with respect to the financial conglomerate referred to in paragraph 1.1, with whichever of PRU 8.4.26 R and PRU 8.4.29 R is applied under paragraph 1.3. |
| 1.3 | For the purposes of paragraph 1.2:
(1) the rule in PRU 8.4 that applies as referred to in paragraph 1.2 is the one that is specified by the requirement referred to in PRU 8.5.8 R;
(2) (where PRU 8.4.29 R is applied) the definitions of conglomerate capital resources and conglomerate capital resources requirement that apply for the purposes of that rule are the ones from whichever of Part 1, Part 2 or Part 3 of PRU 8 Ann 1R G is specified in that requirement; and (3) the rules so applied (including those in PRU 8 Ann 1R G) are adjusted in accordance with paragraph 3.1. |
| 1.4 | If the condition in Articles 7(4) and 8(4) of the Financial Groups Directive is satisfied (the financial conglomerate is headed by a mixed financial holding company) with respect to the financial conglomerate referred to in paragraph 1.1 the firm must also comply with PRU 8.4.35 R (as adjusted in accordance with paragraph 3.1) with respect to that financial conglomerate. |
| 1.5 | A firm must comply with the following with respect to the financial conglomerate referred to in paragraph 1.1:
(1) PRU 8.1 (as it applies to financial conglomerates and as adjusted under paragraph 3.1); and
(2) PRU 8.4.25 R. |
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PRU 8 Ann 2R 2
See Notes
Table: PART 2: Third-country banking and investment groups
| 2.1 | This Part of this annex sets out the rules with which a firm must comply under PRU 8.5.9 R with respect to a third-country banking and investment group of which it is a member. |
| 2.2 | A firm must comply with one of the sets of rules specified in paragraph 2.3 as adjusted under paragraph 3.1 with respect to the third-country banking and investment group referred to in paragraph 2.1. |
| 2.3 | The rules referred to in paragraph 2.2 are as follows:
(1) the applicable sectoral consolidation rules in IPRU(BANK); or
(2) the applicable sectoral consolidation rules for the investment services sector; or (3) the rules in ELM 7. |
| 2.4 | The set of rules from paragraph 2.3 that apply with respect to a particular third-country banking and investment group (as referred to in paragraph 2.1) are those that would apply if they were adjusted in accordance with paragraph 3.1. |
| 2.5 | The sectoral rules applied by Part 2 of this annex cover all prudential rules applying on a consolidated basis including those relating to large exposures. |
| 2.6 | A firm must comply with PRU 8.1 (as it applies to banking and investment groups and as adjusted under paragraph 3.1) with respect to the third-country banking and investment group referred to in paragraph 2.1. |
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PRU 8 Ann 2R 3
See Notes
PART 3: Adjustment of scope
| 3.1 | The adjustments that must be carried out under this paragraph are that the scope of the rules referred in Part 1 or Part 2 of this annex, as the case may be, are amended:
(1) so as to remove any provisions disapplying those rules for third-country groups;
(2) so as to remove all limitations relating to where a member of the third-country group is incorporated or has its head office; and (3) so that the scope covers every member of the third-country group that would have been included in the scope of those rules if those members had their head offices in, and were incorporated in, an EEA State. |
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PRU 8 Ann 3G
Guidance Notes for Classification of Groups
- 01/12/2004
See Notes
This
annex consists only of one or more forms or templates. Forms and templates
are to be found through the 'Forms' link under Useful Links section at www.fsahandbook.info or on the Handbook CD-ROM.
Purpose and scope
- 11/08/2004
The form is designed to identify groups
and sub-groups that are likely to be financial conglomerates under the Financial
Groups Directive. A group may be a financial conglomerate if it contains both
insurance and banking/investment businesses and meets certain threshold tests.
The FSA needs
to identify conglomerates with their head offices in the EEA and those with their head offices outside
the EEA,
although this does not necessarily mean that the latter will be subject to EEA conglomerate supervision.
