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GENPRU 3 Annex 1 Capital adequacy calculations for financial conglomerates (GENPRU 3.1.26R and GENPRU 3.1.29R)

1 Table: PART 1: Method of Annex I of the Financial Groups Directive (Accounting Consolidation Method)

Capital resources

1.1

The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are the capital of that financial conglomerate, calculated on an accounting consolidation basis, that qualifies under paragraph 1.2.

1.2

The elements of capital that qualify for the purposes of paragraph 1.1 are those that qualify in accordance with the applicable sectoral rules, in accordance with the following:

(1)

the conglomerate capital resources requirement is divided up in accordance with the contribution of each financial sector to it; and

(2)

the portion of the conglomerate capital resources requirement attributable to a particular financial sector must be met by capital resources that are eligible in accordance with the applicable sectoral rules for that financial sector.

Capital resources requirement

1.3

The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the capital adequacy and solvency requirements for each financial sector calculated in accordance with the applicable sectoral rules for that financial sector.

Consolidation

1.4

The information required for the purpose of establishing whether or not a firm is complying with GENPRU 3.1.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the consolidated accounts of the financial conglomerate, together with such other sources of information as appropriate.

1.5

The applicable sectoral rules that are applied under this Part are the applicable sectoral consolidation rules. Other applicable sectoral rules must be applied if required.

2 Table: PART 2: Method 2 of Annex I of the Financial Groups Directive(Deduction and aggregation Method)

Capital resources

2.1

The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are equal to the sum of the following amounts (so far as they qualify under paragraph 2.3) for each member of the overall financial sector:

(1) (for the person at the head of the financial conglomerate) its solo capital resources;

(2) (for any other member):

(a) its solo capital resources; less

(b) the book value of the financial conglomerate's investment in that member, to the extent not already deducted in the calculation of the solo capital resources for:1

(i) the person at the head of the financial conglomerate; or 1

(ii) any other member.1

2.2

The deduction in paragraph 2.1(2) must be carried out separately for each type of capital represented by the financial conglomerate's investment in the member concerned.

2.3

The elements of capital that qualify for the purposes of paragraph 2.1 are those that qualify in accordance with the applicable sectoral rules. In particular, the portion of the conglomerate capital resources requirement attributable to a particular member of a financial sector must be met by capital resources that would be eligible under the sectoral rules that apply to the calculation of its solo capital resources.

Capital resources requirement

2.4

The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the solo capital resources requirement for each member of the financial conglomerate that is in the overall financial sector.

Partial inclusion

2.5

The capital resources and capital resources requirements of a member of the financial conglomerate in the overall financial sector must be included proportionally. If however the member is a subsidiary undertaking and it has a solvency deficit, they must be included in full.

Accounts

2.6

The information required for the purpose of establishing whether or not a firm is complying with GENPRU 3.1.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the individual accounts of members of the financial conglomerate, together with such other sources of information as appropriate.

3. Table: PART 3: Method 3 of Annex I of the Financial Groups Directive(Book value/Requirement Method)

Capital resources

3.1

The conglomerate capital resources of a financial conglomerate calculated in accordance with this Part are equal to the capital resources of the person at the head of the financial conglomerate that qualify under paragraph 3.2.

3.2

The elements of capital that qualify for the purposes of paragraph 3.1 are those that qualify in accordance with the applicable sectoral rules. In particular, the portion of the conglomerate capital resources requirement attributable to a particular member of a financial sector must be met by capital resources that would be eligible under the sectoral rules that apply to the calculation of its solo capital resources.

Capital resources requirement

3.3

The conglomerate capital resources requirement of a financial conglomerate calculated in accordance with this Part is equal to the sum of the following amounts for each member of the overall financial sector:

3.4

A participation may be valued using the equity method of accounting.

Partial inclusion

3.5

The capital resources requirement of a member of the financial conglomerate in the overall financial sector must be included proportionally. If however the member has a solvency deficit and is a subsidiary undertaking, it must be included in full.

Accounts

3.6

The information required for the purpose of establishing whether or not a firm is complying with GENPRU 3.1.29 R (insofar as the definitions in this Part are applied for the purpose of that rule) must be based on the individual accounts of members of the financial conglomerate, together with such other sources of information as appropriate.

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

Applicable sectoral rules

4.1

The rules that apply with respect to a particular financial conglomerate under GENPRU 3.1.26 R are those relating to capital adequacy and solvency set out in the table in paragraph 4.2.

