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GENPRU 3.1 Application

GENPRU 3.1.1RRP

1

  1. (1)

    GENPRU 3.1 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)

    GENPRU 3.1 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)

    GENPRU 3.1.25 R (Capital adequacy requirements: high level requirement), GENPRU 3.1.26 R (Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive), GENPRU 3.1.29 R (Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive) and GENPRU 3.1.35 R (Risk concentration and intra group transactions: the main rule) do not apply with respect to a third-country financial conglomerate.

Purpose

GENPRU 3.1.2G

GENPRU 3.1 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 GENPRU 3.2;

  2. (2)

    SUP 15.9 contains notification rules for members of financial conglomerates;

  3. (3)

    material on reporting obligations can be found in SUP 16.7.82 R and SUP 16.7.83 R; and

  4. (4)

    material on systems and controls in financial conglomerates can be found in SYSC 12.

Introduction: identifying a financial conglomerate

GENPRU 3.1.3GRP

  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 GENPRU 3.1.

  9. (9)

    GENPRU 3 Annex 3 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.

Introduction: The role of other competent authorities

GENPRU 3.1.4GRP

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.

Definition of financial conglomerate: basic definition

GENPRU 3.1.5RRP

A financial conglomerate means a consolidation group that is identified as a financial conglomerate in accordance with the decision tree in GENPRU 3 Annex 4.

Definition of financial conglomerate: sub-groups

GENPRU 3.1.6RRP

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.

Definition of financial conglomerate: the financial sectors: general

GENPRU 3.1.7RRP

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.

GENPRU 3.1.8RRP

  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.

Definition of financial conglomerate: adjustment of the percentages

GENPRU 3.1.9RRP

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.

GENPRU 3.1.10RRP

The alteration in GENPRU 3.1.9 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 GENPRU 3.1.9 R; and

  2. (2)

    covers the three years following that date.

Definition of financial conglomerate: balance sheet totals

GENPRU 3.1.11RRP

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.

Definition of financial conglomerate: solvency requirement

GENPRU 3.1.12RRP

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.

Definition of financial conglomerate: discretionary changes to the definition

GENPRU 3.1.13GRP

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.

Capital adequacy requirements: introduction

GENPRU 3.1.14GRP

The capital adequacy provisions of GENPRU 3.1 are designed to be applied to EEA-based financial conglomerates.

GENPRU 3.1.15GRP

GENPRU 3.1.25 R is a high level capital adequacy rule. It applies whether or not the FSA is the coordinator of the financial conglomerate concerned.

GENPRU 3.1.16GRP

GENPRU 3.1.26 R to GENPRU 3.1.31 R and GENPRU 3 Annex 1 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.

GENPRU 3.1.17GRP

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 GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 1 of GENPRU 3 Annex 1.

  2. (2)

    Method 2 calculates capital adequacy using a deduction and aggregation approach. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 2 of GENPRU 3 Annex 1.

  3. (3)

    Method 3 calculates capital adequacy using book values and the deduction of capital requirements. It is implemented by GENPRU 3.1.29 R to GENPRU 3.1.31 R and Part 3 of GENPRU 3 Annex 1

  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 GENPRU 3.1.26 R to GENPRU 3.1.28 R, GENPRU 3.1.30 R and Part 4 of GENPRU 3 Annex 1.

GENPRU 3.1.18G

Part 4 of GENPRU 3 Annex 1 (Use of Method 4 from Annex I of the Financial Groups Directive) applies the FSA's sectoral rules with respect to the financial conglomerate as a whole, with some adjustments. Where Part 4 of GENPRU 3 Annex 1 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.

GENPRU 3.1.19GRP

Paragraph 5.7 of GENPRU 3 Annex 1 (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.

GENPRU 3.1.20G

  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)

    GENPRU 3.1.28 R automatically applies Method 4 from Annex I of the Financial Groups Directive in these circumstances except in the cases set out in GENPRU 3.1.28R (1)(e) and GENPRU 3.1.28R (1)(f). The process in GENPRU 3.1.22 G does not apply.

GENPRU 3.1.21GRP

Where GENPRU 3.1.20 G does not apply, the Annex I method to be applied isdecided by the coordinator after consultation with the relevant competent authorities and the financial conglomerate itself.

GENPRU 3.1.22G

The method of calculating capital adequacy chosen in respect of a financial conglomerate as described in GENPRU 3.1.21 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 GENPRU 3 Annex 1 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 GENPRU 3.1 and GENPRU 3 Annex 1 if that is necessary to reflect the consultations referred to in GENPRU 3.1.21 G.

