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PRU 8 Ann 1R 1PRU 8 Ann 1R

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

PRU 8 Ann 1R 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 PRU 8.4.29 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.

PRU 8 Ann 1R 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.

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 PRU 8.4.29 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.

PRU 8 Ann 1R 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:

(1)

(in the case of the person at the head of the financial conglomerate) its solo capital resources requirement;

(2)

(in the case of any other member) the higher of the following two amounts:

(a)

its solo capital resources requirement; and

(b)

the book value of the interest of the person at the head of the financial conglomerate in that member.

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 PRU 8.4.29 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.

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)

Applicable sectoral rules

4.1

The rules that apply with respect to a particular financial conglomerate under PRU 8.4.26 R are those relating to capital adequacy and solvency set out in the table in paragraph 4.2.

PRU 8 Ann 1R 5

Table: Paragraph 4.2: Application of sectoral consolidation rules

Type of financial conglomerate

Applicable sectoral consolidation rules

Banking conglomerate

IPRU(BANK) Chapter GN rule 3.3.13 (as it applies on a consolidated basis), subject to paragraph 4.7.

Insurance conglomerate

PRU 8.32 amended in accordance with Part 5.

2

Building society conglomerate

IPRU(BSOC) (Volume 1) Chapter 1, rule 1.2.1 (as it applies on a consolidated basis).

Investment services conglomerate

Chapter 14 of IPRU(INV).

PRU 8 Ann 1G 6

Table

How to apply chapter 14 of IPRU(INV)

4.3

Where chapter 14 of IPRU(INV) applies:

(1)

the main investment services undertaking is treated as being the main firm for the purpose of rule 14.4.2 of chapter 14 of IPRU(INV);

(2)

if the main investment services undertaking is not subject to any of the FSA's sectoral rules applied by chapter 14 of IPRU(INV), then the FSA's sectoral rules that are applied are those that would do so if:

(a)

it were a UK domestic firm; and

(b)

it had a permission that includes all the regulated activities that it would need to have in its Part IV permission if it carried on all its activities in the United Kingdom.

The different types of financial conglomerate

4.4

(1)

The decision tree in paragraph 4.5:

(a)

decides into which of the categories listed in the table in paragraph 4.2 a financial conglomerate falls; and

(b)

modifies the definition of the most important financial sector for the purposes of PRU 8 Ann 1R G and for the purposes of any other provision in PRU 8 (Group risk) that applies that decision tree.

(2)

Paragraph 6.1(2) (financial institution allocated to the banking sector) and paragraph 6.1(3) (allocation of asset management companies) apply for the purpose of 4.4 and the table in paragraph 4.5.

PRU 8 Ann 1.7G

Paragraph 4.5: Types of financial conglomerate and definition of most important financial sector

PRU8_para4_310806
PRU 8 Ann 1.8

Table *

A mixed financial holding company

4.6

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

(1)

a financial holding company (if the rules in IPRU(BANK) or IPRU(INV)) are applied; or

(2)

an insurance holding company (if the rules in PRU 8.32 are applied).

2

E-money

4.7

If there are no full credit institutions or investment firms in a banking conglomerate but there are one or more e-money issuers, the sectoral rules in IPRU(BANK) are amended as follows :

(1)

the rules in ELM that apply on a solo basis must be used to establish the capital requirement for the e-money issuers; and

(2)

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 2.4.17 R (6) in accordance with paragraph 3.3(2).

PRU 8 Ann 1R 9

Table: PART 5: Principles applicable to all methods

Transferability of capital

5.1

Capital may not be included in:

(1)

a firm's conglomerate capital resources under PRU 8.4.29 R; or

(2)

in the capital resources of the financial conglomerate for the purposes of PRU 8.4.26 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 PRU 8.4.29 R; or

(2)

the capital resources of the financial conglomerate for the purposes of PRU 8.4.26 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 PRU 8.4.26 R or, as the case may be, PRU 8.4.29 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 PRU 8.4.26 R or, as the case may be, PRU 8.4.29 R.

Application of sectoral rules

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 PRU 8 Ann 1R G, 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 investment services undertaking is included in the investment services sector.

(4)

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

(5)

(In relation to the insurance sector) 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 drafted by reference to assets and liabilities into a hard limit requiring capital to be held at or above specified levels. 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 (5).

(6)

The scope of the 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.

(7)

(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.

No capital ties

5.5

(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 PRU 8.4.28 R (1) (Capital adequacy requirements: Compulsory application of Method 4 from Annex I of the Financial Groups Directive).

(2)

If:

(a)

PRU 8.4.26 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 PRU 8.4.28 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");

PRU 8.4.28 R continues to apply. Otherwise PRU 8.4.28 R does not apply with respect to a financial conglomerate falling into (1).

(3)

If PRU 8.4.28 R applies with respect to a financial conglomerate in accordance with (2) the peripheral members must be excluded from the calculations under PRU 8.4.26 R.

(4)

If:

(a)

PRU 8.4.26 R applies with respect to a financial conglomerate falling into (1) under PRU 8.4.27 R (2) (Use of Part IV permission to apply Annex I of the Financial Groups Directive); or

(b)

PRU 8.4.49 (Capital adequacy requirements: Application of Methods 1, 2 or 3 from 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 PRU 8.4.30 R; and

(d)

PRU 8.4.26 R or PRU 8.4.29 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 PRU 8.4.26 R applies to a firm with respect to a financial conglomerate of which it is a member under PRU 8.4.27 R (1) (automatic application of Method 4 from Annex I of the Financial Groups Directive on satisfaction of the condition in PRU 8.4.28 R), the disapplication of PRU 8.4.28 R under (2) ceases to apply with respect to that financial conglomerate.