5 Table: Paragraph 4.2: Application of sectoral consolidation rules

Type of financial conglomerate

Applicable sectoral consolidation rules

Banking and investment services conglomerate

BIPRU 8 and BIPRU TP, subject to paragraph 4.5.

Insurance conglomerate

INSPRU 6.1 amended in accordance with Part 5.

6 Table

Types of financial conglomerate

4.3

(1) This paragraph sets out how to determine the category of financial conglomerate for the purposes of paragraphs 4.1 and 4.2.

(2) If there is an EEA regulated entity at the head of the financial conglomerate, then:

(a) if that entity is in the banking sector or the investment services sector, the financial conglomerate is a banking and investment services conglomerate; or

(b) if that entity is in the insurance sector, the financial conglomerate is an insurance conglomerate.

(3) If (2) does not apply and the most important financial sector is the banking and investment services sector, it is a banking and investment services conglomerate.

(4) If (2) and (3) does not apply, it is an insurance conglomerate.

7 Table

A mixed financial holding company

4.4

A mixed financial holding company must be treated in the same way as:

(1) a financial holding company (if the rules in BIPRU 8 ) are applied; or

(2) an insurance holding company (if the rules in INSPRU 6.1 are applied).

E-money

4.5

If there are no full credit institutions or investment firms in a banking and investment services conglomerate but there are one or more e-money issuers, the sectoral rules in BIPRU 8 are amended as follows :

  • the rules in ELM that apply on a solo basis must be used to establish the capital requirement for the e-money issuers; and
  • for the purpose of (1), those rules in ELM shall be amended by calculating the amount of the deductions in respect of ownership shares and capital falling into ELM 2.4.17R(6) in accordance with paragraph 3.3(2).

8 Table: PART 5: Principles applicable to all methods

Transfer-ability of capital

5.1

Capital may not be included in:

(1) a firm's conglomerate capital resources under GENPRU 3.1.29 R; or

(2) in the capital resources of the financial conglomerate for the purposes of GENPRU 3.1.26 R;

if the effectiveness of the transferability and availability of the capital across the different members of the financial conglomerate is insufficient, given the objectives (as referred to in the third unnumbered sub-paragraph of paragraph 2(ii) of Annex I of the Financial Groups Directive (Technical principles)) of the capital adequacy rules for financial conglomerates.

Double counting

5.2

Capital must not be included in:

(1) a firm's conglomerate capital resources under GENPRU 3.1.29 R; or

(2) the capital resources of the financial conglomerate for the purposes of GENPRU 3.1.26 R;

if:

(3) it would involve double counting or multiple use of the same capital; or

(4) it results from any inappropriate intra-group creation of capital.

Cross sectoral capital

5.3

In accordance with the second sub-paragraph of paragraph 2(ii) of Section I of Annex I of the Financial Groups Directive (Other technical principles and insofar as not already required in Parts 1-3):

(1) the solvency requirements for each different financial sector represented in a financial conglomerate required by GENPRU 3.1.26 R or, as the case may be, GENPRU 3.1.29 R must be covered by own funds elements in accordance with the corresponding applicable sectoral rules; and

(2) if there is a deficit of own funds at the financial conglomerate level, only cross sectoral capital (as referred to in that sub-paragraph) shall qualify for verification of compliance with the additional solvency requirement required by GENPRU 3.1.26 R or, as the case may be, GENPRU 3.1.29 R.

Application of sectoral rules: General

5.4

The following adjustments apply to the applicable sectoral rules as they are applied by the rules in this annex.

(1) The scope of those rules will be extended to cover any mixed financial holding company and each other member of the overall financial sector.

(2) If any of those rules would otherwise not apply to a situation in which they are applied by GENPRU 3 Annex 1, those rules nevertheless still apply (and in particular, any of those rules that would otherwise have the effect of disapplying consolidated supervision(or, in the case of the insurance sector, supplementary supervision) do not apply).

(3) (If it would not otherwise have been included) an ancillary insurance services undertaking is included in the insurance sector.

(4) The scope of those rules is amended so as to remove restrictions relating to where members of the financial conglomerate are incorporated or have their head office, so that the scope covers every member of the financial conglomerate that would have been included in the scope of those rules if those members had their head offices in an EEA State.

(5) (For the purposes of Parts 1

to 3) those rules must be adjusted, if necessary, when calculating the capital resources, capital resources requirements or solvency requirements for a particular financial sector to exclude those for a member of another financial sector.

(6) Any waiver granted to a member of the financial conglomerate under those rules does not apply for the purposes of this annex.