- 11/08/2004
This form's purpose is to enable the FSA to obtain sufficient
information so as to be able to determine how likely a group/sub-group is
to be a financial conglomerate. In certain cases this can only be determined
after consultation with the other EU relevant competent authorities. A second
purpose of the form is therefore to identify any groups and sub-groups that
may need such consultation so that this can be made as soon as possible. This
should allow firms time to prepare to comply.
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The third purpose of the form is to gain
information from firms on the most efficient way to implement the threshold
calculations in detail (consistently with the directive). We have, therefore,
asked for some additional information in part 4 of the form.
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A copy of this form can be found on the FSA's Financial Groups
Website with current contact details.
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Please include workings showing the method
employed to determine the percentages in part 2 (for the threshold conditions)
and giving details of all important assumptions / approximations made in doing
the calculations.
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The definition of financial conglomerate
includes not only conventional groups made up of parent-subsidiary relationships
but groups linked by control and "consolidation Article 12(1) relationships".
If this is the case for your group, please submit along with this form a statement
that this is the case. Please include in that statement an explanation of
how you have included group members not linked by capital ties in the questionnaire
calculations.
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A consolidation Article 12(1) relationship arises between undertakings in the circumstances set out in Article 12(1) of the Seventh Company Law Directive. These are set out in the Handbook Glossary (in the definition of consolidation Article 12(1) relationship). Broadly speaking, undertakings come within this definition if they do not form a conventional group but:
- (a) are managed on a unified basis; or
- (b) have common management.
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General guidance
- 11/08/2004
We would like this to be completed based
on the most senior parent in the group, and, if applicable, for the company
heading the most senior conglomerate group in the EEA. If appropriate, please
also attach a list of all other likely conglomerate sub-groups.
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Please use the most recent accounts for
the top level company in the group together with the corresponding accounts
for all subsidiaries and participations that are included in the consolidated
accounts. Please indicate the names of any significant subsidiaries with a
different year-end from the group's year-end.
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Please note the following:
- (a) Branches should be included as part of the parent entity.
- (b) Include in the calculations overseas entities owned by the relevant group or sub-group.
- (c) There are only two sectors for this purpose: banking/investment and insurance.
- (d) You will need to assign non-regulated financial entities to one of these sectors:
- • banking/investment activities are listed in - IPRU Banks CS 10 Appendix A
- • insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2 p 163-168.
- • Any operator of a UCITS scheme, insurance intermediary, mortgage broker and mixed financial holding company does not fall into the directive definitions of either financial sector or insurance sector.
- They should therefore be ignored for the purposes of these calculations.
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Threshold tests
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For the purpose of completing section
2 of the form relating to the threshold tests, the following guidance should
be used. However, if you consider that for your group there is a more appropriate
calculation then you may use this calculation so long as the method of computation
is submitted with the form.
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Calculating balance sheet totals
- 11/08/2004
Generally, use total (gross) assets for
the balance sheet total of a group/entity. However, investments in other entities
that are part of the group will need to be deducted from the sector that has
made the investment and the balance sheet total of the entity is added to
the sector in which it operates.
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Our expectation of how this may be achieved efficiently is as follows:
- (i) Off-balance-sheet items should be excluded.
- (ii) Where off-balance sheet treatment of funds under management and on-balance sheet treatment of policy holders' funds may distort the threshold calculation, groups should consult the FSA on the appropriateness of using other measures under article 3.5 of the Financial Groups Directive.
- (iii) If consolidated accounts exist for a sub-group consisting of financial entities from only one of the two sectors, these consolidated accounts should be used to measure the balance-sheet total of the sub-group (i.e. total assets less investments in entities in the other sector). If consolidated accounts do not exist, intra-group balances should be netted out when calculating the balance sheet total of a single sector (but cross-sector intra-group balances should not be netted out).
- (iv) Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
- (v) Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
- (vi) Where there is a subsidiary or participation in the opposite sector from its parent (i.e. insurance sector for a banking/investment firm parent and vice versa), the balance sheet amount of the subsidiary or participation should be allocated to its sector using its individual accounts.