GENPRU 3.1.23G

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 GENPRU 3.1.22 G to all of them. Normally it will only be necessary to apply it to one.

GENPRU 3.1.24G

The FSA expects that in all or most cases falling into GENPRU 3.1.21 G, the rules in Part 4 of GENPRU 3 Annex 1 will be applied.

Capital adequacy requirements: high level requirement

GENPRU 3.1.25RRP

  1. (1)

    A firm that is a member of a financial conglomerate must at all times have capital resources of such an amount and type that results in the capital resources of the financial conglomerate taken as a whole being adequate.

  2. (2)

    This rule does not apply with respect to any financial conglomerate until notification has been made that it has been identified as a financial conglomerate as contemplated by Article 4(2) of the Financial Groups Directive.

Capital adequacy requirements: application of Method 4 from Annex I of the Financial Groups Directive

GENPRU 3.1.26R

If this rule applies under GENPRU 3.1.27 R to a firm with respect to a financial conglomerate of which it is a member, the firm must at all times have capital resources of an amount and type:

  1. (1)

    that ensure that the financial conglomerate has capital resources of an amount and type that comply with the rules applicable with respect to that financial conglomerate under Part 4 of GENPRU 3 Annex 1 (as modified by that annex); and

  2. (2)

    that as a result ensure that the firm complies with those rules (as so modified) with respect to that financial conglomerate.

GENPRU 3.1.27R

GENPRU 3.1.26 R applies to a firm with respect to a financial conglomerate of which it is a member if one of the following conditions is satisfied:

  1. (1)

    the condition in GENPRU 3.1.28 R is satisfied; or

  2. (2)

    this rule is applied to the firm with respect to that financial conglomerate as described in GENPRU 3.1.30 R.

Capital adequacy requirements: compulsory application of Method 4 from Annex I of the Financial Groups Directive

GENPRU 3.1.28R

  1. (1)

    The condition in this rule is satisfied for the purpose of GENPRU 3.1.27R (1) with respect to a firm and a financial conglomerate of which it is a member (with the result that GENPRU 3.1.26 R automatically applies to that firm) if:

    1. (a)

      notification has been made in accordance with regulation 2 of the Financial Groups Directive Regulations that the financial conglomerate is a financial conglomerate and that the FSA is coordinator of that financial conglomerate;

    2. (b)

      the financial conglomerate is not part of a wider FSA regulated EEA financial conglomerate;

    3. (c)

      the financial conglomerate is not an FSA regulated EEA financial conglomerate under another rule or under paragraph (b) of the definition of FSA regulated EEA financial conglomerate (application of supplementary supervision through a firm's Part IV permission);

    4. (d)

      one of the following conditions is satisfied:

      1. (i)

        the financial conglomerate is headed by a regulated entity that is a UK domestic firm; or

      2. (ii)

        the only relevant competent authority for that financial conglomerate is the FSA;

    5. (e)

      this rule is not disapplied under paragraph 5.7 of GENPRU 3 Annex 1 (No capital ties); and

    6. (f)

      the financial conglomerate meets the condition set out in the box titled Threshold Test 2 (10% average of balance sheet and solvency requirements) in the financial conglomerate definition decision tree.

  2. (2)

    Once GENPRU 3.1.26 R applies to a firm with respect to a financial conglomerate of which it is a member under GENPRU 3.1.27R (1), (1)(f) ceases to apply with respect to that financial conglomerate. Therefore the fact that the financial conglomerate subsequently ceases to meet the condition in (1)(f) does not mean that the condition in this rule is not satisfied.

Capital adequacy requirements: application of Methods 1, 2 or 3 from Annex I of the Financial Groups Directive

GENPRU 3.1.29RRP

If with respect to a firm and a financial conglomerate of which it is a member, this rule is applied to the firm with respect to that financial conglomerate as described in GENPRU 3.1.30 R, the firm must at all times have capital resources of an amount and type that ensures that the conglomerate capital resources of that financial conglomerate at all times equal or exceed its conglomerate capital resources requirement.

