Part

Integrated Prudential sourcebook

Chapter

Group risk

Printed on: 30/11/2024

Rulebook at: 31/12/2004

PRU 8

Group risk

PRU 8.2

to follow

  • 31/12/2004

PRU 8.3

Group Risk: Insurance Groups

  • 31/12/2004

Application

PRU 8.3.1

handbook-rule

PRU 8.3 applies to an insurer that is:

  1. (1) a participating insurance undertaking; or
  2. (2) a member of an insurance group (which is not a participating insurance undertaking).
  • 31/12/2004

PRU 8.3.2

handbook-rule

PRU 8.3 does not apply to:

  1. (1) a non-directive friendly society; or
  2. (2) a Swiss general insurer; or
  3. (3) an EEA-deposit insurer; or
  4. (4) an incoming EEA firm; or
  5. (5) an incoming Treaty firm.
  • 31/12/2004

PRU 8.3.3

handbook-guidance

PRU 8.3 applies to a firm:

  1. (1) on a solo basis, as an adjusted solo calculation, where that firm is a participating insurance undertaking; and
  2. (2) on a group basis where that firm is a member of an insurance group.
  • 31/12/2004

PRU 8.3.4

handbook-guidance
For the purposes of PRU 8.3, an insurer includes a pure reinsurer, a friendly society (other than a non-directive friendly society) and a non-EEA insurer.
  • 31/12/2004

Purpose

PRU 8.3.5

handbook-guidance
The purpose of this section is to implement the Insurance Groups Directive on supplementary supervision of firms in an insurance group, as amended by the Financial Groups Directive. The Financial Groups Directive (by amending the Insurance Directives and the Insurance Groups Directive) introduces specific requirements for the treatment of related undertakings of an insurance parent undertaking or a participating insurance undertaking that are credit institutions, investment firms or financial institutions.
  • 31/12/2004

PRU 8.3.6

handbook-guidance

PRU 8.3 sets out the sectoral rules for insurers for:

  1. (1) firms that are participating insurance undertakings carrying out an adjusted solo calculation as contemplated by PRU 2.1.9 R (2);
  2. (2) insurance groups; and
  3. (3) insurance conglomerates.
  • 31/12/2004

PRU 8.3.7

handbook-guidance
For a firm that is a participating insurance undertaking, the rules in PRU 8.3 set out the minimum capital adequacy requirements for the firm itself. A firm that satisfies the test in PRU 8.3.9 R in relation to its group capital resources is deemed by PRU 2.1.9 R (2) to be in compliance with the capital adequacy requirement set out in PRU 2.1.9 R (1).
  • 31/12/2004

Requirement to calculate GCR and GCRR

PRU 8.3.8

handbook-rule
A firm must on a regular basis calculate the group capital resources (GCR) and group capital resources requirement (GCRR) of each undertaking referred to in PRU 8.3.17 R.
  • 31/12/2004

Requirement to maintain group capital

PRU 8.3.9

handbook-rule
Where a firm is the undertaking referred to in PRU 8.3.17 R (1)(c) or PRU 8.3.17 R (2), it must maintain at all times tier one capital resources and tier two capital resources of such an amount that its group capital resources are equal to or exceed its group capital resources requirement.
  • 31/12/2004

PRU 8.3.10

handbook-rule

A firm that is both:

  1. (1) a composite firm; and
  2. (2) an undertaking referred to in PRU 8.3.17 R (1)(c) or PRU 8.3.17 R (2);

must comply with PRU 8.3.9 R separately in respect of its long-term insurance business and its general insurance business.

  • 31/12/2004

PRU 8.3.11

handbook-rule
For the purposes of PRU 8.3.10 R, a firm must include in the calculation of the group capital resources and group capital resources requirement of its long-term insurance business the regulated related undertakings and ancillary services undertakings that are long-term insurance assets.
  • 31/12/2004

PRU 8.3.12

handbook-guidance
PRU 7.6 sets out the detailed requirements for the separation of long-term and general insurance business.
  • 31/12/2004

PRU 8.3.13

handbook-guidance

In order to comply with PRU 8.3.10 R, a composite firm will need to:

  1. (1) establish the group capital resources requirement of its general insurance business and its long-term insurance business separately; and
  2. (2) allocate its group capital resources between its general insurance business and its long-term insurance business so that:
    1. (a) the group capital resources allocated to its general insurance business are equal to or in excess of the group capital resources requirement of its general insurance business; and
    2. (b) the group capital resources allocated to its long-term insurance business are equal to or in excess of the group capital resources requirement of its long-term insurance business.
  • 31/12/2004

PRU 8.3.14

handbook-guidance
Surplus group capital resources in the long-term insurance business cannot be used towards meeting the requirements of the general insurance business (see PRU 8.3.41 R) but surplus group capital resources in the general insurance business may be used towards meeting the amount of the group capital resources requirement that relates to the long-term insurance business.
  • 31/12/2004

PRU 8.3.16

handbook-guidance
Principle 4 requires a firm to maintain adequate financial resources, taking into account any activity of other members of the group of which the firm is a member. PRU 8.3 sets out provisions that deal specifically with the way the activities of other members of the group should be taken into account. This results in the firm being required to hold sufficient capital resources so that the group capital resources are at least equal to the group capital resources requirement. However, the adequacy of the group capital resources needs to be assessed both by the firm and the FSA. Firms are required to carry out an assessment of the adequacy of their financial resources (PRU 1.2.26 R) and the FSA will review this and may provide individual guidance on the amount and quality of capital resources the FSA considers adequate. As part of such reviews, the FSA may also form a view on the appropriateness of the group capital resources requirement and group capital resources. Where necessary, the FSA may also give individual guidance on the capital resources a firm should hold in order to comply with Principle 4 expressed by reference to PRU 8.3.9 R and PRU 8.3.15 R.
  • 31/12/2004

Scope - undertakings whose group capital is to be calculated and maintained

PRU 8.3.17

handbook-rule

The undertakings referred to in PRU 8.3.8 R, PRU 8.3.9 R, PRU 8.3.10 R and PRU 8.3.15 Rare:

  1. (1) for any firm that is not within (2), each of the following:
    1. (a) its ultimate insurance parent undertaking;
    2. (b) its ultimate EEA insurance parent undertaking (if different); and
    3. (c) the firm itself, if it is a participating insurance undertaking; and
  2. (2) the firm itself, where the firm is a participating insurance undertaking and is:
    1. (a) a pure reinsurer; or
    2. (b) a non-EEA insurer; or
    3. (c) a friendly society.
  • 31/12/2004

PRU 8.3.18

handbook-guidance

Article 3(3) of the Insurance Groups Directive allows an undertaking to be excluded from supplementary supervision if:

  1. (1) its head office is in a non-EEA State where there are legal impediments to the transfer of the necessary information; or
  2. (2) in the opinion of the competent authority responsible for exercising supplementary supervision, having regard to the objectives of supplementary supervision:
    1. (a) its inclusion would be inappropriate or misleading; or
    2. (b) it is of neglible interest.
  • 31/12/2004

PRU 8.3.19

handbook-guidance
If an application is made for a waiver, it is the policy of the FSA to consider the effect, in the circumstances described in PRU 8.3.18 G, of granting a waiver allowing the exclusion of a related undertaking from the calculation of group capital resources and the group capital resources requirement required by PRU 8.3.8 R.
  • 31/12/2004

PRU 8.3.20

handbook-guidance
Examples of related undertakings which may be excluded from supplementary supervision by Article 3(3) of the Insurance Groups Directive include insurance holding companies in the insurance group that are not the ultimate insurance parent undertaking or, if different, the ultimate EEA insurance parent undertaking of a firm.
  • 31/12/2004

PRU 8.3.21

handbook-guidance
If more than one member of the insurance group is to be excluded in the circumstances described in PRU 8.3.18 G (2)(b), they may only be excluded if, considered together, they are of negligible interest in the context of the insurance group.
  • 31/12/2004

PRU 8.3.22

handbook-guidance
When giving a waiver in the circumstances described in PRU 8.3.18 G, the FSA may impose a condition requiring the firm to provide information about any member of the insurance group excluded pursuant to a waiver granted in the circumstances described in PRU 8.3.18 G.
  • 31/12/2004

Optional alternative method of calculation for firms subject to supplementary supervision by another EEA competent authority

PRU 8.3.23

handbook-rule
If the competent authority in an EEA State other than the United Kingdom has agreed to be the competent authority responsible for exercising supplementary supervision of an insurance group of which a firm is a member under Article 4(2) of the Insurance Groups Directive, the firm may prepare the calculations required under PRU 8.3.8 R in relation to the ultimate EEA insurance parent undertaking in accordance with the requirements of supplementary supervision in that EEA State.
  • 31/12/2004

PRU 8.3.24

handbook-guidance
The FSA will notify the firm if it has reached agreement with the competent authority in an EEA State other than the United Kingdom in accordance with Article 4(2) of the Insurance Groups Directive.
  • 31/12/2004

Non-EEA ultimate insurance parent undertakings

PRU 8.3.25

handbook-rule

Where the ultimate insurance parent undertaking of a firm has its head office in a non-EEA State, the firm may:

  1. (1) calculate the group capital resources and the group capital resources requirement of its ultimate insurance parent undertaking in accordance with accounting practice applicable for the purposes of the regulation of insurance undertakings in the state or territory of the head office of the ultimate insurance parent undertaking adapted as necessary to apply the general principles set out in Annex I (1) paragraphs B, C and D of the Insurance Groups Directive; and
  2. (2) elect (see PRU 8.3.26 R) to carry out the calculation referred to in (1) in accordance with the accounting consolidation method set out in Annex I (3) of the Insurance Groups Directive.
  • 31/12/2004

PRU 8.3.26

handbook-rule
A firm may elect to use the calculation method referred to in PRU 8.3.25 R (2) if it has made the election by written notice to the FSA in a way that complies with the requirements for written notice in SUP 15.7.
  • 31/12/2004

PRU 8.3.27

handbook-rule
PRU 8.3.15 R does not apply in respect of the group capital resources of a firm's ultimate insurance parent undertaking if that ultimate insurance parent undertaking has its head office in a non-EEA State.
  • 31/12/2004

Proportional holdings

PRU 8.3.28

handbook-rule

Subject to PRU 8.3.30 R and PRU 8.3.31 R, when calculating group capital resources and the group capital resources requirement of an undertaking in PRU 8.3.17 R, a firm must take only the relevant proportion of the following items ("calculation items") into account:

  1. (1) the solo capital resources of a regulated related undertaking;
  2. (2) the assets of a regulated related undertaking which are required to be deducted as part of the calculation of group capital resources; and
  3. (3) the individual capital resources requirement of a regulated related undertaking.
  • 31/12/2004

PRU 8.3.29

handbook-rule

In PRU 8.3.28 R, the relevant proportion is either:

  1. (1) the proportion of the total number of issued shares in the regulated related undertaking held, directly or indirectly, by the undertaking in PRU 8.3.17 R; or
  2. (2) where a consolidation Article 12(1) relationship exists between related undertakings within the insurance group, such proportion as the FSA determines in accordance with Article 28(5) of the Financial Groups Directive and Regulation 15 of the Financial Groups Directive Regulations.
  • 31/12/2004

PRU 8.3.30

handbook-rule
Where the undertaking in PRU 8.3.17 R is a firm, if the individual capital resources requirement of a regulated related undertaking that is a subsidiary undertaking and not an insurer exceeds the solo capital resources of that undertaking less the amount calculated in PRU 8.3.74 R (3) (if any), the full amount of the calculation items of that regulated related undertaking less the amount in PRU 8.3.74 R (3) must be taken into account in the calculation of group capital resources and the group capital resources requirement.
  • 31/12/2004

PRU 8.3.31

handbook-rule
Except where PRU 8.3.30 R applies, if the individual capital resources requirement of a regulated related undertaking that is a subsidiary undertaking of the undertaking in PRU 8.3.17 R exceeds its solo capital resources, the full amount of the calculation items of that regulated related undertaking must be taken into account in the calculation of group capital resources and the group capital resources requirement.
  • 31/12/2004

PRU 8.3.32

handbook-rule

For the purposes of PRU 8.3.10 R, where a composite firm that is an undertaking in PRU 8.3.17 R (1)(c) or (2):