Application of sectoral rules: Insurance sector

5.5

(1) This rule applies an adjustment to the applicable sectoral rules for the insurance sector as they are applied by the rules in this annex.

(2) To the extent that:

(a) those rules merely require a report on whether or not a specified level of solvency is met (a soft limit); or

(b) the requirements in those rules concern having certain net assets of an amount at or above certain levels;

those requirements are restated so as to include an obligation at all times actually to have capital at or above that level (a hard limit), thereby turning a soft limit into a hard limit and turning a limit drafted by reference to assets and liabilities into a requirement that the level of capital be maintained at or above a specified level. If those rules apply both a hard and a soft limit, and the level of the soft limit is higher, that soft limit is applied under this annex, but translated into a hard limit in accordance with the earlier provisions of this rule.

Application of sectoral rules: Banking sector and investment services sector

5.6

The following adjustments apply to the applicable sectoral rules for the banking sector and the investment services sector as they are applied by the rules in this annex.

(1) References in those rules to non-EEA sub-groups do not apply.

(2) (For the purposes of Parts 1 to 3), where those rules require a group to be treated as if it were a single undertaking, those rules apply to the banking sector and investment services sector taken together.

(3) Any investment firm consolidation waivers granted to members of the financial conglomerate do not apply.

(4) (For the purposes of Parts 1 to 4), without prejudice to the application of requirements in BIPRU 8 preventing the use of an advanced prudential calculation approach on a consolidated basis, any advanced prudential calculation approach permission that applies for the purpose of BIPRU 8 does not apply.

(5) (For the purposes of Parts 1 to 4), BIPRU 8.5.9 R and BIPRU 8.5.10 R do not apply.

(6) (For the purposes of Parts 1 to 4), where the financial conglomerate does not include a credit institution, the method in GENPRU 2 Annex 4 must be used for calculating the capital resources and BIPRU 8.6.8 R does not apply.

No capital ties

5.7

(1) This rule deals with a financial conglomerate in which some of the members are not linked by capital ties at the time of the notification referred to in GENPRU 3.1.28R (1) (Capital adequacy requirements: Compulsory application of Method 4 fromAnnex I of the Financial Groups Directive).

(2) If:

(a) GENPRU 3.1.26 R (Capital adequacy requirements: Application of Method 4 from Annex I of the Financial Groups Directive) would otherwise apply with respect to a financial conglomerate under GENPRU 3.1.28 R; and

(b) all members of that financial conglomerate are linked directly or indirectly with each other by capital ties except for members that collectively are of negligible interest with respect to the objectives of supplementary supervision of regulated entities in a financial conglomerate (the "peripheral members");

GENPRU 3.1.28 R continues to apply. Otherwise GENPRU 3.1.28 R does not apply with respect to a financial conglomerate falling into (1).

(3) If GENPRU 3.1.28 R applies with respect to a financial conglomerate in accordance with (2) the peripheral members must be excluded from the calculations under GENPRU 3.1.26 R.

(4) If:

(a) GENPRU 3.1.26 R applies with respect to financial conglomerate falling into (1) under GENPRU 3.1.27R (2) (Use of Part IV permission to apply Annex I of the Financial Groups Directive); or

(b) GENPRU 3.1.29 R (Capital adequacy requirements: Application of Methods 1, 2 or 3from Annex I of the Financial Groups Directive) applies with respect to a financial conglomerate falling into (1);

then:

(c) the treatment of the links in (1) (including the treatment of any solvency deficit) is as provided for in the requirement referred to in GENPRU 3.1.30 R; and

(d) GENPRU 3.1.26 R or GENPRU 3.1.29 R, as the case may be, apply even if the applicable sectoral rules do not deal with how undertakings not linked by capital ties are to be dealt with for the purposes of consolidated supervision (or, in the case of the insurance sector, supplementary supervision).

(5) 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) (automatic application of Method 4 from Annex I of the Financial Groups Directive on satisfaction of the condition in GENPRU 3.1.28 R), the disapplication of GENPRU 3.1.28 R under (2) ceases to apply with respect to that financial conglomerate.

9 Table: PART 6: Definitions used in this Annex

Defining the financial sectors

6.1

For the purposes of Parts 1 to 3 of this annex (but, not for the purposes of the definition of most important financial sector):

(1) an asset management company is allocated in accordance with GENPRU 3.1.39 R; and

(2) a mixed financial holding company must be treated as being a member of the most important financial sector.