Capital adequacy requirements: use of Part IV permission to apply Annex I of the Financial Groups Directive

GENPRU 3.1.30RRP

With respect to a firm and a financial conglomerate of which it is a member:

  1. (1)

    GENPRU 3.1.26 R (Method 4 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate for the purposes of GENPRU 3.1.27R (2); or

  2. (2)

    GENPRU 3.1.29 R (Methods 1 to 3 from Annex I of the Financial Groups Directive) is applied to the firm with respect to that financial conglomerate;

if the firm's Part IV permission contains a requirement obliging the firm to comply with GENPRU 3.1.26 R or, as the case may be, GENPRU 3.1.29 R.

GENPRU 3.1.31RRP

If GENPRU 3.1.29 R (Methods 1-3 from Annex I of the Financial Groups Directive) applies to a firm with respect to a financial conglomerate of which it is a member, 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 GENPRU 3 Annex 1 is specified in the requirement referred to in GENPRU 3.1.30 R.

Risk concentration and intra-group transactions: introduction

GENPRU 3.1.32GRP

GENPRU 3.1.35 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.

GENPRU 3.1.33GRP

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. GENPRU 3.1 does not take up that option, although the FSA may impose such obligations on a case by case basis.

Risk concentration and intra-group transactions: application

GENPRU 3.1.34RRP

GENPRU 3.1.35 R applies to a firm with respect to a financial conglomerate of which it is a member if:

  1. (1)

    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); and

  2. (2)

    that financial conglomerate is an FSA regulated EEA financial conglomerate.

Risk concentration and intra group transactions: the main rule

GENPRU 3.1.35RRP

A firm must ensure that the sectoral rules regarding risk concentration and intra-group transactions of the most important financial sector in the financial conglomerate referred to in GENPRU 3.1.34 R are complied with with respect to that financial sector as a whole, including the mixed financial holding company. The FSA's sectoral rules for these purposes are those identified in the table in GENPRU 3.1.36 R.

Risk concentration and intra-group transactions: Table of applicable sectoral rules

GENPRU 3.1.36RRP

Table: application of sectoral rules

This table belongs to GENPRU 3.1.35 R

The most important financial sector

Applicable sectoral rules

Risk concentration

Intra-group transactions

Banking and investment services sector

BIPRU 8.9 (Consolidated concentration risk requirements) including BIPRU TP as it applies to a UK consolidation group.

BIPRU 10 (Concentration Risk) including BIPRU TP as it applies on a solo basis and relates to BIPRU 10.

Insurance sector

None

Rule 9.39 of IPRU(INS)

Note

Any waiver granted to a member of the financial conglomerate, on a solo or consolidated basis, shall not apply in respect of the financial conglomerate for the purposes of GENPRU 3.1.36 R.

GENPRU 3.1.37R

  1. (1)

    Where the rules for the banking and investment services sector are being applied, a mixed financial holding company must be treated as being a financial holding company.

  2. (2)

    Where the rules for the insurance sector are being applied, a mixed financial holding company must be treated as being an insurance holding company.

GENPRU 3.1.38R

  1. (1)

    This rule applies for the purposes of the definitions of:

    1. (a)

      aconcentration risk group counterparty; and

    2. (b)

      a consolidation concentration risk group counterparty;

    as they apply for the purposes of the rules for the banking and investment services sector as applied by GENPRU 3.1.36 R.

  2. (2)

    For the purposes of BIPRU 3.2.27 R (1)(a) and (b) (as they apply to the definition in GENPRU 3.1.38R (1)(a)), the conditions are also satisfied if the counterparty and the firm are included within the scope of consolidated supervision on a full basis with respect to the same financial conglomerate under GENPRU 3.1 or the relevant implementation measures in another EEA State for the Financial Groups Directive.

  3. (3)

    Subject to (4), for the purposes of BIPRU 8.9.11R (3) (as it applies to the definition in GENPRU 3.1.38R (1)(b)), the conditions are also satisfied if the counterparty and the firm are included within the scope of consolidated supervision on a full basis with respect to the same financial conglomerate under GENPRU 3.1 or the relevant implementation measures in another EEA State for the Financial Groups Directive.

  4. (4)

    BIPRU 8.9.11R (3)(a) does not apply.

The financial sectors: asset management companies

GENPRU 3.1.39RRP

  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)

      GENPRU 3.1.26 R to GENPRU 3.1.36 R;

    2. (b)

      GENPRU 3 Annex 1 (Capital adequacy calculations for financial conglomerates) and GENPRU 3 Annex 2 (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).

  5. (5)

    This rule applies even if:

    1. (a)

      a UCITS management company is a BIPRU investment firm; or

    2. (b)

      an asset management company is an investment firm.