  1. (1) holds directly or indirectly shares in a regulated related undertaking; and
  2. (2) the shares in (1) are held partly by its long-term insurance business and partly by its general insurance business;
  3. (3) the relevant proportion of the calculation items calculated in accordance with PRU 8.3.29 R, subject to PRU 8.3.30 R and PRU 8.3.31 R, must be allocated between the long-term and general insurance business in proportion to their respective holdings, directly or indirectly, in the shares in that regulated related undertaking.
  • 31/12/2004

Calculation of the GCRR

PRU 8.3.33

handbook-rule
  • 31/12/2004

PRU 8.3.34

handbook-rule

For the purposes of PRU 8.3, an individual capital resources requirement is:

  1. (1) in respect of an insurer that is not within (2):
    1. (a) its capital resources requirement calculated in accordance with PRU 2.1; less
    2. (b) where the capital resources requirements of both the insurer and its insurance parent undertaking that is an insurer include with-profits insurance capital components, any element of double-counting that may arise from the aggregation of the individual capital resources requirements for the purposes of PRU 8.3.33 R;
  2. (2) in respect of an insurer that is either a pure reinsurer or whose main business otherwise consists of reinsurance, and whose head office is in the United Kingdom, the capital resources requirement that would apply to the firm in accordance with PRU 2.1 if its insurance business was not restricted to reinsurance;
  3. (3) in respect of an insurance undertaking that is not within (1) or (2) and whose main business is reinsurance and whose head office is in a designated State or territory, either:
    1. (a) the proxy capital resources requirement that would apply to it if, in connection with its reinsurance activities, the permissions on the basis of which that proxy capital resources requirement is calculated were permissions to carry on insurance business that is not restricted to reinsurance; or
    2. (b) the solo capital resources requirement that would apply to it if, in connection with its reinsurance activities, the insurance undertaking were a regulated insurance entity whose insurance business is not restricted to reinsurance for the purposes of calculating the solo capital resources requirement in accordance with the relevant sectoral rules of the designated State or territory;
  4. (4) in respect of an insurance undertaking that is not within (1) to (3) and whose main business is reinsurance, the proxy capital resources requirement that would apply to it if, in connection with its reinsurance activities, the permissions on the basis of which that proxy capital resources requirement is calculated were permissions to carry on insurance business that is not restricted to reinsurance;
  5. (5) in respect of an EEA insurer, the equivalent of the capital resources requirement as calculated in accordance with the applicable requirements in its Home State;
  6. (6) in respect of an insurance undertaking that is not within (1) to (5) and whose head office is in a designated State or territory, either:
    1. (a) the solo capital resources requirement applicable to it in that designated State or territory; or
    2. (b) its proxy capital resources requirement;
  7. (7) in respect of an insurance undertaking that is not within (1) to (6), its proxy capital resources requirement;
  8. (8) in respect of a regulated entity with its head office in the EEA (excluding an insurance undertaking), its solo capital resources requirement calculated in accordance with the sectoral rules for the financial sector applicable to it in the EEA State in which it has its head office;
  9. (9) in respect of a regulated entity not within (8) (excluding an insurance undertaking), its solo capital resources requirement;
  10. (10) in respect of an asset management company, the solo capital resources requirement that would apply to it if, in connection with its activities, it were treated as an investment firm for the purposes of calculating the solo capital resources requirement;
  11. (11) in respect of a financial institution that is not a regulated entity (including a financial holding company), the solo capital resources requirement that would apply to it if, in connection with its activities, it were treated as being within the banking sector; and
  12. (12) in respect of an insurance holding company, zero.
  • 31/12/2004

PRU 8.3.35

handbook-guidance

The Insurance Groups Directive defines reinsurers in terms of the 'main business' they carry on. Under the directive, the individual capital resources requirements for reinsurers (including those whose head office is in the United Kingdom) are to be calculated on the basis of requirements analogous to those applicable to direct insurers (that is, insurers carrying on insurance business that is not restricted to reinsurance). Although insurers that are pure reinsurers are already subject to PRU, there are a number of respects in which the capital regime that applies to them differs from that applicable to insurers who are direct insurers. The effect of PRU 8.3.34 R (2) to (4) is to calculate the individual capital resources requirement for all reinsurers as if they were carrying on direct insurance. This applies to:

  1. (1) pure reinsurers whose head office is in the United Kingdom;
  2. (2) insurers whose head office is in the United Kingdom and whose main business is reinsurance (because an insurer that is not a pure reinsurer with their business restricted to reinsurance may nevertheless in principle still have reinsurance as its main business);
  3. (3) reinsurers whose head office is in another EEA State;
  4. (4) reinsurers whose head office is in a designated State or territory (other than an EEA State); and
  5. (5) reinsurers whose head office is outside the EEA.
  • 31/12/2004

Calculation of GCR

PRU 8.3.36

handbook-rule
For the purposes of PRU 8.3.8 R and subject to PRU 8.3.23 R and PRU 8.3.25 R, a firm must calculate the group capital resources of an undertaking in PRU 8.3.17 R in accordance with the table in PRU 8.3.43 R, subject to the limits in PRU 8.3.45 R.
  • 31/12/2004

PRU 8.3.37

handbook-rule

For the purposes of PRU 8.3, the following expressions when used in relation to either an undertaking in PRU 8.3.17 R or a regulated related undertaking which is not subject to PRU 2.2.14 R, are to be construed as if that undertaking were required to calculate its capital resources in accordance with PRU 2.2.14 R, but with such adjustments being made to secure that the undertaking's calculation of its solo capital resources complies with the relevant sectoral rules applicable to it:

  1. (1) tier one capital resources;
  2. (2) tier two capital resources;
  3. (3) upper tier two capital resources;
  4. (4) lower tier two capital resources;
  5. (5) innovative tier one capital resources; and
  6. (6) core tier one capital.
  • 31/12/2004

PRU 8.3.38

handbook-rule

For the purposes of PRU 8.3.37 R, the sectoral rules applicable to:

  1. (1) an insurance holding company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an insurer;
  2. (2) an asset management company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an investment firm; and
  3. (3) subject to PRU 8.3.39 R, a financial institution, that is not a regulated entity, are the sectoral rules that would apply to it if, in connection with its activities, it were treated as being within the banking sector.
  • 31/12/2004

PRU 8.3.39

handbook-rule

Where a financial institution, that is not a regulated entity, has invested in tier one capital or tier two capital issued by a parent undertaking that is:

  1. (1) an insurance holding company; or
  2. (2) an insurer;

the sectoral rules that apply to that financial institution are the sectoral rules for the insurance sector.