- (vii) The balance-sheet total of the parent entity/sub-group is measured as total assets of the parent/sub-group less the book value of its subsidiaries or participations in the other sector (i.e. the value of the subsidiary or participation in the parent's consolidated accounts is deducted from the parent's consolidated assets).
- (viii) The cross-sector subsidiaries or participations referred to above, valued according to their own accounts, are allocated pro-rata, according to the aggregated share owned by the parent/sub-group, to their own sector.
- (ix) If the cross-sector entities above themselves own group entities in the first sector (i.e. that of the top parent/sub-group) these should (in accordance with the methods above) be excluded from the second sector and added to the first sector using individual accounts.
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Solvency (capital adequacy) requirements
- 11/08/2004
Generally, the solvency requirements
should be according to sectoral rules (that is EEA prudential sectoral legislation - see
Glossary). However, for convenience, you may choose to use either EEA rules, FSA rules or local rules.
But if this choice makes a significant difference, either with respect to
whether the group is a financial conglomerate or with respect to which sector
is the biggest, you should consult with the FSA. Non-regulated financial entities should
have proxy requirements calculated on the basis of the most appropriate sector.
If sub-groups submit single sector consolidated returns then the solvency
requirement may be taken from those returns.
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Our expectation of how this may be achieved efficiently is as follows:
- (i) If you complete a solvency return for a sub-group consisting of financial entities from only one of the two sectors, the total solvency requirement for the sub-group should be used.
- (ii) Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
- (iii) Where there is a regulated subsidiary or participation in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be from its individual regulatory return. If there is an identifiable contribution to the parent's solvency requirement in respect of the cross-sector subsidiary or participation, the parent's solvency requirement may be adjusted to exclude this.
- (iv) Where there is an unregulated financial undertaking in the opposite sector from its parent/sub-group, the solvency requirement of the subsidiary or participation should be one of the following:
- (a) (a) as if the entity were regulated by the FSA under the appropriate sectoral rules;
- (b) (b) using EU minimum requirements for the appropriate sector; or
- (c) (c) using non-EU local requirements* for the appropriate sector.
- Please note on the form which of these options you have used, according to the country and sector, and whether this is the same treatment as in your latest overall group solvency calculation.
- (v) For banking/investment requirements, use the total amount of capital required.
- (vi) For insurance requirements, use the Required Minimum Margin:
- (a) (a) UK firms, Form 9: for general insurance business = capital resources requirement [line 29]; for long-term insurance business = capital resources requirement (higher of Minimum Capital Requirement and Enhanced Capital Resources Requirement) [line 52].
- (b) (b) Overseas firms, either:
• the local requirement*;• the EU minimum; or• the FSA requirement.* N.B. local requirements may only be used if they are at least equivalent to the EU minimum (designated states or territories). However, local requirements of a non-designated state or territory may be used if the resulting ratio in F5 is significantly below the 10% threshold (for this purpose "significantly below" may be taken to mean <5%).
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Market share measures
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These are not defined by the directive.
The aim is to identify any standard industry approaches to measuring market
share in individual EU countries by sector, or any data sources which are
commonly used as a proxy.
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Threshold tests
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Test F2
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Test F3/F4/F5
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The relevant percentage for the insurance
sector is:
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(A% + C%)/2 = I %
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The relevant percentage for the banking/investment
sector is:
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(B% + D%)/2 = BI %
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The smallest sector is the sector with
the smallest relevant percentage.
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If I% < BI%
then F3 is insurance, F4 = A%, and F5 = C%
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If BI% < I%
then F3 is banking/investment, F4 = B% and F5 = D
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PRU 8 Ann 4R
PRU 8 Ann 4 (see PRU 8.4.5 R)
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PRU 8 Ann 4.1R
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Footnote:
The conditions are that the EEA
regulated entity at the head of the consolidation group:
(1)is a parent undertaking of
a member of the consolidation
group in the overall
financial sector;(2)has a participation in a member
of the consolidation group that
is in the overall financial
sector; or(3)has a consolidation Article 12(1) relationship with
a member of the consolidation
group that is in the overall
financial sector.
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