Solo capital resources requirement: Banking sector and investment service sector

6.2

(1) The solo capital resources requirement of an undertaking in the banking sector or the investment services sector must be calculated in accordance with this rule, subject to paragraphs 6.5 and 6.6.

(2) The solo capital resources requirement of a building society is its CRR.

(3) The solo capital resources requirement of an e-money issuer is:

(a) (in the case of ELMI) the capital resources requirement that applies to it under ELM; or

(b) (in any other case) the capital resources requirement that would apply to it under ELM if it were an ELMI incorporated in the United Kingdom.

(4) If there is a credit institution in the financial conglomerate, the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is, subject to (2) and (3), calculated in accordance with the rules for calculating the CRR of a bank that is a BIPRU firm.

(5) If:

(a) the financial conglomerate does not include a credit institution;

(b) there is at least one CAD investment firm in the financial conglomerate; and(c) all the CAD investment firms in the financial conglomerate are limited licence firms or limited activity firms;

the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is calculated in accordance with the rules for calculating the CRR of:

(d) (if there is a limited activity firm in the financial conglomerate), a BIPRU limited activity firm; or

(e) (in any other case), a BIPRU limited licence firm.

(6) If:

(a) the financial conglomerate does not include a credit institution; and

(b) (5) does not apply;

the solo capital resources requirement for any undertaking in the banking sector or the investment services sector is calculated in accordance with the rules for calculating the CRR of a full scope BIPRU investment firm.Any CRR calculated under a BIPRU TP may be used for the purposes of the solo capital resources requirement in this rule in the same way that the CRR can be used under BIPRU 8.

Solo capital resources requirement: application of rules

6.3

Any exemption that would otherwise apply under any rules applied by paragraph 6.2 do not apply for the purposes of this Annex.

Solo capital resources requirement: Insurance sector

6.4

(1) The solo capital resources requirement of an undertaking in the insurance sector must be calculated in accordance with this rule.

(2) Subject to (3), the solo capital resources requirement of an undertaking in the insurance sector is the capital resources requirement identified inINSPRU 6.1.34 R (1) to (8) as applying to that undertaking.

(3) INSPRU 6.1.34 R (1)(b) does not apply for the purposes of this annex.

Solo capital resources requirement: EEA firms in the banking sector or investment services sector

6.5

The solo capital resources requirement for an EEA regulated entity (other than a BIPRU firm, an insurer or an EEA insurer) that is subject to the solo capital adequacy sectoral rules for its financial sector of the competent authority that authorised it is equal to the amount of capital it is obliged to hold under those sectoral rules provided that the following conditions are satisfied:

(1) (for the purposes of the banking sector and the investment services sector) those sectoral rules must correspond to the FSA's sectoral rules identified in paragraph 6.2 as applying to that financial sector;

(2) the entity must be subject to those sectoral rules in (1); and

(3) paragraph 6.3 applies to the entity and those sectoral rules.

Solo capital resources requirement: non-EEA firms subject to equivalent regimes in the banking sector or investment services sector

6.6

The solo capital resources requirement for a recognised third country credit institution or a recognised third country investment firm is the amount of capital resources that it is obliged to hold under the sectoral rules for its financial sector that apply to it in the state or territory in which it has its head office provided that:

(1) there is no reason for the firm applying the rules in this annex to believe that the use of those sectoral rules would produce a lower figure than would be produced under paragraph 6.2; and

(2) paragraph 6.3 applies to the entity and those sectoral rules.

Solo capital resources requirement: mixed financial holding company

6.7

The solo capital resources requirement of a mixed financial holding company is a notional capital requirement. It is the capital adequacy requirement that applies to regulated entities in the most important financial sector under the table in paragraph 6.10.

10 Table

Solo capital resources requirement: the insurance sector

6.8

References to capital requirements in the provisions of GENPRU 3 Annex 1 defining solo capital resources requirement must be interpreted in accordance with paragraph 5.4.

Applicable sectoral consolidation rules

6.9

The applicable sectoral consolidation rules for a financial sector are the FSA's sectoral rules about capital adequacy and solvency on a consolidated basis that are applied in the table in paragraph 6.10.

11 Table: Paragraph 6.10: Application of sectoral consolidation rules

Financial sector

FSA's sectoral rules

Banking sector

BIPRU 8 and BIPRU TP, as adjusted under paragraph 4.5

Insurance sector

INSPRU 6.1.

Investment services sector

BIPRU 8 and BIPRU TP

12 Table:

Part 5

1

This Part 6 is subject to Part 5 of this Annex.