  • 31/12/2004

PRU 8.3.40

handbook-rule

For the purposes of PRU 8.3.36 R, the capital resources of a financial institution within PRU 8.3.39 R that can be included in the calculations in PRU 8.3.48 R (2), PRU 8.3.50 R (2), PRU 8.3.53 R (2), PRU 8.3.55 R (2) and PRU 8.3.57 R (2) are:

  1. (1) the issued tier one capital or tier two capital of that financial institution held, directly or indirectly, by its parent undertaking referred to in PRU 8.3.39 R; and
  2. (2) the lower of:
    1. (a) the tier one capital or tier two capital issued by the parent undertaking referred to in PRU 8.3.39 R pursuant to the investment by the financial institution; and
    2. (b) the tier one capital or tier two capital issued by the financial institution to raise funds for its investment in the capital resources of the parent undertaking referred to in (a).
  • 31/12/2004

PRU 8.3.41

handbook-rule
  1. (1) In calculating group capital resources, a firm must exclude the restricted assets of a regulated related undertaking except insofar as those assets are available to meet the individual capital resources requirement of that regulated related undertaking.
  2. (2) In (1), "restricted assets" means assets of a regulated related undertaking which are subject to a legal restriction or other requirement having the effect that those assets cannot be transferred or otherwise made available to another regulated related undertaking for the purposes of meeting its individual capital resources requirement without causing a breach of that legal restriction or requirement.
  • 31/12/2004

PRU 8.3.42

handbook-guidance
For the purposes of PRU 8.3.41 R, in respect of an insurance undertaking that is a member of an insurance group, the assets of a long-term insurance fund are restricted assets within the meaning of PRU 8.3.41 R. Any excess of assets over liabilities in the long-term insurance business may only be included in the calculation of the group capital resources up to the amount of the capital resources requirement related to that long-term insurance business.
  • 31/12/2004

PRU 8.3.43

handbook-rule
Table: Group capital resources
  • 31/12/2004

Calculation of GCR - Limits on the use of different forms of capital

PRU 8.3.44

handbook-guidance
As the various components of capital differ in the degree of protection that they offer the insurance group, restrictions are placed on the extent to which certain types of capital are eligible for inclusion in the group capital resources of the undertaking in PRU 8.3.17 R. These restrictions are set out in PRU 8.3.45 R.
  • 31/12/2004

PRU 8.3.45

handbook-rule
  1. (1) For the purposes of PRU 8.3.9 R, PRU 8.3.10 R and PRU 8.3.15 R, a firm must ensure that at all times its tier one capital resources and tier two capital resources are of such an amount that the group capital resources of the undertaking in PRU 8.3.17 R comply with the following limits:
    1. (a) (P - Q) > ½ (R - S);
    2. (b) (P - Q + T - W) > ¾ (R - S);
    3. (c) V > ½ P;
    4. (d) Q < 15% of P;
    5. (e) T < P; and
    6. (f) W < ½ P
  2. (2) For the purposes of PRU 8.3.9 R and PRU 8.3.10 R, a firm must ensure that at all times its tier one capital resources and tier two capital resources are of such an amount that its group capital resources comply with the following limit:
    1. (P - Q + T) > 1/3 X + (R - S - U - X).
  3. (3) For the purposes of (1) and (2):
    1. (a) P is the total group tier one capital of the undertaking in PRU 8.3.17 R;
    2. (b) Q is the sum of the innovative tier one capital resources calculated in accordance with PRU 8.3.53 R;
    3. (c) R is the group capital resources requirement of the undertaking in PRU 8.3.17 R;
    4. (d) S is the sum of all the with-profits insurance capital components of an undertaking in PRU 8.3.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
    5. (e) T is the total group tier two capital of the undertaking in PRU 8.3.17 R;
    6. (f) U is the sum of all the resilience capital requirements of an undertaking in PRU 8.3.17 R that is an insurer and each of its regulated related undertakings that is an insurer;
    7. (g) V is the sum of all the core tier one capital calculated in accordance with PRU 8.3.55 R;
    8. (h) W is the sum of the lower tier two capital resources calculated in accordance with PRU 8.3.57 R; and
    9. (i) X is the MCR of the firm less its resilience capital requirement, if any.
  • 31/12/2004

PRU 8.3.46

handbook-guidance
The amount of any capital item excluded from group capital resources under PRU 8.3.45 R (1)(d) may form part of total group tier two capital calculated in accordance with PRU 8.3.50 R subject to the limits in PRU 8.3.45 R (1)(e) and (f).
  • 31/12/2004

PRU 8.3.47

handbook-rule
For the purposes of PRU 8.3.10 R, a firm must ensure that the tier one capital resources and tier two capital resources of each of its long-term insurance business and its general insurance business are of such an amount that the group capital resources of each its long-term insurance business and its general insurance business comply with the limits in PRU 8.3.45 R separately for each type of business.
  • 31/12/2004

Calculation of GCR - Total group tier one capital

PRU 8.3.48

handbook-rule

For the purposes of PRU 8.3.43 R, the total group tier one capital of an undertaking in PRU 8.3.17 R is the sum of:

  1. (1) the tier one capital resources of the undertaking in PRU 8.3.17 R; and
  2. (2) subject to PRU 8.3.40 R, the tier one capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in PRU 8.3.49 R.
  • 31/12/2004

PRU 8.3.49

handbook-rule

The deduction referred to in PRU 8.3.48 R is the sum of:

  1. (1) the book value of the investment by the undertaking in PRU 8.3.17 R in the tier one capital resources of each of its related undertakings that is a regulated related undertaking; and
  2. (2) the book value of the investments by related undertakings of the undertaking in PRU 8.3.17 R in the tier one capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
  • 31/12/2004

Calculation of GCR - Total group tier two capital

PRU 8.3.50

handbook-rule

For the purposes of PRU 8.3.43 R, the total group tier two capital of an undertaking in PRU 8.3.17 R is the sum of:

  1. (1) the upper tier two capital resources and the lower tier two capital resources of that undertaking; and
  2. (2) subject to PRU 8.3.40 R, the upper tier two capital resources and the lower tier two capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in PRU 8.3.51 R.
  • 31/12/2004

PRU 8.3.51

handbook-rule

The deduction referred to in PRU 8.3.50 R is the sum of:

  1. (1) the book value of the investments by the undertaking in PRU 8.3.17 R in the upper tier two capital resources and the lower tier two capital resources of each of its related undertakings that is a regulated related undertaking; and
  2. (2) the book value of the investments by related undertakings of the undertaking in PRU 8.3.17 R in the upper tier two capital resources and the lower tier two capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
  • 31/12/2004

PRU 8.3.52

handbook-guidance
For the purposes of PRU 8.3.50 R (2), the limits in PRU 2.2.23 R apply to the upper tier two capital resources and the lower tier two capital resources of any regulated related undertaking that is an insurer. Similar limits may apply to other regulated related undertakings under the relevant sectoral rules.
  • 31/12/2004

Calculation of GCR - Innovative tier one capital resources, lower tier two capital resources and core tier one capital

PRU 8.3.53

handbook-rule

For the purposes of PRU 8.3.45R (3)(b), the innovative tier one capital resources is the sum of:

  1. (1) the innovative tier one capital resources of the undertaking in PRU 8.3.17 R; and
  2. (2) subject to PRU 8.3.40 R, the innovative tier one capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in PRU 8.3.54 R.
  • 31/12/2004

PRU 8.3.54

handbook-rule

The deduction referred to in PRU 8.3.53 R is the sum of:

  1. (1) the book value of the investments by the undertaking in PRU 8.3.17 R in the innovative tier one capital resources of each of its related undertakings that is a regulated related undertaking; and
  2. (2) the book value of the investments by related undertakings of the undertaking in PRU 8.3.17 R in the innovative tier one capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
  • 31/12/2004

PRU 8.3.55

handbook-rule

For the purposes of PRU 8.3.45R (3)(g), the core tier one capital is the sum of:

  1. (1) the core tier one capital of the undertaking of PRU 8.3.17 R; and
  2. (2) subject to PRU 8.3.40 R, the core tier one capital of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in PRU 8.3.56 R.
  • 31/12/2004

PRU 8.3.56

handbook-rule

The deduction referred to in PRU 8.3.55 R is the sum of:

  1. (1) the book value of the investments by the undertaking in PRU 8.3.17 R in the core tier one capital of each of its related undertakings that is a regulated related undertaking; and
  2. (2) the book value of the investments by related undertakings of the undertaking in PRU 8.3.17 R in the core tier one capital of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
  • 31/12/2004

PRU 8.3.57

handbook-rule

For the purposes of PRU 8.3.45R (3)(h), the lower tier two capital resources is the sum of:

  1. (1) the lower tier two capital resources of the undertaking in PRU 8.3.17 R; and
  2. (2) subject to PRU 8.3.40 R, the lower tier two capital resources of each of the related undertakings of that undertaking that is a regulated related undertaking after the deduction in PRU 8.3.58 R.
  • 31/12/2004

PRU 8.3.58

handbook-rule

The deduction referred to in PRU 8.3.57 R is the sum of:

  1. (1) the book value of the investments by the undertaking in PRU 8.3.17 R in the lower tier two capital resources of each of its related undertakings that is a regulated related undertaking; and
  2. (2) the book value of the investments by related undertakings of the undertaking in PRU 8.3.17 R in the lower tier two capital resources of the undertaking in PRU 8.3.17 R and each of its related undertakings that is a regulated related undertaking.
  • 31/12/2004

Calculation of GCR - Inadmissible assets

PRU 8.3.59

handbook-rule
For the purpose of PRU 8.3.43 R, a firm must deduct from the group capital resources before deduction (calculated at stage C in the table in PRU 8.3.43 R) of the undertaking in PRU 8.3.17 R, the value of all assets of the undertaking in PRU 8.3.17 R and each of its regulated related undertakings that are not admissible assets as set out in PRU 8.3.60 R.
  • 31/12/2004

PRU 8.3.60

handbook-rule

For the purposes of PRU 8.3.59 R, an asset is not an admissible asset if:

  1. (1) in respect of a regulated related undertaking or undertaking in PRU 8.3.17 R that is an insurer, it is not an admissible asset as listed in PRU 2 Annex 1R;
  2. (2) in respect of a regulated related undertaking or undertaking in PRU 8.3.17 R that is not an insurer, it is an asset of the undertaking that is not admissible for the purpose of calculating that undertaking's solo capital resources in accordance with the sectoral rules applicable to it.
  • 31/12/2004

PRU 8.3.61

handbook-rule

For the purposes of PRU 8.3.60 R (2), the sectoral rules applicable to:

  1. (1) an asset management company are the sectoral rules that would apply to it if, in connection with its activities, it were treated as an investment firm; and
  2. (2) a financial institution that is not a regulated entity are the sectoral rules that would apply to it if, in connection with its activities, it were treated as being within the banking sector.
  • 31/12/2004

Calculation of GCR - Deductions under requirement deduction method from group capital resources

PRU 8.3.62

handbook-rule
For the purposes of PRU 8.3.43 R, a firm must deduct from the group capital resources before deduction (calculated at stage C in the table in PRU 8.3.43 R) of an undertaking in PRU 8.3.17 R, the sum of the value of the direct or indirect investments by the undertaking in PRU 8.3.17 R in each of its related undertakings which is an ancillary services undertaking, calculated in accordance with PRU 8.3.63 R.
  • 31/12/2004

PRU 8.3.63

handbook-rule
The value of an investment in an undertaking referred to in PRU 8.3.62 R is the higher of the book value of the direct or indirect investment by the undertaking in PRU 8.3.17 R and the notional capital resources requirement of that undertaking.
  • 31/12/2004

PRU 8.3.64

handbook-rule

For the purposes of PRU 8.3.63 R, the notional capital resources requirement is:

  1. (1) for an ancillary insurance services undertaking, zero;
  2. (2) for any other ancillary services undertaking, the capital resources requirement that would apply to that undertaking, if it were a regulated related undertaking, in accordance with the sectoral rules applicable to a regulated related undertaking whose activities are closest in nature and scope to the activities of that undertaking.
  • 31/12/2004

Calculation of GCR - Deductions of ineligible surplus capital

PRU 8.3.65

handbook-rule
Where the undertaking in PRU 8.3.17 R is a participating insurance undertaking, the firm must, for the purposes of PRU 8.3.43 R, deduct from its group capital resources before deduction (calculated at stage C in the table in PRU 8.3.43 R) the sum of the ineligible surplus capital of each of its regulated related undertakings that is an insurance undertaking, calculated in accordance with PRU 8.3.67 R.
  • 31/12/2004

PRU 8.3.66

handbook-guidance

The purpose of PRU 8.3.65 R is to ensure that, where the undertaking in PRU 8.3.17 R is a firm, group capital resources are not overstated by the inclusion of capital that, although surplus to the requirements of the relevant regulated related undertaking that is an insurance undertaking, cannot practically be transferred to support requirements arising elsewhere in the group. Therefore, ineligible surplus capital in a regulated related undertaking that is an insurance undertaking is deducted in arriving at group capital resources. Surplus capital in such a regulated related undertaking is regarded as transferable only to the extent that:

  1. (1) it can be transferred without the regulated related undertaking breaching its own limits on the use of different forms of capital;
  2. (2) it does not contain assets that are restricted within the meaning of PRU 8.3.41 R; and
  3. (3) in the case of a regulated related undertaking that has a long-term insurance business, it does not contain any assets allocated to the capital resources of that undertaking for the purposes of the capital resources of its long-term insurance business meeting the capital resources requirement of its long-term insurance business.
  • 31/12/2004

PRU 8.3.67

handbook-rule
  1. (1) For the purposes of PRU 8.3.65 R, the ineligible surplus capital of a regulated related undertaking that is an insurance undertaking is calculated by deducting B from A where:
    1. (a) A is the regulatory surplus value of that insurance undertaking less any restricted assets of the insurance undertaking that have been excluded under PRU 8.3.41 R; and
    2. (b) B is the transferable capital of that undertaking.
  2. (2) If A minus B is negative, the ineligible surplus capital is zero.
  • 31/12/2004

PRU 8.3.68

handbook-rule

For the purposes of PRU 8.3.67 R (1)(b), the transferable capital is calculated by deducting the sum of the following from the tier one capital resources of the regulated related undertaking that is an insurance undertaking:

  1. (1) any restricted assets of that insurance undertaking that have been excluded under PRU 8.3.41 R;
  2. (2) any tier one capital resources of that insurance undertaking that have been allocated towards meeting the individual capital resources requirement of its long-term insurance business; and
  3. (3) the higher of:
    1. (a) 50% of the individual capital resources requirement of the general insurance business of that insurance undertaking; and
    2. (b) the individual capital resources requirement of the general insurance business of that insurance undertaking less the difference between E and F where:
      1. (i) E is its tier two capital resources; and
      2. (ii) F is the amount of its tier two capital resources that have been allocated towards meeting the individual capital resources requirement of its long-term insurance business.
  • 31/12/2004

PRU 8.3.69

handbook-guidance

Examples of transferable and ineligible surplus capital:

Example 1

  1. (i) Under PRU 8.3.68 R, transferable capital = tier one capital resources of 50, less the sum of:
    1. (1) restricted assets excluded under PRU 8.3.41 R = (none);
    2. (2) tier one capital resources allocated to the long-term insurance business = (none); and
    3. (3) higher of (50% of 50 = 25 and 50 - 40 = 10) = (25) = (50 - 25) = 25
  2. (2) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (40) less restricted assets excluded under PRU 8.3.41 R (0) less transferable capital (25) = 15.


Example 2

  1. (i) Under PRU 8.3.68 R, transferable capital = tier one capital resources of 60, less the sum of:
    1. (1) restricted assets excluded under PRU 8.3.41 R = (5);
    2. (2) tier one capital resources allocated to the long-term insurance business = (5); and
    3. (3) the higher of (50% of 45 = 22.5; and 45 - 40 = 5) = (22.5)= 60 - 32.5 = 27.5
  2. (ii) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (50) - restricted assets excluded under PRU 8.3.41 R of (5) - transferable capital (27.5) = 17.5.


Example 3

The requirement relating to the long-term insurance business is met by the FFA of 20 and tier two capital resources of 5. Of the remaining tier two capital resources of 35, 5 is excluded at the solo level because the tier one capital resources allocated to the general insurance business are 30.

  1. (i) Under PRU 8.3.68 R, transferable capital = tier one capital resources of 50, less the sum of:
    1. (1) restricted assets excluded under PRU 8.3.41 R = (none);
    2. (2) tier one capital resources allocated to the long-term insurance business = (20); and
    3. (3) the higher of (50% of 25 = 12.5; and 25 - (35 - 5) = -5) = (12.5)= 50 - 32.5 = 17.5.
  2. (ii) Under PRU 8.3.67 R, ineligible surplus capital = regulatory surplus value (35) - restricted assets excluded under PRU 8.3.41 R of (0) - transferable capital (17.5) = 17.5.
  • 31/12/2004

Calculation of GCR - Assets in excess of market risk and counterparty exposure limits

PRU 8.3.70

handbook-rule
Where the undertaking in PRU 8.3.17 R is a participating insurance undertaking, the firm must deduct from its group capital resources before deduction (calculated at stage C in the table in PRU 8.3.43 R) the assets in excess of market risk and counterparty exposure limits calculated in accordance with PRU 8.3.74 R.
  • 31/12/2004

PRU 8.3.71

handbook-guidance
For the purposes of PRU 8.3.43 R, where the undertaking in PRU 8.3.17 R is a participating insurance undertaking, the investments referred to in PRU 8.3.48 R and PRU 8.3.50 R are not subject to the market risk and counterparty exposure limits.
  • 31/12/2004

PRU 8.3.72

handbook-rule

The firm (A) must, subject to PRU 8.3.73 R, include in the calculation in PRU 8.3.74 R each related undertaking (B) that is:

  1. (1) a regulated related undertaking that is a subsidiary undertaking; or
  2. (2) a related undertaking where the firm has elected to value the shares held in that undertaking by the firm in accordance with PRU 1.3.35 R for the purposes of calculating the tier one capital resources of the firm.
  • 31/12/2004

PRU 8.3.73

handbook-rule

The related undertakings in PRU 8.3.72 R need only be included in the calculation in PRU 8.3.74 R if:

  1. (1) where B is a regulated related undertaking, the solo capital resources of that undertaking exceed its individual capital resources requirement; or
  2. (2) where B is an undertaking in PRU 8.3.72 R (2), its assets that fall within one or more of the categories in PRU 2 Annex 1R exceed its accounting liabilities.
  • 31/12/2004

PRU 8.3.74

handbook-rule

A's assets in excess of the market risk and counterparty exposure limits are calculated as follows:

  1. (1) Subject to (2), a firm must apply the market risk and counterparty exposure limits in PRU 3.2.22 R (3) to:
    1. (a) where B is an insurer, the admissible assets of B;
    2. (b) where B is a regulated related undertaking that is not an insurer, the assets of that undertaking less those assets identified in PRU 8.3.60 R (2) as not being admissible assets.
  2. (2) The market risk and counterparty exposure limits do not need to be applied to an undertaking in PRU 8.3.72 R (2).
  3. (3) Where the assets of B in PRU 8.3.74 R (1) exceed the limits in PRU 3.2.22 R (3), the assets of B in excess of the limits must be deducted by the firm from B's solo capital resources for the purposes of PRU 8.3.30 R.
  4. (4) After the application of (1) and (2), the surplus assets of B are aggregated with the admissible assets of A, where the surplus assets of B are:
    1. (a) where B is a firm, the admissible assets of B that represent the amount by which the capital resources of B exceed its capital resources requirement, subject to PRU 8.3.77 R, and limited to the amount of transferable capital calculated in accordance with PRU 8.3.68 R;
    2. (b) where B is a regulated related undertaking that is not a firm, the assets of the undertaking in PRU 8.3.74 R (1)(b) that represent the amount by which the solo capital resources of B exceed its individual capital resources requirement and, where B is an insurance undertaking that is not a firm, limited to the amount of transferable capital calculated in accordance with PRU 8.3.68 R; and
    3. (c) where B is an undertaking in PRU 8.3.72 R (2), the assets of the undertaking which represent those assets that fall within one or more of the categories in PRU 2 Annex 1R which exceed its accounting liabilities.
  5. (5) The market risk and counterparty exposure limits are then applied to the aggregate of A's admissible assets and the surplus assets in PRU 8.3.74 R (4).
  • 31/12/2004

PRU 8.3.75

handbook-rule
The firm (A) must then deduct the amount by which the admissible assets aggregated in accordance with PRU 8.3.74 R (5) exceed the market risk and counterparty exposure limits from A's group capital resources before deduction (calculated at stage C in the table in PRU 8.3.43 R) in accordance with PRU 8.3.70 R.
  • 31/12/2004

PRU 8.3.76

handbook-rule

In relation to any of its regulated related undertakings that is not an insurer, A may modify the calculation in PRU 8.3.74 R by:

  1. (1) omitting the calculation in PRU 8.3.74 R (1) and (3); and
  2. (2) aggregating all of the assets of B identified in PRU 8.3.74 R (1)(b) as admissible assets with the admissible assets of A in PRU 8.3.74 R (4).
  • 31/12/2004

PRU 8.3.77

handbook-rule
The admissible assets of either A or B that are part of a long-term insurance fund of A or B are excluded for the purposes of the calculation in PRU 8.3.74 R except insofar as those assets are available to meet the liabilities and capital resources requirement of that long-term insurance fund.
  • 31/12/2004

PRU 8.3.78

handbook-rule
If B is itself either a participating insurance undertaking or an insurance parent undertaking, the admissible assets of B for the purposes of PRU 8.3.74 R (1) must be calculated as in PRU 8.3.75 R but as if B were A.
  • 31/12/2004

PRU 8.4

Cross sector groups

  • 01/12/2004

Application

PRU 8.4.1

handbook-rule
  1. (1) PRU 8.4 applies to every firm that is a member of a financial conglomerate other than:
    1. (a) an incoming EEA firm;
    2. (b) an incoming Treaty firm;
    3. (c) a UCITS qualifier; and
    4. (d) an ICVC.
  2. (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. (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

handbook-guidance

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. (1) further material on third-country financial conglomerates can be found in PRU 8.5;
  2. (2) SUP 15.9 contains notification rules for members of financial conglomerates;
  3. (3) material on reporting obligations can be found in SUP 16.7.73 R and SUP 16.7.74 R; and
  4. (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

handbook-guidance
  1. (1) In general the process in (2) to (8) applies for identifying financial conglomerates.
  2. (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. (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. (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. (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. (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. (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. (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. (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

handbook-guidance
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.
  • 11/08/2004

Definition of financial conglomerate: basic definition

PRU 8.4.5

handbook-rule
A financial conglomerate means a consolidation group that is identified as a financial conglomerate in accordance with the decision tree in PRU 8 Ann 3G G.
  • 31/12/2004

Definition of financial conglomerate: sub-groups

PRU 8.4.6

handbook-rule

A consolidation group is not prevented from being a financial conglomerate because it is part of a wider:

  1. (1) consolidation group; or
  2. (2) financial conglomerate; or
  3. (3) group of persons linked in some other way.
  • 11/08/2004

Definition of financial conglomerate: the financial sectors: general

PRU 8.4.7

handbook-rule

For the purpose of the definition of financial conglomerate, there are two financial sectors as follows:

  1. (1) the banking sector and the investment services sector, taken together; and
  2. (2) the insurance sector.
  • 11/08/2004

PRU 8.4.8

handbook-rule
  1. (1) This rule applies for the purpose of the definition of financial conglomerate and the financial conglomerate definition decision tree.
  2. (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. (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

handbook-rule

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. (1) the figure of 40% in the box titled Threshold Test 1 is replaced by 35%;
  2. (2) the figure of 10% in the box titled Threshold Test 2 is replaced by 8%; and
  3. (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

handbook-rule

The alteration in PRU 8.4.9 R only applies to a financial conglomerate during the period that:

  1. (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. (2) covers the three years following that date.
  • 11/08/2004