PRU 8 Ann 1R 10

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, unless specified otherwise in paragraph 4.4, not for the purposes of the definition of most important financial sector):

(1)

the banking sector and the investment services sector are considered separately;

(2)

if a financial institution could otherwise fall into both the banking sector and the investment services sector, it must be allocated to the banking sector;

(3)

an asset management company is allocated in accordance with PRU 8.4.39 R; and

(4)

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

Solo capital resources requirement: UK domestic firms

6.2

The solo capital resources requirement for a regulated entity that is a UK domestic firm is its solo regulatory capital requirement under the FSA's sectoral rules for its financial sector applicable to it.

Solo capital resources requirement: EEA firms

6.3

The solo capital resources requirement for an EEA regulated entity 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 resources it is obliged to hold under those sectoral rules.

Solo capital resources requirement: mixed financial holding company

6.4

The solo capital resources requirement for 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 6.8.

Solo capital resources requirement: non-EEA firms subject to equivalent regimes

6.5

The solo capital resources requirement for a regulated entity that:

(1)

does not fall into paragraphs 6.2 to 6.4;

(2)

is subject to any of the sectoral rules referred to in paragraph 6.6 applicable to its financial sector; and

(3)

is incorporated in and has its head office in:

(a)

(where the sectoral rules in (2) are for the banking sector or the investment services sector) the same state or territory as the regulator for those sectoral rules, as referred to in paragraph 6.6(1) or 6.6(2)); or

(b)

(where the sectoral rules in (2) are for the insurance sector) the designated state or territory in question, as referred to in 6.6(3);

is equal to the amount of capital resources it is obliged to hold under those sectoral rules. However, where 3(b) would otherwise apply, paragraph 6.7 may be applied instead.

6.6

The sectoral rules referred to in paragraph 6.5 are:

(1)

(for the banking sector) the sectoral rules of or administered by one of the regulators listed in Appendix D of chapter CS of IPRU(BANK);

(2)

(for the investment services sector) the sectoral rules of or administered by one of the regulators listed in Appendix 59 of chapter 10 of IPRU(INV); and

(3)

(for the insurance sector) the sectoral rules of thedesignated States or territories2 excluding EEA States.

2

Solo capital resources requirement: other members

6.7

The solo capital resources requirement for:

3

(1)

any of the following:3

(a)

a UK domestic firm;

(b)

an EEA regulated entity; or

(c)

a regulated entity that is incorporated in and has its head office in one of the states or territories referred to in paragraph 6.5;

that is not subject to the solo capital adequacy sectoral rules referred to in paragraph 6.2, 6.3 or 6.6 (including in a case in which this paragraph applies under paragraph (i) of the definition of sectoral rules); and

(2)

any member of a financial conglomerate in the overall financial sector otherwise not treated under paragraphs 6.2 to 6.6;

is a notional capital requirement. It is the capital resources requirement that would apply to it under the following rules:

(33)

3

(in the case of an asset management company) the rules in Chapter 7 of IPRU(INV); and

(43)

3

(in any other case) the rules applicable to its financial sector under the table in paragraph 6.8.

PRU 8 Ann 1R 11

Table: Paragraph 6.8: The FSA's sectoral rules for the solo capital resources requirement

Financial sector

FSA's sectoral rules

Banking sector

The FSA's sectoral rules for banks, except that e-money issuers are subject to ELM.

Insurance sector

The FSA's sectoral rules for insurance undertakings.

Investment services sector

(1) The rules in IPRU(INV) that would apply on the assumptions in paragraph 4.3(2).

(2) (If (1) does not result in the application of any rules in IPRU(INV)) the rules in IPRU(INV) that would be applied to it under rule 14.5.2 of Chapter 14 of IPRU(INV) (Group financial resources requirement).

PRU 8 Ann 1R 12

Table

Solo capital resources requirement: the insurance sector

6.9

References to capital requirements in the provisions of PRU 8 Ann 1R G defining solo capital resources requirement must be interpreted in accordance with paragraph 5.4(5).

Applicable sectoral consolidation rules

6.10

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 6.11.

PRU 8 Ann 1R 13

Table: Paragraph 6.11: Application of sectoral consolidation rules

Financial sector

Type of financial conglomerate

FSA's sectoral rules

Banking sector

Building society conglomerate

The rules for building societies.

Any other type

The rules for banks.

Insurance sector

N/A

The rules for insurance undertakings.

Investment services sector

N/A

The rules for investment firms.

Note 1: Paragraph 4.6 applies for the purposes of those rules.

PRU 8 Ann 1R 14

Table:

Applicable sectoral consolidation rules (contd.)

6.12

The rules referred to in the third column of the table in paragraph 6.11 are as follows:

(1)

the rules for building societies are the ones for building society conglomerates listed in the table in paragraph 4.2;

(2)

the rules for banks are the ones for banking conglomerates listed in the table in paragraph 4.2 as adjusted under paragraph 4.7;

(3)

the rules for insurance undertakings are whichever of the ones for insurance conglomerates that are applied by the table in paragraph 4.2; and

(4)

the rules for investment firms are the ones for investment services conglomerates listed in the table in paragraph 4.2 as applied under paragraph 4.3 (How to apply chapter 14 of IPRU(INV)).