Definition of financial conglomerate: balance sheet totals

PRU 8.4.11

handbook-rule
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

handbook-rule
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

handbook-guidance

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. (1) change the definition of financial conglomerate and the obligations applying with respect to a financial conglomerate;
  2. (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. (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

handbook-guidance
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

handbook-guidance
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.
  • 11/08/2004

PRU 8.4.16

handbook-guidance
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

handbook-guidance

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. (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. (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. (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. (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

handbook-guidance

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. (1) the insurance sector, that involves a combination of Methods 2 and 3; and
  2. (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

handbook-guidance
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

handbook-guidance
  1. (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:
    1. (a) where a financial conglomerate is headed by a regulated entity that has been authorised by the FSA; or
    2. (b) the only relevant competent authority for the financial conglomerate is the FSA.
  2. (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

handbook-guidance
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

handbook-guidance
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

handbook-guidance
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

handbook-guidance
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

Capital adequacy requirements: high level requirement

PRU 8.4.32

handbook-guidance
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.
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PRU 8.4.33

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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.
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The financial sectors: asset management companies

PRU 8.4.39

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  1. (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. (2) An asset management company is in the overall financial sector and is a regulated entity for the purpose of:
    1. (a) PRU 8.4.26 R to PRU 8.4.36 R;
    2. (b) PRU 8 Ann 1R G (Capital adequacy calculations for financial conglomerates) and PRU 8 Ann 2R (Prudential rules for third country groups); and
    3. (c) any other provision of the Handbook relating to the supervision of financial conglomerates.
  3. (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. (4) The choice in (3):
    1. (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);
    2. (b) applies to all asset management companies that are members of the financial conglomerate from time to time;
    3. (c) cannot be changed; and
    4. (d) must be notified to the FSA as soon as reasonably practicable after the notification in (4)(a).
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PRU 8.5

Third-country groups

  • 31/12/2004

Application

PRU 8.5.1

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PRU 8.5 applies to every firm that is a member of a third-country group. But it does not apply to:

  1. (1) an incoming EEA firm; or
  2. (2) an incoming Treaty firm; or
  3. (3) a UCITS qualifier; or
  4. (4) an ICVC.
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Purpose

PRU 8.5.2

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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

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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.
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Other methods: General

PRU 8.5.4

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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.
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Supervision by analogy: introduction

PRU 8.5.5

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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.
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PRU 8.5.6

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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.
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PRU 8.5.7

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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.
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PRU 8 Ann 1R

PRU 8 Ann 1R

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Capital adequacy calculations for financial conglomerates (PRU 8.4.26 R and PRU 8.4.29 R)
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PRU 8 Ann 1R 1

Table: PART 1: Method of Annex I of the Financial Groups Directive (Accounting Consolidation Method)
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PRU 8 Ann 1R 2

Table: PART 2: Method 2 of Annex I of the Financial Groups Directive (Deduction and aggregation Method)
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PRU 8 Ann 1R 3

Table: PART 3: Method 3 of Annex I of the Financial Groups Directive (Book value/Requirement Method)
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PRU 8 Ann 1R 4

Table: PART 4: Method 4 of Annex I of the Financial Groups Directive (Combination of Methods 1, 2 and 3)
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PRU 8 Ann 1R 5

Table: Paragraph 4.2: Application of sectoral consolidation rules
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PRU 8 Ann 1G 6

Table
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PRU 8 Ann 1.7

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Paragraph 4.5: Types of financial conglomerate and definition of most important financial sector
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PRU 8 Ann 1.8

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Table *
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PRU 8 Ann 1R 9

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Table: PART 5: Principles applicable to all methods
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PRU 8 Ann 1R 10

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Table: PART 6: Definitions used in this Annex
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PRU 8 Ann 1R 11

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Table: Paragraph 6.8: The FSA's sectoral rules for the solo capital resources requirement
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PRU 8 Ann 1R 12

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Table
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PRU 8 Ann 1R 13

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Table: Paragraph 6.11: Application of sectoral consolidation rules
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PRU 8 Ann 1R 14

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Table:
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PRU 8 Ann 2R

PRU 8 Ann 2R

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Prudential rules for third country groups (PRU 8.5.8 R to PRU 8.5.9 R)
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PRU 8 Ann 2R 1

Table: PART 1: Third-country financial conglomerates
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PRU 8 Ann 2R 2

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Table: PART 2: Third-country banking and investment groups
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PRU 8 Ann 2R 3

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PART 3: Adjustment of scope
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PRU 8 Ann 3G

Guidance Notes for Classification of Groups

  • 01/12/2004

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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
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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.
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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:
  1. (a) are managed on a unified basis; or
  2. (b) have common management.
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General guidance
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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:
  1. (a) Branches should be included as part of the parent entity.
  2. (b) Include in the calculations overseas entities owned by the relevant group or sub-group.
  3. (c) There are only two sectors for this purpose: banking/investment and insurance.
  4. (d) You will need to assign non-regulated financial entities to one of these sectors:
    1. • banking/investment activities are listed in - IPRU Banks CS 10 Appendix A
    2. • insurance activities are listed in - IPRU Insurers Annex 11.1 and 11.2 p 163-168.
    3. • 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.
  5. 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
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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:
  1. (i) Off-balance-sheet items should be excluded.
  2. (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.
  3. (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).
  4. (iv) Where consolidated accounts are used, minority interests should be excluded and goodwill should be included.
  5. (v) Where accounting standards differ between entities, groups should consult the FSA if they believe this is likely materially to affect the threshold calculation.
  6. (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.
  7. (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).
  8. (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.
  9. (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
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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:
  1. (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.
  2. (ii) Solvency requirements taken must include any deductions from available capital so as to allow the appropriate aggregation of requirements.
  3. (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.
  4. (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:
    1. (a) (a) as if the entity were regulated by the FSA under the appropriate sectoral rules;
    2. (b) (b) using EU minimum requirements for the appropriate sector; or
    3. (c) (c) using non-EU local requirements* for the appropriate sector.
  5. 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.
  6. (v) For banking/investment requirements, use the total amount of capital required.
  7. (vi) For insurance requirements, use the Required Minimum Margin:
    1. (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].
    2. (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)

  • 01/12/2004

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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